UK: Grip over Brexit negotiations appears to loosened to some extent - Natixis

Not only has Theresa May’s gambit not paid off, but her grip over the Brexit negotiations appears to have been loosened to some extent, feels René Defossez, Research Analyst at Natixis.

Key Quotes

“Her political future is uncertain. It may well be that her wish for a hard Brexit will not come about. Admittedly, as yet there is the greatest confusion: the government still includes ministers that are favourable to a clean Brexit, but a number of senior Tories have made it clear, since the disastrous election results, that their preference was for a soft exit from the European Union (EU). Furthermore, the proposed coalition with the Democratic Unionist Party (DUP) immediately proposed by Theresa May is laden with ambiguity. The DUP is favourable to a soft Brexit, for obviously economic reasons (30% of Northern Ireland’s exports are to the Republic of Ireland), and that now seems to sit well with the Tories. However, because of the Good Friday Agreement, the British government is supposed to maintain political neutrality in Northern Ireland. Clearly, this neutrality would be in question if there is a coalition with the DUP.”

“The question is what is meant by a soft Brexit. As regards the EU27, it will obviously not compromise over the four freedoms, which considerably reduces what is in the realm of the possible. There will be no negotiation over intra-EMU immigration, nor over the free movement of goods and services as well as capital, which cannot be dissociated from the free movement of persons. Under these conditions, one can imagine mainly two scenarios:

1. A very long transitional period beyond March 2019, during which the UK would have to abide by EU regulations. There are some who dream this transitional period will end up becoming permanent. It is not certain, however, that the EU would be favourable to such a scenario: some time ago, several EU officials stressed that this transitional period needed to be as short as possible.
2. The UK leaves the EU but remains in the EEA. This would maintain access to the single market, but the UK would have to abide by EU regulations and contribute towards the EU budget.”

“Of course, the softest Brexit is no Brexit at all. This possibility has resurfaced since the 8 June general elections. As regards the EU27, several high-profile personalities such as Emmanuel Macron and Wolfgang Schaeuble have said that if the UK decided to remain in the EU, they would not stand in its way. However, this scenario does seem unlikely: the only party that is dead set on remaining in the UK is the Lib-Dem, but it is far too weak to have a say. As regards Labour, the least that can be said is that Jeremy Corbyn is not an enthusiastic Remain advocate.”

“For the government to backpedal, one or more Brexit-related risks would have to crystallise. The most important are probably as follows:

• A recession triggered notably by strong inflation fuelled by sterling’s depreciation (penalising consumption) and the persistence of major uncertainties (depressing investment and accelerating the relocation of certain financial activities on the Continent).
• Difficulties financing the UK’s current account deficit. If the political and economic situation of the UK deteriorates significantly and if sterling remains under pressure, foreign investors could be a good deal less attracted by sterling-denominated assets.”

“Such a turn of events could prompt British electors to reconsider, in the next elections, possibly in a new referendum, their position.”