Commentaries

PMC Weekly Review – December 14, 2018

A Macro View – Brexit: The ship is on fire

2018 has been a tough year for Europe, and this week was no different. On Wednesday, UK Prime Minister Theresa May
barely survived her Conservative party’s no-confidence vote, which was triggered by her party rebels angry at her Brexit
policy. A result of the June 23, 2016, referendum, Brexit continues to add uncertainties to the global political and economic
landscape.

What do we know about Brexit so far? Brexit was mainly a vote against globalization. Most of the pro-Brexit voters were
working-class, older voters in England’s countryside. They were afraid of the free movement of immigrants and an increase in
refugees from Africa and the Middle East, while failing to see how the free movement of capital and trade with EU benefited
them. Following the will of the voters, Prime Minister May submitted the Article 50 withdrawal notification to the EU on
March 29, 2017. The two parties have until March 29, 2019 to negotiate an agreement. In March of this year, the UK and EU
agreed to a 21-month transition plan that many have dubbed a “soft Brexit.” This is not a formal agreement, but merely a
backstop in case no formal agreement is reached before the deadline. May’s cabinet approved the plan, but she still faces
difficulty in having Parliament approve it, as shown by her December 10 decision to postpone the vote on it. The Prime
Minister recently outlined the three choices facing her country:

1. Keep the deal, given that a better agreement with EU is unlikely. UK would remain within the EU’s Single Market and
Customs Union for an unspecified period, which would prevent a “hard border” between Northern Ireland and the Republic
of Ireland. In addition, the two sides would not impose tariffs on each other’s imports, and the UK would maintain complete
access to capital. The UK also would abide by EU laws but could no longer vote on them. The transition plan, however, would
not allow the UK to prohibit the free flow of people from the EU, which was the primary reason people voted for Brexit.

2. Leave with no deal, which essentially means a “hard Brexit,” the option that the opponents favor. Under this option the UK
would give up full access to the EU and its Single Market and Customs Union. The UK would get full control over its borders,
making new trade deals and applying laws within its own territory. However, this option comes with tremendous costs for
the UK economy and markets. If no new trade agreements were negotiated, British manufacturers could face steep tariffs
from the EU. London specifically could be hit hard, as the City would lose the status of being Europe’s financial hub.
According to a City of London’s report, 5,000 jobs could be lost under this scenario. Other negative repercussions include
falling real estate prices; inability of UK companies to bid on public contracts in EU countries; and closed labor markets for
young British workers. US companies would feel the brunt of a “hard Brexit” as well, as it would dampen business growth for
companies that operate in Europe. US companies are the most significant investors in the UK, using it as a gateway to free
trade with the EU. A “hard Brexit” would not pan out well for the EU either. The Brexit vote has strengthened antiimmigration
parties throughout Europe. If these parties gain enough ground in France and Germany, they could force an anti-
EU vote, meaning the EU could lose one of its most robust economies, with severe repercussions for the entire block.

3. No Brexit deal, which is a plausible option that cannot be ruled out. This would mean having another referendum,
although whether the “leavers” would even accept the validity of another vote remains uncertain.
Brexit negotiations have dragged on for a long time, but the uncertainties around the UK-EU separation have not abated. No
one can predict how the Brexit chaos will be resolved, but one thing is almost certain: The UK will leave the European Union
at 11 pm on March 29, 2019.

Sonila Gjata, CFA
AVP, Senior Portfolio Manager

Download the full PDF

Sources
https://www.cnn.com/2018/11/15/opinions/may-fate-brexit-deal-merrick-gbr-intl/index.html
https://www.cnn.com/2018/11/14/economy/markets-economy-brexit-deal/index.html
https://www.wsj.com/graphics/brexit-decisions/?mod=djem10point
https://www.wsj.com/articles/u-k-s-hammond-announces-sharp-cuts-to-economic-forecasts-1511357941
https://www.businessinsider.com/bank-of-englands-iain-mccafferty-exodus-of-eu-bankers-from-london-2018-8
https://foreignpolicy.com/2018/12/10/no-brexit-no-exit-from-brexit-and-nobodys-in-charge/

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