Should The Markets Worry About Article 16?

By Orbex

Later today, the EU is holding one of its myriad of leaders’ summits. The major issue on the docket is foreign policy, with China relations at the forefront.

Most notably, since January 1st foreign policy also includes the relationship of the EU with the UK.

Earlier this week, there was some market consternation over comments from the UK Brexit minister Frost over the Northern Ireland issue. In particular, he repeatedly used the word “threat”. Now analysts expect the EU to give some kind of “response”, presumably after the meeting later today.

Is there anything more to this than just rhetoric? And with the markets in Europe under pressure, how much will this situation depress the outlook and affect the two major currencies?

The thorn in the side

The Northern Ireland Protocol has been a major sticking point for Brexit for a long list of political and historic reasons.

The ‘why’ of the issue won’t have as much of an impact on the markets as the ‘what’ of the issue.

Basically, both sides believe that the other will have a significant political cost if they don’t offer certain concessions. The markets apparently believe this as well. In fact, the rise of potential uncertainty leads investors to stay away until the issue’s resolution.

Specifically, should the UK press its initiatives, the EU could retaliate with punitive trade restrictions in other areas. This would naturally affect the value of the respective currencies. And it could also impact UK stocks that rely on exporting or importing those goods.

What about Article 16?

David Frost mentioned that Article 16 might be invoked in early November. This will happen if the UK doesn’t get what it wanted out of negotiations with the EU. However, the EU doesn’t want that and would challenge the invocation on legal grounds.

Why is it an issue? Because invoking the article allows for the suspension of certain aspects of the Brexit deal.

The worry for the markets is that if that happens, it could lead to a spiral of uncertainty similar to what happened following Brexit.

Right now, investors know what the rules are, even if they have a diverse range of opinions on whether they are good or bad rules. Nonetheless, invoking a suspension of the rules, even if temporarily, opens the possibility of new rules. This, in turn, could influence investment outcomes.

What can we expect?

Many analysts think this is another show of brinkmanship between the UK and the EU, and that they’ll find a resolution in the 11th hour, just like with the main Brexit agreement.

Whether there is a resolution of the issue in favor of the EU or the UK, economists do not expect a major impact on the markets.

After all, the actual size of Northern Ireland’s economy is quite small. And unlike before the last general election, Northern Ireland representatives in Parliament aren’t the key to avoiding a no-confidence vote in the government.

We might see a minor aversion to the UK risk in the upcoming couple of weeks as a consequence of the Northern Ireland issue.

There are many other factors, however, that could outweigh the effect. Unless it gets to the point that the UK does in fact invoke article 16.

Article by Orbex

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