The fuss over Brexit continues
By: Robert J. Teuwissen
Tags: Brexit, Economy, Investing, Finance

The Brexit-referendum was over 4 years ago, but the split-off still creates a lot of uncertainty. In June 2016, 52% of British voters decided that they no longer wanted to be members of the European Union. Now the British do not see themselves as part of Europe anyway. Europe is, above all, an indication for the European continent, not for the British Isles. For years the British have pursued a policy of divide and conquer and obstructed further integration of the European Union. A common market is fine for the British, but further political integration is out of the question. And that political integration has become unavoidable again with the advent of the euro.

The deadlines for an agreement on the terms of the British’s departure are butter-soft. Everything liquefies under high pressure, so it is even possible that the deadline of a hard Brexit, an exit from the Union without a new trade agreement, will be stretched even further. The most likely scenario is that a bare trade agreement will soon emerge. The European Commission must reach an agreement with the United Kingdom to that end. It will then have to be ratified by the European Council and the European Parliament. The European Parliament has a veto but cannot change the terms of the agreement. A simple majority is sufficient, but the agreement must first be ratified by at least three different committees. This process will normally take at least three weeks, possibly even six. The last plenary session of the European Parliament this year is from 14 to 17 December. It is likely that after that the agreement will also have to be ratified by all the national European parliaments and by the regional British parliaments, but this can be done next year. The last session of the British House of Representatives will be on 20 December this year.

A breakthrough in the short term will give everyone just enough time to get the agreement through the various parliaments. In particular, the departure of Dominic Cummings is seen as a signal that an agreement is imminent. Cummings is a staunch supporter of the Brexit. He led the campaign in 2015 and 2016 to vote in favour of the departure. Until recently, he was special advisor to Prime Minister Boris Johnson. Even if a deal is made in the first half of December, the politicians are bound to find creative solutions to make the agreement legally valid. Europe is accustomed to negotiating late into the night and only reaching a meagre compromise after many earlier deadlines. There is already talk of an extraordinary session of the European Parliament on 28 December this year.

As time goes on, both sides will have to prepare for a hard Brexit. That is a Brexit without an agreement, one where the United Kingdom falls back on the basic terms of the World Trade Organisation for trade. EU trade rules for the UK will then expire on 1 January. That means that there will be import duties coming back and forth overnight. Think, for example, of exports of animals or plants. That is not a problem at the moment, but we will soon have to check whether a consignment complies with the rules of the exporting country. This is a big step backwards for the British, but it is not the end of the world either. Moreover, the economic impact of the corona crisis is difficult to measure at this time in particular. So there is a political advantage for Johnson, he can blame the economic decline on the coronavirus and not on the Brexit.

The negotiations are stuck on three issues: fisheries, a level playing field and who is allowed to decide when there is disagreement. British fisheries are economically useless. It is 0.1% of Britain’s GDP and the British financial sector is already contributing more to Britain’s GDP in a week. Fishermen from other EU countries are still allowed to fish in British waters, but the British will soon want to set their own quotas again. The level playing field is inextricably linked to free trade within the European Union. This includes, for example, the ban on state aid to businesses, competition conditions, workers’ rights and environmental requirements. It is impossible for Europe to give in in this area. If the British concede to this, it is a Norwegian or a Swiss variant. Those countries, although independent, have to comply with the European Union’s requirements in terms of a level playing field. Only then can there be free trade. These two countries are not allowed to take part in this and the British were allowed to do so before departure. Part of this free trade is also the border between Ireland and Northern Ireland. If there is no free trade, then border posts must be re-established on that border. That immediately puts at risk the Good Friday Agreement, the peace signed by the governments of the United Kingdom and Ireland on 10 April 1998. Most political parties in Northern Ireland supported that agreement. The Protestant Northern Ireland Democratic Unionist Party (DUP) sees the alternative, border controls between the United Kingdom and Northern Ireland, as the beginning of the unification of Ireland and is therefore totally opposed to it. Furthermore, it does not help Johnson that Trump should be succeeded by Biden. Trump fought a lucrative trade deal after leaving the Union, Biden is a representative of the Irish exodus, the Irish emigration triggered by immense poverty and famine under the domination of the English. The Irish Americans are in favour of a united Ireland. Finally, there remains the question of who has the last word in the event of a conflict. The British want their sovereignty back and will not accept a ruling from a European court.

Many European countries, including France, do not want to give in to the British. In France, there will be elections in 2022 and it now seems to be a neck-and-neck race between Macron and Le Pen. The American elections have shown that populism is alive and kicking and Le Pen is spinning yarn in Macron’s corona approach and the many terrorist attacks that plague the country. According to Le Pen, with the departure, the British will regain their freedom. Macron, therefore, wants the British to suffer as much as possible if they leave the Union, otherwise, the barrier to leaving the Union for Le Pen or for the Italians, for example, will be very small. That would be the end of the euro and of the European Union.

After four and a half years of fuss over the Brexit, the British economy has already suffered most. Because of the uncertainty, many companies have (partly) relocated their activities. Because of this long period of uncertainty, the British stock exchange has lagged behind many other stock exchanges. The British pound is also historically cheap. The British stock exchange and the British pound can benefit from a trading deal or a further extension. This, of course, applies, particularly to local British shares. There is already more interest in the British stock exchange because of its highly cyclical nature. Mining companies, oil companies and banks and insurers are strongly represented. But even with a hard Brexit, the chances of the British stock market and the British pound sinking further are less than people think. Investors would prefer to see an end to this long period of uncertainty. Hard Brexit or soft Brexit, once it is over, will finally allow investors to reduce their heavy underweight in British assets. The low valuation, the cyclical sensitivity in a year when the global economy is growing by more than 6%, combined with the sharp fall in uncertainty, is already making British investment interesting.