Possible way forward for Brexit

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There are now fewer than 100 days until UK is scheduled to leave the European Union on March 29, 2019. Pessimists tend to prosper in uncertain times, and British politics at present is very much a catastrophists’ market. Critics and doomsayers are agitating more noisily as the prospect of the U.K. leaving without a deal becomes more likely. The “will of the people”, expressed in the 2016 EU referendum, is propelling Britain towards the EU exit door, but MPs are still debating how to execute Brexit, whether to leave without a deal or even whether to leave at all. The no deal situation would allow Britain immediately to negotiate and sign trade deals beyond Europe. It would force May’s government to cut taxes to make us more competitive. It would result in a tremendous boost to national unity.

Last month, as negotiations on her EU deal reached a climax, Mrs May started to use a new phrase. The sheer novelty caught the attention. Until November, “the UK family” had not previously played a role in Mrs May’s speeches. Suddenly, the phrase was rarely absent from them. Under present circumstances, nobody can possibly predict what is going to happen in coming months. Still, there are three plausible scenarios. First, after a few more dramatic happenings and couple of meetings with European Union (EU) leaders, the existing deal is agreed upon with a few modifications or clarifications. Second, things go absolutely wrong and we have an accidental hard Brexit on March 29, 2019.

Third, there is no Brexit at all, either due to second referendum or parliamentary vote revoking Article 50 of the Lisbon Treaty. Although both the EU and the UK have now started preparing even for a no deal scenario, chances of that happening is still relatively low. Businesses in Europe are more or less ready to adjust with the existing deal. It gives them enough time to prepare for new realities. The present deal is the least bad scenario for the UK.

Everyone must remember that this is the only deal on the table. Except for a few possible modifications, no other deal is going to be negotiated in the remaining few months. The main sticky point is so-called backstop, which practically means the UK will remain tied to significant EU rules till the time it is able to find a solution to avoid a hard border between Northern Ireland and the Republic of Ireland. The opposition comes from the fact that while agreeing to this solution, the UK will continue to follow EU regulations even after it exits the community.

Although the transition period is scheduled to end in December 2020, it could extend further.

In a way, this arrangement also guarantees that companies will continue to do business in Europe without any serious disruptions, till the time a new trade agreement is agreed upon between the UK and the EU. In the given situation, this is maximum the UK can expect from the EU.

Precisely for this reason, May asserted earlier “there is no deal that comes without a backstop, and without a backstop there is no deal”. If MPs reject her deal at the first attempt in mid-January, as seems likely, parliament is likely to test alternative options: they include a no-deal exit, a Norway-style deal or a second referendum. It is possible none will achieve a majority.

The terms of Brexit will be the major determinant of the pound sterling exchange rate over the next three months. A no deal exit will lead to a fall in the GBP against the euro and dollar, not leaving a rise. The exchange rate will bounce around as the varied options change probability. The coming three months, up to March 29, offer an interesting speculative opportunity for those with strong nerves. For by far the major determinant of the pound sterling (GBP) exchange rate against the US dollar, euro (EUR) and other major currencies will be the terms upon which that Brexit exit take place.

Published in The Asian Telegraph on December 27th, 2018.

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