United Kingdom Politics January 2017

United Kingdom

United Kingdom: Hard Brexit beckons as Article 50 trigger draws nearer

January 30, 2017

Following months of uncertainty as to how the United Kingdom will walk away from the European Union, Prime Minister Theresa May revealed a 12-point statement on the government’s plan on 17 January. May’s speech signaled a resolutely “hard” Brexit, ruling out any possibility of a partial breakup and suggesting that, “No deal for Britain is better than a bad deal for Britain”. The immediate market reaction to the speech was positive, but doubt about the feasibility of the proposed Brexit plan remains, casting a shadow over the health of the economy in the medium- to long-term.

May envisages the UK leaving the single market and the European Court of Justice, regaining full control of the country’s borders by imposing visas on EU workers, and becoming a partial member of the Customs Union. She foresees the latter condition allowing the UK to negotiate free trade agreements with countries outside the EU without imposing the single market’s common external tariff. The PM emphasized that the UK’s contributions to the EU budget every year will be scrapped once they are out of the bloc, though it will continue to help fund some specific European programs in selected areas such as science and research. The plan also sets out the government’s determination to protect and enhance workers’ rights, make the UK an attractive investment destination, and maintain the Common Travel Area with the Republic of Ireland. May also committed to putting the final Brexit agreement to vote in both houses of the UK parliament, though her critics note that by that stage, since Article 50 will have been triggered, the alternative of leaving the EU without a deal is not likely to be one the Parliament chooses, even if the deal is not to its liking.

The market reaction in the aftermath of the speech was positive, largely on account of its clarity after months of uncertainty as to the government’s intentions, and this was reflected in the immediate appreciation of the pound. However, negotiations with the EU will be anything but an easy ride. Efforts to secure tariff-free access to the single market for key sectors such as the cars industry and financial services might fail. As of now, it is uncertain whether the EU will accept sector-specific deals, and the non-discriminatory rules of the World Trade Organization call into question the feasibility of the proposed deal. A UK outside of the single market will also make it very difficult for financial firms to maintain their “passporting” rights, despite May’s intention to negotiate this. In fact, HSBC and UBS have already confirmed plans to relocate thousands of jobs outside the UK amid concerns about the future of the country.

Set to trigger Article 50

Theresa May remains determined to trigger Article 50 before the end of March of this year—as she had promised in October last year. To this effect, she presented a Bill to Parliament on 26 January notifying the UK’s intention to withdraw from the EU. The move came days after the government lost its case in the Supreme Court on whether it could Article 50 without the approval of Parliament.

The Bill is expected to receive parliamentary approval in the House of Commons, given that Labour leader Jeremy Corbyn has imposed a three-line whip on Labour MPs to vote in favor of it, in yet another move causing internal dissent within the Labour Party and risking a shadow cabinet rebellion. The parliamentary vote does give some opportunity to the opposition and even to backbench Tory MPs to scrutinize the Brexit deal and suggest amendments, though May has kept the Bill to a bare minimum to reduce the scope for debate prior to Article 50 being triggered.

The more challenging task for the government will be to pass the bill in the House of Lords, where the Conservatives do not have a majority. The House of Lords could well make passing the Bill difficult, which might potentially lead to delays, but is not ultimately expected to block it.

While debates over triggering Article 50 will continue to influence business and consumer confidence, the real impact on the economy is not expected to hit until UK-EU negotiations start to take place. Andy Chaytor, Head of European Rates Strategy at Nomura, adds:

“We do not expect any significant economic ramifications from the triggering of Article 50. As the UK economy has been resilient to the ‘shock’ of the Brexit vote, the ‘expected’ triggering of Article 50 should not be an issue. Brexit is likely to start to bite when the market starts to understand the future relationship between the UK and the EU. However, political bandwidth in the EU will be limited by Q2 French elections and Q4 German elections. We can still have negotiations start and market-moving headlines, but suspect the real substance of Brexit negotiations will be more of a 2018 issue.”

May’s leadership and her political future will inevitably be judged on how she manages to handle the unprecedented task of Brexit without inflicting severe harm on the UK economy, while also safeguarding the country’s unity. The relationship between the central government and the devolved administrations of the Scottish Parliament and the Welsh and Northern Ireland Assemblies is on the rocks since the Supreme Court confirmed that none of them will have a veto on the proposed Brexit agreement. The government’s proposal for a hard Brexit has taken Scotland one step closer to seeking a second independence referendum.

Author:, Senior Economist

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