SUMMARY

  • Brexit Brinksmanship Returns
  • Low Plateau for Fed Lending Programs
  • Young Adults and the Comforts of Home

Brinkmanship is a situation in which competitors flirt with disaster in order to get the most positive outcome for themselves. A poker player will sometimes go all-in to intimidate other players into folding, despite holding a relatively weak hand. This approach can work, but only until another player calls the bluff.

The U.K. has engaged in brinkmanship for much of the four-year-old Brexit saga. With less than four months to go in the transition period that followed its departure from the European Union (EU), the U.K. is still banking on this strategy. The EU has shown no signs of folding, raising the risk of a disastrous outcome.

Britain left the EU in January after signing a Withdrawal Agreement requiring it to follow EU rules during this year’s transition period. The two sides were to invest the 12 months negotiating and agreeing the outline of a new economic relationship. But instead of building on the base of the Withdrawal Agreement, the U.K. government recently stunned the EU and some British citizens by seeking to break it down. This has raised the risk of departure on December 31 without a new economic treaty with the EU; this risk is being priced into the markets for British assets and the pound.

Weekly Economic Commentary - 09/18/20 - Chart 1

Britain wants to set many of its own rules, particularly on state aid to industry, the biggest roadblock in Brexit negotiations. Instead of following the European regime, which would have provided better market access to British businesses, the U.K. intends to follow World Trade Organization (WTO) state aid rules to create its own national champions.

The U.K. Parliament is currently considering a bill that suggests it would not implement the dual customs regime for Northern Ireland that was central to the Withdrawal Agreement. Retreat from this commitment would lead to customs checks and a hard border between Northern Ireland and the Republic of Ireland, something both sides seemed anxious to avoid a year ago.