03.12 Weekly Viewpoint : The British government has capitulated once again in the negotiations over its exit from the European Union

The British government has capitulated once again in the negotiations over its exit from the European Union. Nonetheless, an agreement may not be within reach all the same. Setback in the process of approving the tax reform in the United States……


OPEC and Russia have announced a nine-month extension of the agreement that places a ceiling on domestic oil production. 

In the past few days, sterling has received significant support from rumours that the British government has prepared a much more generous counterproposal to settle its financial commitments towards the EU ahead of its exit from the Union. The counterproposal, which in many ways may be read as a capitulation, comes two weeks before the European Council, which could approve the start of the second phase of the negotiations, as long as sufficient progress is made on the priority issues dealt with in the first phase (in addition to settlement of the divorce bill, the rights of EU citizens legally living in the UK and vice versa, and special accord for the border between the Republic of Ireland and Northern Ireland). However, there is no certainty that an agreement will be reached on the other two points before the European Council meeting: a capitulation of the UK government on the Irish dossier as well would have serious consequences in terms of the resilience of the government coalition, whereas Ireland could veto any agreement that fails to guarantee an open border.  Time is playing against the British government: the asymmetry in trade relations implies that the cost of a hard Brexit for the United Kingdom would be disproportionate compared to the consequences faced by the rest of the European Union. With no guarantee of a transition period effectively being decided, businesses operating in the United Kingdom, and the British government itself, will inevitably have to make contingency plans ahead of a potential hard Brexit scenario. Therefore, the British negotiators have already surrendered (1) on the sequence laid out for negotiations, (2) on the fact that the United Kingdom has sizeable financial commitments to settle, (3) on the need of embracing sections of European law into national law, (4) on the need for a transition period during which little would change, initially rejected by Leavers. Ultimately, the agreement will be much in line with the terms upheld by EU negotiators from the start. Also, the United Kingdom will in all likeliness need to postpone most effects of Brexit to well beyond 29 March 2019. 

In the United States, the Tax Cuts and Jobs Act (TCJA) has incurred a setback in its approval process in the Senate: discussion of the bill, which should have begun yesterday, has not yet been scheduled. After McCain’s declaration of support for the tax reform bill, the opposition of the fiscal conservatives group has become more problematic, following the publishing of dynamic macroeconomic estimates by the Joint Committee on Taxation (JCT). The JCT argues (not surprisingly) that the reform would not finance itself via stronger economic growth, but would result in a higher cumulated deficit over 10 years by one trillion dollars. The Senate leadership is attempting to draw up safeguard clauses that will reassure the senators concerned about the reform’s impact on the deficit, while a possible change in the corporate tax rate is also being discussed.

OPEC and Russia have announced a nine-month extension of the agreement which places a ceiling on domestic oil production. The new terms will be in place until the end of December 2018. Current cuts in volumes have been confirmed (totalling 1.8 million barrels per day). The biggest positive surprise involves Libya and Nigeria, previously exempt from the cuts, but now subjected to an aggregate ceiling of 2.8 million barrels per day in output. Furthermore, the Joint Ministerial Monitoring Committee, presided over by Saudi Arabia and Russia, will meet every three months to assess respect of the agreement and analyse the evolution of demand and supply fundamentals. If the agreement is largely respected, the global oil market will probably stay balanced in 2018. The main threats will lie in changes to non-standard (shale) production.

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Source: BONDWorld