Ever since the Leavers overwhelmed the Remain faction in the UK’s Brexit vote, observers have been wondering how the UK is going to effect its break with the EU …and how complete the breach with continental Europe will be.
The two main approaches were dubbed soft, meaning that negotiations would be held at a leisurely pace, the break would come eventually–but not soon–and that the UK would retain as many of the privileges of EU membership will shedding as many obligations as possible.
Article 50 of the Lisbon Treaty lays out the process for a country to withdraw from the EU. It provides that a state that wishes to leave sets the process in motion by invoking Article 50. That starts a two-year clock running, at the end of which the separation occurs. Since two years is a relatively short period in diplomatic time, especially to arrange complex future trade agreements, conventional wisdom has been that a country like the UK would begin negotiations first and only trigger Article 50 when the negotiating finish line was in sight. Taking this path would be the more economically sensible. It would also be a clear sign that soft is the ultimate goal.
The alternative would be “hard,” meaning basically getting out of Dodge as fast as possible. Why do so when collateral economic damage would result? …because other political considerations, like halting immigration from the rest of the EU, have a higher priority.
Over the past week or so, Prime Minister Theresa May has been signalling that Brexit will not be put on the back burner, and that, in consequence, the UK government is opting for the “hard” road. She will invoke Article 50 by next March, at the latest. And she has packed her negotiating committee with the most anti-EU people she can find.
This decision has a number of consequences:
–Scotland, where two-thirds of voters cast their ballots to Remain in the EU, is reviving its own referendum to withdraw from the UK and enter the EU as a sovereign country itself
–putting itself under time pressure by effectively starting a two-and-a-half-year clock running, the UK has revealed its sense of urgency. That may have lost it negotiating leverage
–half of the UK’s exports go to the rest of the EU. Time constraints may see it leaving the EU in early 2019 without trading agreements with countries where its major customers reside–meaning export sales may fall off a cliff
–similarly, it becomes less likely that bankers based in London can retain their current unfettered access to clients in other EU countries. This suggests that banks may begin to shift operations to the Continent
–sterling will continue to slide. For portfolio investors like you and me, this has perhaps the most important near-term implications. There’s no need now, nor in the near future, to change from favoring London-traded stocks whose assets and earnings are outside the UK. Better still if the firms’ borrowings and SG&A expenses are in sterling.