Brexit – it doesn’t have to happen, but it might be hard if it does

The Brexit negotiations are only progressing very slowly. So far, there has still been no agreement on the terms for leaving. However, at present, this is a prerequisite for the EU to start negotiations about future cooperation. All things considered, it increasingly looks as if the UK Government is not pursuing a reasonable or reliable strategy in the negotiations. In light of the complexity of the consequences of Brexit, this is not particularly surprising. This is compounded by the fact that Prime Minister Theresa May’s position is extremely weak.

Time is running against the UK and is favouring European interests. Negotiations on Brexit terms would have to be concluded by autumn 2018 at the latest, as the outcome will need to be ratified by the national parliaments of all the remaining EU states. If progress is not made soon in the negotiations, I believe that there are two possible scenarios.

The UK could leave the EU without an agreement. This would mean that the UK would become a third country in the eyes of the EU, with all of the associated negative consequences for international trade relations. In this scenario, it would be very likely that the UK would enter into a recession. The economic consequences would also be negative for the EU, but manageable. The political signal sent, however, would be very negative.

The other option would be for the UK Government to withdraw the formal notification of its wish to leave the EU, thereby also revoking the activation of Article 50. The prevailing opinion is that this can be done at any point until the actual withdrawal from the EU. However, for this to be realistic, the current government would have to be totally restructured and Prime Minister May would have to step down. After that, the UK could hold a second referendum to establish whether a majority of the population would still be in favour of leaving if it meant a hard Brexit.

In my opinion, the second option would undoubtedly be the more desirable of the two, although we cannot rule out the possibility of a hard Brexit when the leaving date comes at the end of March 2019. However, it seems increasingly unlikely that the ongoing negotiations will actually lead to a controlled Brexit.

Brexit is increasingly creating a win-lose situation for the finance market. A hard Brexit would lead to significant losses for the stock markets and the pound. In contrast, postponing or even cancelling Brexit would have a very positive effect on the British finance markets and the currency.

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