In what has been a one of the most turbulent days in British political history since the fall of Margaret Thatcher in the 1990s, – it’s time we take notice of what is happening to the Brexit deal: threats of food shortages, grounded flights, stoppage of intercontinental fund transfers and stalled factories are looming large in one of the world’s biggest economies as the country faces the prospect of a no-deal Brexit in March 2019. Business investment has dried up in many sectors and the property market, particularly in London, has turned south. The sterling has weakened as its volatility has suddenly woken up from a long slumber.
Imagine this – Past fears of Grexit were enough to slam global stock markets : The UK economy is more than 10-times the size of Greece and is a hub for $1.4tn (£1.1tn) in annual trade, indicating the severity of market reaction if things get messy. The UK is one of the foremost financial hubs in the world and any danger to its status could throw things in a disarray quickly.
Since the Brexit referendum took place on 23 June 2016, Brexit has been an object of intense speculation. Many major issues, from the Irish border to the single market, and from the rights of EU citizens to the divorce bill, have been debated and negotiated between the United Kingdom and the European Union, leaving much uncertainty in the air over whether the UK will opt for a Hard or Soft Brexit.
As you know, back in June 2016, the British populace shocked the world by narrowly voting to leave the European Union. This was seen as potentially catastrophic for England’s economy, as leaving the EU would drastically curtail the free movement of people, goods, and services that has been so critical to the U.K.’s economic growth. Since the vote, Prime Minister Theresa May and her fellow lawmakers in the U.K. and EU have been trying to figure out how to actually deliver on the referendum while avoiding disaster.
On Wednesday Nov 15th 2018, the core members of May’s Cabinet endorsed her draft plan for “Brexit.” But within a day, several secretaries and junior ministers had quit May’s Cabinet in protest. This has thrown UK politics in disarray and the Sterling in a mess. Is this just a harbinger of things to come?
A big chunk of the country never wanted Brexit and still doesn’t. Among those who do support Brexit, many see May’s draft as a capitulation to the European Union.
What is May’s new deal
Whatever happens, Britain is legally out of the EU on March 29, 2019. May’s draft is a voluminous divorce agreement that runs to 585 pages. But this deal would create a transition period lasting until December 2020 to give Britain and the EU time to hash out a final agreement on trade and other matters. Then there’s a loose proposed draft of principles on what that final settlement may hopefully look like.
In effect, trade between Britain and the EU would maintain its status quo for the transition period. After that, the goal is continued trade without tariffs and with minimal restrictions, though that’s dependent on further negotiations. Britain would still participate in the EU criminal justice system and still have access to EU databases for missing persons, criminal records, and the like. EU funding for research and universities would remain available for Britain until December 2020. May’s deal sketches out a process by which control over environmental regulations, energy and power utilities, nuclear fuel, and more would revert to Britain, but in a way that maintains continuity with the current EU standards.
The pretty uninhibited movement across EU borders would stay the same during the transition. After that, EU citizens who come to Britain, or who are still in Britain, would have to apply for new documentation. The same goes for British citizens still in the EU.
That is what May proposes. EU has other thoughts on this matter though – and things may get ugly real quick.
Another Thorn – The Irish issue
Northern Ireland is part of the United Kingdom, and will leave the EU on March 29. The Republic of Ireland will remain in the EU. That means Brexit could split the island in two. Preventing the return to a “hard” border — with physical stops and customs checks — has been one of the most contentious issues in the negotiations.
Britain and the EU will have to sort that out in the transition phase as well. If no finalized agreement is reached by December 2020, Northern Ireland would automatically be subject to the EU customs rules: no tariffs on trade with other EU members, and the same tariffs as the rest of the EU on trade from outside. It would also have to keep abiding by a lot of other EU trade regulations. The rest of the United Kingdom would be subject to those same EU tariff rules for goods specifically, but not other forms of trade.
What happens next?
European Union member nations will assess May’s draft over the next week and will need to issue their own declaration on the structure of the relationship. Everyone will then get a few more days to assess that document. Then the European Union Council will need to finalize the agreement on Nov. 25, and the EU member states will have to approve it. Finally, the British Parliament will also have to vote on May’s deal sometime in December.
Can May’s deal pass the British Parliament?
It’s unclear, but right now its chances don’t look great. May’s own Conservative party is internally split. And the Conservatives don’t even have a majority in Parliament, meaning May will have to rely on a fractious coalition of parties to push the deal through. She could very easily fail. There may even be a vote of no confidence in May’s government.
The Chaos Cometh?
If the deal doesn’t pass, things may get ugly real fast: Britain leaves the EU on March 29 with no agreed upon rules for how borders, customs, trade, and everything else should work from then on.
There’s one other possibility, albeit an unlikely one: The government squeezes another referendum in before March 29, and gives British voters one last chance to admit their mistake and call the whole thing off.
Meanwhile, its best to stay away from a Long Sterling or Sterling proxy position in any way – including companies who derive a large part of their incomes denominated in this currency. Given that the USD is also playing at the edges of weakness, theres an exciting time coming next few weeks!
Watch this space as things get exciting!