Brexit Antagonism Escalates as EU, U.K. Go Another Round

(Bloomberg) -- When the U.K. and European Union shook hands on a trade deal late last year, few expected the new relationship to be plain sailing. And as with many divorces, antagonism between the sides has refused to fade.

Among the most sensitive issues is Northern Ireland, and tensions ramped up considerably this week when the U.K. announced it will ignore some crucial obligations under the Brexit deal and the EU responded with a dramatic threat of legal action.

With Prime Minister Boris Johnson already under pressure from members of his own party to rip up the Northern Ireland deal, the risk is a further escalation that erodes relations. That could have spillovers far beyond politics, and the ongoing saga is a frustration for business. The U.K.'s huge finance industry, for example, is seeing the potential for beneficial trade agreements being slowly whittled away by endless political spats.

For its part, the EU had already raised the temperature when it controversially suggested in January -- albeit briefly -- that it could use an emergency clause in the Northern Ireland deal as part of export controls on vaccines.

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European Commission Vice President Maros Sefcovic told the Financial Times on Thursday that the EU would launch legal action “very soon.” This would just be the first step in a long dispute process set down in the Brexit agreement that could last months but could ultimately impose trade tariffs or other penalties on the U.K.

Strains on the fragile compromise over Northern Ireland are particularly dangerous, threatening stability in a region that suffered decades of bloodshed. The Irish News reported that some paramilitary loyalist groups in the region are withdrawing their support for the Good Friday peace deal, which largely ended the violence.

The deal signed by Johnson avoids border checks on the island of Ireland, and keeps Northern Ireland inside the EU's customs union and much of its single market. That means the border, and its accompanying checks, are effectively in the Irish Sea, between Northern Ireland and the rest of the U.K

To ease the adjustment for businesses, not all trade checks were introduced on goods moving between Northern Ireland and the rest of the U.K. at the end of the post-Brexit transition period. But now the U.K. has extended the waiver until October, beyond the March 31 date agreed with the bloc.

Ireland's Foreign Minister Simon Coveney called the move “deeply unhelpful.” Johnson on Thursday said these were “temporary, technical measures” to help trade.

“I'm sure that with a bit of goodwill and common sense, all these issues are eminently soluble,” he said.

On Wednesday, Johnson had told Parliament the government would act as needed to ensure Northern Ireland's position within the U.K. internal market, and “we leave nothing off the table.”

Northern Ireland is just one example of the inherent tension in the agreements that established the post-Brexit relationship. Given those needed nearly four years of complicated, bad-tempered, and at times chaotic negotiations there's a sense of foreboding behind the scenes in London and Brussels.

Within Johnson's Conservative Party, some members want him to invoke the agreement's Article 16, which gives both sides the unilateral power to take action should its application create “serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade.” It's considered by architects of the agreement on both sides as the nuclear option that was never expected to be used.

Many in Brussels believe it suits Johnson's government to constantly pick holes in the deal, in what's ostensibly a post-Brexit manifestation of the way the U.K. blamed the EU before the split. But the EU's blunder in January, -- which Commission President Ursula von der Leyen said she regretted -- has given the U.K. reason to push the issue.

For the U.K., there's frustration with the stance in Brussels. One official with knowledge of the discussions said it was clear that EU figures see the issue solely through the perspective of the Republic of Ireland and are too sympathetic to Northern Ireland's nationalist community.

Dealing with the province isn't the only source of contention. There's also finance, a sector vital to the U.K. economy and one that the EU would like to raid for spoils. The City of London has already seen some share and swaps trading slip away, and a slow exodus of bankers is expected to continue. Last month, Bank of England Governor Andrew Bailey warned the EU against demanding euro derivatives be settled by clearinghouses inside the bloc, saying such a move would be a “very serious escalation.”

The two sides have also bickered over a ban on shellfish exports. And Johnson's government is standing alone in the world in refusing to grant full diplomatic status to the EU's ambassador in London.

Adding to the tension is the appointment of David Frost, formerly Johnson's chief negotiator, as a minister in charge of relations with the EU. He's considered a hardliner who, in private meetings in Brussels, has made clear his dislike for the Northern Ireland Protocol, despite helping to negotiate it. He has also several times spoken of the need to prioritize sovereignty over short-term economic benefits.

Mujtaba Rahman, director of political risk consultancy Eurasia, summed it up recently in a note to clients: “Permanent conflict will be the new normal.”

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