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Brexit Article 50: Into The Unknown As Political Risks Increase

Company Strategy, Economics, Europe, US
By John Richardson on 29-Mar-2017


By John Richardson

BRITAIN enters the unknown today with the triggering of Article 50, the beginning of the formal procedure for quitting the EU. The clock will start ticking on two years of negotiations when British ambassador to the EU, Sir Tim Barrow, delivers a letter already signed by British Prime Minister Theresa May to the EU at mid-day UK time today.

Can any business predict with any certainty what will happen next? No. As Kenneth Clarke, former UK finance minister so accurately put it:

“There isn’t anybody who knows what is going to happen in the next 12 months. We’ve never been here before. Things are out of control. I have never seen a situation like it.”

Where do you start with the challenges involved for Britain? As good a place to start as any is that it is one versus 27 in these talks. The terms of Article 50 state that any exit deal must be approved by a “qualified majority” (72% of the remaining 27 EU states, representing 65% of the population) but must also get the backing of MEPs.

And this is a 27 that may well not want to make life easy for Britain. Agreeing to terms for Britain’s exit that would allow it to maintain full, or even partial, access to the single market whilst not agreeing to EU free movement of labour rules would embolden populist politicians elsewhere in Europe. If the EU goes soft on the UK, the populists would be able to turn to their base and in effect say, “Look, there is nothing to worry about as Britain’s got a great deal, and so life outside the EU would be great”. That would make a break-up of the EU more likely. The temptation by the other 27 to make exit difficult for the UK as a lesson to the others is thus clearly there.

Or perhaps not. Maybe a “win, win” deal can be reached where Britain is allowed to choose advantages of being in the EU without having to follow the rules that it doesn’t like. In the interests of economic harmony, and stability across the EU, that could happen. But the signs today are not good.

The fifth paragraph of Article 50 comprises the option for Britain to re-join the EU once it has left. Or maybe things won’t get that far. With the main opposition in the UK, the Labour Party, currently in disarray, what follows does seem very unlikely right now. But what if May’s government was to fall if negotiations go very badly and public opinion swings against Brexit? The Conservatives only have a parliamentary majority of 11. So we could end up with a new government and a decision not to leave the EU after all.

But let’s assume that as the Conservatives stay in office, and as the PM has said, “Brexit means Brexit”. Let’s then assume a tough take it or leave exit deal for Britain from the other 27 EU members. Can the UK prosper outside the EU if a hard Brexit happens?  Imagine a world of much longer supply chains for UK companies as they try to do more business with the rest the world and less with their near EU neighbours. And imagine if Britain’s critically important consumer-led economy is damaged by a rise in inflation resulting from new tariffs.

In the interim, as it becomes clear during the next two years of talks that a hard Brexit is very likely, what will be the effect on the British economy? UK businesses may decide it is prudent to move their operations to France, Germany or Ireland, at the expense of local jobs as the likelihood of a hard Brexit increases. Autos and financial services are two industries that might vote with their feet. The auto industry is worth £19bn to the UK economy and employs 800,000 workers. Financial services is worth £120bn and employs 1.1 million people.

This might appear to come down on the side of the negatives of a hard Brexit. This is not down to my own opinion on the issue, but is instead the result of a lack of clarity about exactly how a hard Brexit would end up as a big win for the British economy. This evidence – perhaps a compelling case for a “Singapore-style” Britain – may emerge. But the absence of convincing case for a hard Brexit is another of today’s uncertainties.

This just scratches the surface of all the complexities and uncertainties that lie ahead for Britain and the rest of the EU. It is also reminder that in a post-Economic Supercycle world political risk has returned with a vengeance.  During the Supercycle, the populists couldn’t find a voice that was loud and convincing enough to be heard because the middle and working classes in the US and Europe were economically moving forward on an excess of demand over supply. Not anymore.