Source: Adobe Stock/Sulupress
The fact is Europe is deeply worried that giving the U.K. anything like access to the single market without acceptance of the “Four Freedoms” would be the beginning of the end for European federalism. That Europe would unravel as everyone saw the benefits without the pain.
The irony is French President Francois Hollande is the most unpopular French politician ever. Not in the last decade. Not in this century. Ever, assuming we don’t count King Louis XVI who brought the French Revolution upon himself, and who wasn’t even an elected head of state anyway.
Remainers Dig In
Even Hollande’s own countrymen don’t listen to a word he says, so why the markets would have taken any notice is a mystery. Maybe because he isn’t alone. Even previously conciliatory German Chancellor Angela Merkel has this week been lecturing her own business leaders not to lobby for a soft exit in the interests of their trade with the U.K. According to the Guardian, she appealed to German firms to show a united front with E.U. governments in negotiations over the U.K.’s departure from the bloc, urging them to support the principle of “full access to the single market only in exchange for signing up to the four freedoms.”
Most Remainers would have said, prior to the referendum, that this was always going to be Europe’s position. The markets appear to have been hoping for some kind of softer exit deal, some kind of compromise that both sides could live with. But in the last week or two it has become progressively clearer that for whatever reasons, mostly short-term political survival in the case of the U.K. government, compromise is not something anyone is talking about.
Right or wrong, the exit looks like it will be a hard one and, as a result, firms should expect more volatility in the months ahead as positions harden and the markets take announcements as a shock.
Was the Pound Always Overvalued?
Some, such as Liam Halligan in the Telegraph, would argue that the pound has been overvalued for some time and an adjustment has been in the cards for months if not a year or more. He cites an International Monetary Fund report last year which judged that, based on the U.K.’s trade and productivity, the pound was overvalued by 20%. I suspect they were hoping for a more gradual readjustment than we have seen since June but, nevertheless, the IMF at least may argue the pound is closer now to where it should be… even if driven there for the wrong reasons.
HSBC’s economist David Bloom is predicting parity for the British pound to the Euro and 1.20 against the U.S. dollar over the coming months. Those with exposure should consider positioning themselves for such a possibility. Politicians are not much interested in the effect their words are have on the exchange rate or on companies struggling to cope with the volatility.