Pound Sterling Slides as Germany Closes Brexit Backdoor Lombardi Letter 2017-09-07 02:14:31 Pound sterling GBP/EUR Brexit economy Germany closed backdoor channels with the British, sending the GBP/EUR sliding. News

Pound Sterling Slides as Germany Closes Brexit Backdoor

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Merkel Deals Blow to Theresa May

In accordance with their public statements, German officials are closing down backchannels between their government and the British government, at least in conversations related to Brexit. This isn’t good news for the pound sterling.

The orders come all the way from Chancellor Angela Merkel herself. (Source: “Germany Said to Shut Door on Brexit Back Channels in Blow to May,” Bloomberg, October 19, 2016.)


Merkel doesn’t want any ex parte communication between the two governments, particularly as Article 50 of the European Union constitution has not been invoked. The provision was written to enact the departure of a member state, but Britain has not officially triggered it.

As a result, the backdoor channels between British and German officials have been closed, leaving the island nation with a shrinking amount of leverage. Subsequently, markets resumed the months-long slide of the pound sterling.

Let’s not forget that the GBP/EUR exchange rate plummeted 17.6% since the start of the year.

The lead-up to, and aftermath of, Brexit was an unqualified catastrophe for the purchasing power of ordinary British people. Investors held out some hope that favorable terms for Britain’s departure could be negotiated with the EU, but those hopes are founded on shaky grounds.

The idea is that not triggering Article 50 leaves a question mark on the finality of Britain’s referendum, and that British negotiators can use that sliver of hope to drive concessions from their EU counterparts. It is supposed to soften the blow of Brexit with favorable terms.

But Merkel has been keenly aware of this strategy. She has pushed for a united EU front in dealing with Britain’s pivotal decision. Both in public statements and in private ones, Merkel has apparently tried to embargo any conversations that don’t concern Article 50.

As such, British diplomats are received cordially enough, but they don’t get to start haggling over how much of the EU’s bill they’ll be skipping out on. Recent reports say they had committed as much as $20.0 billion worth of funds to EU projects.

In all likelihood, neither party wants to be left on the hook for those bills.

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