The pound fell against the euro and dollar on Thursday afternoon, after the European Union threatened to walk away from Brexit trade talks unless the UK abandoned plans to renege on parts of the Withdrawal Agreement.
Cabinet Office minister Michael Gove met with EU Vice-President Maroš Šefčovič in London on Monday to discuss Europe’s “serious concerns” about the Internal Market Bill. The bill, published on Wednesday, would overrule part of the Withdrawal Agreement related to Northern Ireland and violate international law as a result.
The meeting failed to resolve the issue and the EU said Brexit trade talks could collapse unless Britain changes course.
“Violating the terms of the Withdrawal Agreement would break international law, undermine trust and put at risk the ongoing future relationship negotiations,” the European Commission said in a statement on Thursday afternoon.
The pound also sold off against the dollar (GBPUSD=X) and was down 0.7% by mid-afternoon.
“Sterling took a bit of a kicking as the mood music around this week’s Brexit talks took a decided turn for the worse,” said Neil Wilson, chief market analyst at Markets.com.
Šefčovič gave Gove an ultimatum to withdraw or amend the Internal Market Bill by the end of the month. If it does not, the European Commission said the EU would “not be shy” in pursuing legal action. The commission said the bill “constitutes an extremely serious violation of the Withdrawal Agreement and of international law.”
“By putting forward this Bill, the UK has seriously damaged trust between the EU and the UK,” the EU said. “It is now up to the UK government to re-establish that trust.”
The British government signalled it would not change course. The government published a legal opinion stating it believes it has the right to overrule parts of the Withdrawal Agreement.
“It is an established principle of international law that a state is obliged to discharge its treaty obligations in good faith,” the government wrote in the one page statement. “This is, and will remain, the key principle in informing the UK’s approach to international relations.
“However, in the difficult and highly exceptional circumstances in which we find ourselves, it is important to remember the fundamental principle of Parliamentary sovereignty.”
Wilson said: “The language and tone coming out of everything today would suggest a material increase in no deal risks.”
The Northern Ireland protocol of the Withdrawal Agreement bound the whole island of Ireland to abide to European standards and tariffs if no Brexit trade deal could be reached. It was conceived in order to protect the EU single market and avoid a hard border between the Republic of Ireland and Northern Ireland.
However, the protocol would require checks of some goods moving between Ireland and mainland Britain in a no deal scenario, necessitating some form of sea or land border.
The Internal Market Bill seeks to overrule this clause in order to avoid the need for a border and fulfil Boris Johnson’s election pledge of unfettered trade between all four nations in the UK.
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