Following closely guarded ‘tunnel talks’ over the last week the EU and UK finally agreed a Brexit deal this morning. The main elements of the deal are:
1. Northern Ireland will officially remain in the UK customs union but effectively will operate within the EU customs union
2. EU regulations will apply to most goods in Northern Ireland
3. There will be no border checks on the island of Ireland but border checks will be based in the Irish sea
4. VAT measures will retain the integrity of the single market while respecting some UK conditions
5. The Northern Island assembly will have a majority vote every 4 years to determine if these arrangements are to remain in place
A transition period to the end of 2020 is to apply over which time the UK and EU will attempt to agree a fee trade deal. The deal is expected to be ratified at the current two day EU summit with the UK parliament due to sit and vote on the deal on Saturday.
The DUP have objected to the deal with concerns on 3 main issues:
1. The customs agreement whereby Northern Ireland effectively remains in the EU customs union and the resultant border checks in the Irish sea
2. The majority vote every 4 years in the Northern Ireland Assembly which removes any DUP veto
3. Concerns over VAT rules
The next crucial step is the vote in the Commons on Saturday. The Conservatives currently have 288 MP’s but need 320 to carry the vote. It has been estimated that 16 of the 21 MP’s who recently lost the Tory party whip would vote for the deal. Within the European Research Group (ERG) up to 28 MP’s are seen as ‘hardline Brexiteers’ and therefore may not vote for the deal particularly if the DUP are not supporting it. Without these 28 hardliner votes it could be very difficult for Johnson to get the deal passed. However with leading ERG members supporting the deal, many of these might also be convinced to do so. With all ERG members on board, Johnson could still need between 15/20 Labour MP’s to get the deal across the line which is possible given previous votes and comments by some Labour MP’s. Our sense is that while the vote will be very tight, Johnson will succeed in getting the vote through. As a result recent Brexit related uncertainty could be expected to ease with positive implications for Irelands growth outlook.
Market reaction to the announcement this morning is somewhat mixed with the FTSE 100 up 0.9% while sterling is down slightly after recent gains with EURGBP trading at 0.8670. The ISEQ index after an initial rise is down approx. -0.4% on the day.
Lenny Mc Loughlin
Investment Strategist | Irish Life Investment Managers