Sterling fell more than 1% Monday after the U.K. Prime Minister Boris Johnson said he wouldn't accept EU standards as a price to pay in order to secure a free trade deal.
The United Kingdom left the EU officially on Friday, but it has yet to agree a new relationship with the EU. Both sides laid out separately on Monday what they want from a future trade deal but positions appear so far apart that economists have not excluded the possibility of an abrupt breakup at the end of the year.
"I would put it at 20% at the moment," Anna Rosenberg, head of Europe and the U.K. at the advisory firm Signum Global, told CNBC Monday. "We have to track how talks pan out. If tensions rise and they seem to break down, I will revise it up," she added.
The U.K. is currently in a transition period, during which EU law and rules are still applicable across the country, and the U.K. government can prepare trade deals with other nations. During this period, London also aims to develop new trade arrangements with Brussels. Failure to reach a new trade deal would bring higher costs for U.K. and European exporters.
"There's no doubt there is also considerable difference between the parties," David Henig, a U.K. trade policy expert at the think tank ECIPE, told CNBC. "There is a possible deal that removes tariffs in return for some level playing field provisions, but equally no deal remains a distinct possibility," he said.
A Canada-like agreement?
"We have made our choice: we want a free trade agreement, similar to Canada's," U.K. Prime Minister Boris Johnson said Monday.
The EU reached a free trade agreement with Canada back in 2016. This deal took seven years to negotiate and has yet to be fully ratified by national parliaments in Europe.
Also, speaking Monday, the EU's chief negotiator said there is not enough time to put together a similar deal with the U.K.
"Yes, that is the objective," Michel Barnier said about reaching a free trade agreement with the U.K. "But we are constrained by the decision, if it's confirmed, the decision of Boris Johnson to leave the single market and the customs union at the end of this year."
When you are not a member of the EU then, objectively speaking, your position is different and less favorable.Michel BarnierEU's chief negotiator
The British Prime Minister wants to conclude the negotiations before the end of the year – allowing for less than 11 months to discuss every negotiating chapter. Boris Johnson also said there is "no need" for a free trade agreement to involve accepting EU rules.
"There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment or anything similar, any more than the EU should be obliged to accept U.K. rule," Johnson said.
The EU has repeatedly said that the more the U.K. deviates from European rules, the more difficult it will be to design new trade arrangements.
Michel Barnier said Monday that any offer of zero tariffs would require a "level playing field over the long term" in areas such as environmental standards and state aid.
"The most ambitious partnership is what we had. When you are not a member of the EU then, objectively speaking, your position is different and less favorable," Barnier said.
Annual negotiations over fisheries?
Fisheries have already emerged as one of the biggest sticking points.
Boris Johnson proposed Monday to have annual negotiations with the EU over fishing – similar to what Norway does. The latter is not a member of the European Union, but it contributes to the EU's budget in exchange for access to the European single market – a free trade zone.
However, European fishermen are against annual negotiations with the U.K. They rely heavily on access to British waters and every year they would face uncertainty over access and the amount of fish allowed to be caught.
"We want to maintain the existing arrangements in terms of access," Sean O'Donoghue, founder of the European Fishing Alliance, a lobby group for European fishermen, told CNBC Thursday.
The fishing industry represents a small part of the EU's economy, but it has strong political influence.
