Brexit talks are heating up, which helps to revive Scottland’s potential independence from the United Kingdom. In early December, U.K. Prime Minister Johnson is going to Brussels for high-level Brexit negotiations with E.C. President von der Leyen, ahead of the E.U. Summit. While both sides appear to want a Brexit agreement to move forward, recent comments surrounding the notations have been negative. PM Jonson indicated he could ditch the internal market bill draft legislation, which would sideline an obstacle. The most likely scenario is that a skinny deal, but the market seems to be pricing in a no-deal Brexit, which will have little impact on global markets. A hard Brexit is the absolute last thing that the U.K. and E.U. need in the middle of a pandemic.
Could a Vaccine Help?
The pandemic continues to rage, but a vaccine could help smooth the issues related to Brexit. The spread of the virus has hammered the economy, and this has hampered Brexit talks. While the U.K. economy rose 1.1% in September, the GDP index is down approximately 8% for the year. The first of 800,000 doses of the Pfizer/BioNTech vaccine were injected on December 8, 2020. Up to four million more are expected by the end of the month. The U.K. will initially focus on the over-80 crowd and healthcare workers. Authorities around the U.K. have been stating how important the vaccine will be to the region.
What Will Scotland Do If there is a Brexit?
Scotland’s ties to the U.K. continue to be souring and have not improved since their referendum for independence in 2014. The Brexit saga has created even more angst. Scottland appears to be unhappy with the rewrite of the withdrawal agreement with the European Union, raising questions about the Irish border. This has raised renewed calls for Scottland to vote on a referendum to leave the U.K. and rejoin the E.U. An independent Scotland would be a member of the E.U. and NATO and engaged in the Arctic and North Atlantic security. Some SNP politicians compare their planned future sovereign state to Ireland and Nordic and Baltic nations. Scotland wants to reassure Europe and the West that an independent Scotland would be the right trading partner.
Additional Stimulus Needed
For Brexit to be successful, both the U.K. and the E.U. will need to be on solid footing. Currently, the spread of COVID-19 has hindered strong economic output and has led to the bickering that has reduced the chances of even a skinny deal. The ECB will meet in early December, and help is desperately needed.
The financial news markets seem to expect an increase and extension of quantitative easing. Q.E. could include further bond purchases and could fall under the Q.E. infinity the U.S. is currently employing. A policy change could occur at the December meeting or in early 2021. The ability to deliver a jolt to the market ahead of the arrival of the vaccine is now. The ECB could increase the Pandemic Emergency Purchase Program (PEPP). PEPP should be extended again, this time through at least end-2021 and perhaps even to June 2022 from June 2021 currently. After this stimulus, the ECB will move back to wait and see how 2021 develops.
How Have the Currencies Faired?
Both the Pound and the Euro have been appreciated relative to the dollar, but the Euro has outperformed the Pound. The ECB is concerned about the Pound’s relative strength and might suggest it is too strong in its monetary policy meeting. The rise in the Euro will likely lead to jawboning as there is very little more than the ECB can do to get the Euro to slide in value relative to the U.S. dollar and the British Pound.
The Bottom Line
The upshot is that Brexit has a range of impacts that need attention. The negative feedback loop reflects regions that are unwilling to yield and could create a skinny deal. A hard Brexit would not be favorable. The pandemic has thrown a monkey wrench into negotiations. Still, the arrival of a vaccine could go a long way toward elevating some of the U.K.’s issues and the E.U.’s economic contraction.
Scottland is also wild care. The country appears to be leaning toward a new referendum that would help the country leave the United Kingdom. The lack of robust negotiations between London and Brussels has restored Scottland’s negative feeling for the U.K. A skinny deal or a hard Brexit is likely to lead to additional angst between Scottland and London, which could push Scottland toward a new referendum.`
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