Britain’s Brexit Boat Hits the Rocks

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Well, that didn’t go very well, did it?

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After a couple of weeks scurrying around European capitals and intense lobbying directly to E.U. leaders, Britain’s Prime Minster Theresa May received short shrift at an E.U. conference in Salzburg, Austria last week.

May sacrificed a lot internally in the run-up to the conference. She faced intense opposition from her own hard right against her so called Chequers plan (termed thus because it was presented at the prime minister’s grace-and-favor residence Chequers in the summer), she lost two cabinet colleagues who resigned over it and has faced opposition from just about everyone, inside her party and out.

May had hoped it would form the basis of a negotiated exit agreement encompassing a free trade deal on goods but not services, plus much more with the E.U.

The E.U., meanwhile, has problems of its own — granting the U.K. any kind of conciliatory deal would make matters much worse.

The E.U. Perspective

Faced with the prospect that Italy’s flamboyant new government could decide it also wants to pursue such a deal — not to mention austerity-oppressed Greece and the rise of anti-immigration, far-right parties in eastern Europe and even Sweden threatening splits — the E.U. is determined to make the prospects for the U.K. outside of the E.U. as miserable as possible … and who can blame them?

All along, Britain’s position has been to cling to the naïve promises made by those promoting Brexit that “taking back control” and “forging our own way in the world” would equate to better economic prospects than being part of the largest trading bloc in the world.

Infuriating British MPs on the right of the party, French President Emmanuel Macron took the opportunity in his address to the conference to repeat statements he has made before, saying: “Those who explain that we can easily live without Europe, that everything is going to be all right, and that it’s going to bring a lot of money home, are liars. It’s even more true since they left the day after so as not to have to deal with it.”

Unfortunately, he is right. There was no strategic plan behind those promoting Brexit and most, if they were honest, would probably admit they hadn’t even expected to win.

What Will a ‘Hard Brexit’ Entail?

So the prospects of a hard Brexit, by which it is generally assumed to mean an exit without an agreement and no trade deal, could mean adoption of World Trade Organization (WTO) tariffs and rules. From the paperwork point of view this would be a nightmare, as neither the freight industry or governments on either side are staffed or equipped to handle the volume of paperwork involved.

It is generally expected, therefore, that in the event of both sides failing to reach an agreement by the exit date of March 27, 2019, some form of an extension would probably be agreed as being in the interests of all parties.

Germany, for example, has a €47 billion trade surplus with the UK, bigger than with any other country in Europe, and Britain is the market with highest profit margins. The German car industry alone sells 770,000 vehicles a year to the U.K., so it really cant afford the imposition of significant tariff barriers.

Not surprisingly, the country’s powerful export lobby DIHK has reportedly been deluged by over 10,000 requests for advice over recent weeks as to the consequences of an increasingly likely hard exit. The DIHK estimates that Brexit will entail 14.6 million extra customs declarations, depending on the exact deal. It said companies fear supply-chain damage from port chaos in Holland, Belgium, and France, as well as Dover in the U.K.

A Trade Barrier

Many business people who have been slightly anxious over the last year are becoming increasingly fearful, our own anecdotal research has shown. The topic has become top of the list of threats facing SMEs discussed at forums, trade events and seminars over the last month or more.

There remains an underlying hope that some kind of fudge will be found, but the largest obstacle appears to be the Irish border.

The E.U. has been adamant from the start that it will not accept a hard border between E.U. Republic of Ireland and the U.K. Northern Ireland, yet if the U.K. leaves the E.U. that is exactly what would happen.

Vague suggestions of a technological fix are so far off in the future that nearly everyone agrees they are not viable, regardless of what a few adamant Brexiters claim. The capitulation on the U.K.’s part that is likely to usher in an agreement on a free trade deal is creating an imaginary border down the Irish sea, a position the British have claimed would be to annex Northern Ireland from the rest of the U.K., but may prove to be the price of a deal.

The E.U. suggests that most checks between Britain and Northern Ireland will take place in offices and warehouses, and only live animals and food products will need to be examined at ports themselves. But no amount of diplomatic politesse can conceal Brexit’s reality: one part of the U.K. will be economically split from another, and that will prove a major problem for parliament.

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So, rather than achieve clarity and agree a way forward, last week in Salzburg has kicked the future of a U.K.-E.U. trade deal into the long grass.

Expect more uncertainty and increasing volatility on exchange rates as the markets react to each piece of news. As the deadline approaches the stakes rise, and with them markets’ reaction to the perceived direction.

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