24/10/2018 - EU May Offer Customs Deal

GBP

Sterling briefly gained on Tuesday after a media report that the European Union could offer British Prime Minister Theresa May a UK-wide customs union to clinch a Brexit deal. The pound’s strength was only brief as the market remains unconvinced May can successfully sell any deal to her Conservative party colleagues and get it through parliament.

EU diplomats have said that the bloc is examining ways to solve the Irish border problem by keeping the whole of the United Kingdom, and not just Northern Ireland, inside the EU’s customs territory. This would be fully settled only in post-Brexit negotiations – and the EU would set stricter terms than May offered. The EU also still wants some element of special protection for Northern Ireland in the treaty, although it may be only hypothetical.

May’s spokesman said on Tuesday that the British leader was confident she could get a Brexit deal that will win the support of parliament. The prime minister had told parliament on Monday that the Brexit deal with Brussels was 95 percent complete, and she urged restive lawmakers to back her in the final stages of Britain’s exit from the EU, saying talks were in their most difficult phase. But opponents within her own party and in the opposition have stepped up criticism of the deal she is trying to get, even if an imminent challenge to May’s leadership appears less likely.

EUR

The European Commission rejected Italy’s draft 2019 budget on Tuesday, saying it brazenly broke EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action. In a letter to the Commission on Monday, Italy acknowledged that the draft violated EU rules, but said it would stick to it. Deputy Prime Minister Luigi Di Maio responded to the Commission rejection by calling for “respect” for Italians.

A spokeswoman for the economy ministry in Rome defended the expansionary budget and said Italy stuck by its position that the only way to cut public debt was by boosting economic growth.

Italy has the second highest debt-to-GDP ratio in the EU after Greece, at 131.2 percent in 2017, and the highest debt servicing costs in Europe. But it believes additional spending through a higher deficit would boost growth, helping reduce the debt-to-GDP ratio. Having recently emerged from the Greek debt debacle that nearly destroyed the single currency, the EU is concerned about another possible crisis if debt-laden Italy were to lose market trust.

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