Does the British Prime Minister, as EU Commission President Juncker is claimed to have suggested in media reports, live on a different galaxy? Will Theresa May prove to be a (to use her own words) „bloody difficult woman“ in the approaching negotiations? And what exactly happened in the latest meeting between Juncker and May? We do not know the exact answers to these questions but what is clear is that the positions over Britain’s pending departure from the EU have recently become entrenched.
Last weekend’s summit meeting, at which the representatives of the European Union excluding Great Britain sent out a signal of unity to London, also fits into this picture. No major discussions were needed to unanimously adopt the guidelines for the forthcoming negotiations with the British government on the country’s withdrawal modalities and a possible future partnership. Talks are to commence from early June, following the parliamentary elections in Great Britain. They are to have been completed by autumn 2018 at the latest in order to ensure that the necessary ratification process can be finalised before the two year deadline elapses in March 2019.
Estimating the potential outcome of the negotiations is anything but easy. A wide range of possibilities exists – starting from an „exit from Brexit“ to a „War of the Roses“ in which no agreement of any kind is reached on a partnership between London and Brussels following Britain’s EU withdrawal. Despite the frostier sentiment and the greatly diverging positions, we consider a compromise to be the most likely solution which will allow for a free trade agreement for the goods sector but not for the service sector. The EU could make concessions towards Great Britain in other ways by offering, for example, an „implementation phase“ from March 2019 onwards, or a lower „exit bill“.
While the European Union as a whole, and the member states with good trade relations to the UK in particular, could probably live quite well with such a compromise and expect manageable economic consequences, the United Kingdom will most likely be faced with far more significant growth losses. After all, the loss of the EU „single passport“ for financial services would deal a painful blow to the country’s economy and be the price paid for sovereignty. The pound would respond to this development with tangible exchange rate losses against the European single currency.
The British public and the pound could take comfort from the knowledge that a scenario of no future trade agreements would inflict even greater growth losses on the country and bring about a significant recession. However, the potential consequences will not necessarily deter the United Kingdom from a hard Brexit. Particularly in the light of the events of recent days and weeks, this could indeed lie within the realms of possibility. And should, contrary to expectations, the price of Brexit appear too high for London after all, it could still retract the withdrawal application. However, given the expected political consequences for Theresa May and her party, we consider this „exit from Brexit“ scenario to be extremely unlikely.