Why Northern Ireland’s Protocol Protest Need Not Worry Sterling

• Stormont throws curveball in protocol dispute
• With de facto triggering of Article 16 provision
• But Article 18 suggests it need not worry GBP

Above: File image of Northern Ireland First Minister Paul Givan. Givan is expected to resign on Feb. 03 in protest over the NI protocol.

Stormont’s agricultural minister has announced the disapplication of a key Northern Ireland Protocol provision in a unilateral action that does little to ease tensions between London and Brussels, although Article 18 of the very same protocol offers an outline of why this need not trouble Pound Sterling.

Northern Ireland’s unionist agricultural minister Edwin Poots told the press late on Wednesday that his Department of Agriculture, Environment and Rural Affairs (Daera) has been instructed to cease the inspection of agricultural goods arriving in the province from the British mainland.

Inspections were necessitated by Article 5 (customs, movement of goods) of the protocol and their abandonment would appear to be a breach of its terms, one which could lead Brussels to seek penalties that would potentially hinder the trade relationship between the UK and European Union.

Poots’ announcement comes amid a months-long and so far unsuccessful effort by London to renegotiate aspects of the protocol with Brussels, during which the UK government has repeatedly threatened to unilaterally invoke Article 16 of the protocol in order to disapply some of the contentious terms.

“If Article 16 is triggered and customs checks end, the EU would be entitled to retaliatory measures, which could include tariffs or terminating the post-Brexit trade deal,” writes Brendan McKenna, an economist at Wells Fargo. “In this scenario the GBP/USD exchange rate could fall to $1.20 within weeks and the EUR/GBP exchange rate could move to 0.8750 [1.1428].”

The UK government was met in each instance with warnings of “serious consequences” from Brussels if it takes the Article 16 course of action, but with this path now effectively being taken from Stormont rather than Westminster; the EU has now been thrown something of a curveball that could limit its capacity to respond aggressively.

Above: Article 18, Northern Ireland protocol.

Most notably, Article 18 of the very same protocol requires democratic consent to be obtained from a majority on both sides of the sectarian divide in order for its various contentious terms to remain in force.

Article 18 also provides for much of the protocol to be scrapped following a specific period of time in the event that democratic consent cannot be obtained from both the unionist and republican communities in the province.

The protocol provides up to six years from January 2021 for this consent to be obtained, while making clear that democratic consent is fundamentally necessary for the device and its terms to remain in force beyond that point.

Stormont unionists’ celebrations of minister Poots’ instruction this week are evidence that no such democratic consent exists within that community and could potentially work in favour of the UK government in the hearing of any complaint by the EU-UK Joint Committee on Northern Ireland.

This is because the protocol makes clear that neither party intended for Articles 5 to 10 and any other related clauses to survive or remain in force in the absence of democratic consent, and because the apparent refusal of consent ultimately dooms the above referenced provisions.

In a nutshell; with Stormont taking action rather than Westminster, the risk of a breakdown in the UK-EU trade relationship is greatly reduced and Pound Sterling need not necessarily worry about trade tariffs, financial penalties or any increases in non-tariff barriers. However, it's not clear whether or in what way the anticipated resignation of Paul Givan as leader of the Democratic Unionist Party would impact Wednesday's announcement from Poots.

For readers’ background, the protocol is the final incarnation of the ‘Northern Irish backstop,’ which entered into force as an addendum to the UK-EU trade and cooperation agreement when that was voted onto the statute book by the House of Commons and House of Lords in January 2021.

That agreement and the accompanying protocol served to facilitate continued tariff free trade with the European Union following the UK’s exit from the transition period at the beginning of last year.

However, the protocol’s various provisions left Northern Ireland behind in the EU’s customs union and stoked fears among Northern Ireland’s unionists about the province’s place in the United Kingdom.