The pound fell steeply against the euro and the dollar on Thursday, after European Commission president Ursula von der Leyen said Europe would begin legal action against the UK over its threat to break part of the Brexit Withdrawal Agreement.
At a press conference in Brussels, von der Leyen said the Commission had sent a “formal notice” to Downing Street over Britain’s Internal Market Bill, which threatens to break part of the Withdrawal Agreement.
Von der Leyen said the bill “by its very nature, breaches the obligation of good faith laid down in Withdrawal Agreement”. The European Commission had given Britain until the end of September to withdraw or amend the bill but von der Leyen said the “problematic parts” remain.
The Commission’s letter marks the beginning of a formal infringement process against the United Kingdom. It has one month to reply to today's letter and could face a further escalation.
A UK government spokesperson said Downing Street would respond “in due course”.
The Withdrawal Agreement was ratified by both the EU and the UK and went into force on 1 February 2020.
Last month Downing Street announced plans to break part of the agreement related to Northern Ireland. The UK claim the changes, which were tabled as legislation under the Internal Market Bill, are to prevent a hard border on the island of Ireland. The EU claims the UK's plans will in fact lead to a hard border.
“We need to create a legal safety net to protect the integrity of the UK’s internal market, ensure ministers can always deliver on their obligations to Northern Ireland and protect the gains from the peace process,” a government spokesperson said on Thursday.
Britain’s threat to renege on parts of the Withdrawal Agreement, as well as state aid and fisheries policies, have been major sticking points in Brexit trade negotiations.
The UK should accept that the EU “isn’t bluffing” and “won’t compromise”, said Ranko Berich, head of market analysis at Monex Europe.
“Boris Johnson will be seen as backing down or will need to spend some serious political capital” to achieve a deal, he added.
Boris’s greatest “breakthrough” came last year when he broke former UK prime minister Theresa May’s red line on the border with the Irish sea, Berich said.
“Now the same red lines that the EU wouldn't move on are now closing in on Boris.”
Sterling is likely to head 5% to 8% lower if both sides walk away from a deal, Berich said.
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