Application for withdrawal from the EU: hard Brexit now looming

The countdown has started: two years’ time to sort out Brexit. Today the British government submits its official application to exit the European Union. This starts the two-year period in which the formalities of the exit can be settled.

 

The starting situation is very difficult: none of those involved has any experience with the procedure, after all the exit of a member state is an inglorious première. And the lack of routine handling such negotiations creates a strong inclination to make maximal demands. The British government is entering the negotiations with a very hard stance and is aiming to wring as many concessions as possible out of the EU. I regard these negotiating tactics as very daring. After all, Great Britain clearly has more to lose than the EU. In addition, a very large number of existing agreements within the EU have to be discussed individually. So the two-year deadline looks very tight, and it would be very difficult to prolong it as all EU countries would have to agree. So from the EU’s point of view it makes little sense to grant any long transitional period following the exit negotiations as this would strengthen the British government’s negotiating position.

If the British government does not change its present stance, then it is very likely that no agreement at all is reached in the end and Great Britain leaves the EU without any follow-up treaties. In other words: a hard Brexit is looming. This would be an immense strain on the British economy and population and would probably have a very negative effect on growth. However: there could be a counter-reaction if there are signs that a hard Brexit is hardly to be avoided. The pressure on the British government to change its conduct of the negotiations in order to achieve an acceptable compromise after all would then be likely to increase correspondingly rapidly. A face-saving development for those involved could then be for prime minister May to resign in order to make way for new ideas – as at the moment she appears to be very determined to pursue a hard course.

The Brexit that is now looming large will change the EU. For the first time in history the wheel of EU integration and expansion will be turned back. However, precisely this could be an opportunity for the remaining member states to reorganise the EU. The model of a multi-speed Europe that is currently being discussed should be on the short list here. It would at least be a model that pays tribute to the member states’ different levels of ambition and which would probably create greater stability.

Regarding the capital markets I take a fairly relaxed view of the forthcoming Brexit negotiations. They will lead to repeated fluctuations, especially in the foreign exchange markets, but I do not expect any sudden slumps in equity or currency markets. Instead, the progress of the negotiations and the probable outcome are likely to be priced in gradually. Great Britain will probably bear most of the brunt. But there is no doubt less cause for concern for German companies. They will be able to react relatively flexibly by diverting their investments and exports.

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