andreas dombret : we can work it out – or can we? current challenges in brexit talks speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at an event of the atlantik - brucke at the travellers club, london, 8 november 2017. * * * 1 introduction ladies and gentlemen, it ’ s a great pleasure to be with you in london, which for me has always been the embodiment of both british and international spirit. just a few miles from this building, 52 years ago, on 20 october 1965, the beatles recorded their hit “ we can work it out ” at emi studios, later renamed abbey road studios. this song is about the difficulties in repairing a damaged relationship. the legend goes that paul mccartney delivered the up - beat mood, concentrating on the possibility to work it out – before john lennon added the rather sceptical voice. thus, the attitude of the song swings from positive to negative. to me, this clash of messages describes the current state of the brexit talks better than anything else. currently everyone is asking whether the eu and the uk can work it out. yet, in a way, it ’ s too late : the train has already left the station. the uk will leave the eu, and that will include a fullblown exit from the single market and the customs union. but on another level, we can still work it out, as we can still find an agreement that achieves the two big goals : a stable and friendly political alliance as the foundation for close cooperation in foreign and security matters, and economic cooperation that allows for an efficient division of labour and trade. from an economic point of view, the question then is : can we still work out a deal of close cooperation with little in the way of friction? or will we break up entirely and trade on quite prohibitive terms? i remain optimistic that we can achieve a good deal for both sides, and i remain committed to this outcome. but what does that mean? for me it means two things. first, there is no need to panic : even the worst - case scenario is manageable from an economic viewpoint. yet, it will have serious effects on our economic process. thus, and this is the second point, if we want a strong economic partnership that ’ s based on a sound political partnership going forward, both politicians will need to work out the best possible terms for economic cooperation ;

demand pressures on prices are likely to remain subdued given the expectation of a negative output gap throughout next year, the outlook for inflation presents, in my opinion, risks tilted to the upside. the possibility of a rebound in the prices of agriculture and livestock, present for some time given below - trend increases, is already materializing. however, recent experience suggests that its effects on overall inflation should be transitory. therefore, the evolution of the exchange rate continues to represent the main risk for inflation. the possibility of a higher pass - through to prices has increased as a result of the additional peso depreciation in recent weeks and the potential for further pressures on the peso in the short term, especially in view of the upcoming presidential election in the united states. depreciation of the peso is explained by a combination of external and domestic factors. naturally, the anticipated normalization of monetary policy in the united states has been a source of apprehension. in addition, as already noted, uncertainty regarding the outcome of the electoral process in that country has been reflected in the behavior of the peso, in view of the potential implications for mexico ’ s economy. the situation has been further complicated by weak oil prices, a generalized situation of uncertainty in international financial markets, and the use of the peso as a hedging instrument against risks in other emerging market economies and for speculative purposes. on the domestic front, distress is mainly related to the evolution of public finances and, to a lesser extent, the widening of the current account deficit. in a situation characterized by a negative output gap, low inflation and well anchored inflation expectations, on the one hand, but higher risks for inflation, on the other, the target for the overnight inter - bank interest rate has been increased four times since late 2015 to date. the first increase, of 25 basis points, took place as a response to a corresponding adjustment in the target range for the federal funds rate in the us. the reasons are straightforward. in view of close links between the mexican and us economies, an environment of widespread nervousness in international financial markets, a very open capital account in mexico and high peso - dollar exchange rate levels, a narrowing of the interest rate differential between the us and mexico could have resulted in disorderly capital outflows, and risks for inflation and financial stability. subsequent increases in the monetary policy interest rate in mexico of 50 basis points each in february, june and september are explained by a number of common factors : the expectation