Brexit: about to get real

In the six months since the UK voted to leave the EU, on 23 June 2016, the economy has been remarkably resilient. But we think 2017 will see a harsher economic reality.

The chart attempts to depict the process from here. As we go to print, the UK is still awaiting the result of the Supreme Court appeal on whether the UK needs to seek parliamentary approval to invoke Article 50, which is the first step in the process to leave the EU (when the UK notifies its EU partners of its intent to leave).

If the government wins, Prime Minister Theresa May will likely trigger Article 50, using Royal Prerogative, by the end of March 2017, as she previously pledged to. If the government loses, then Mrs May will likely bring forward a short bill to approve Article 50 which will have to pass through the Commons and Lords. An overwhelming majority of MPs have now gone on record as approving the government’s timetable, thanks to the motion passed on 7 December. It will be hard for any of them to reverse course, so in theory this bill should pass easily.

However, it could prove more complicated. The Supreme Court could find that that triggering Article 50 requires an Act of Parliament, not a simple, non-binding motion such as the one passed in December. This will be subject to debate, and possible amendments. Any required consultations of the devolved parliaments in Scotland, Wales and Northern Ireland could also complicate and delay matters further. The Lords could send the bill back to the Commons, too, potentially multiple times. So, the timetable is clearly at risk of delay.

Let us assume, though, that Mrs May gets her wish, and Article 50 is invoked in March 2017.

This will start the clock ticking on the two-year negotiation process with the EU (although taking into account the fact that any deal will need to be approved by the European Parliament and all the national parliaments of the other EU Member States, it looks like the actual time available for negotiation will be more like 15 months).7 In light of this, Chief European negotiator Michel Barnier wants to complete a draft exit deal by October 2018 at the latest, leaving at least six months to ratify and prepare for Britain’s full exit at a set date in 2019.

The UK will have to hammer out a deal for its post-EU future. But what kind of deal? The government appears to be divided on whether to seek a soft Brexit, maintaining a close relationship with the bloc and minimising the impact on UK businesses, or a hard Brexit, cutting ties completely and leaving the UK at no greater advantage than a non-EU country. Mrs May says she is seeking a ‘red, white and blue Brexit’ – ie a bespoke deal unique to the UK. But this will prove complicated – for obvious reasons, the EU is not keen to offer the UK a deal unavailable to current members, or that could push other members to leave.

The government has committed to provide an outline of its strategy (to the extent that it does not compromise its position in negotiations) ahead of any vote. Brexit Secretary David Davis has said that this will not be published until February at the earliest but it may well be light on detail. It may not be required at all if the government is able to use the Royal Prerogative.

We know that the UK wants to have control over inward migration, withdraw from the jurisdiction of the European Court of Justice, and maintain ‘the best possible’ access to the single market. It has not ruled out making a payment to the EU in exchange for this access, or implementing a length transition period. There remains a lot we don’t know, however, including: the status of existing migrants in the EU; whether the UK would be prepared to pay an exit fee running into the tens of billions of euros (for future liabilities); whether it will remain in the customs union; and whether there will be a transition arrangement.

Ultimately, with the clock ticking, the UK may not be in a position to make too many demands. It has some leverage: the oft-cited big consumer market for BMWs and Prosecco, for example, and Europe’s dependence on UK financial services. But it will be the smaller partner in these talks and, arguably, the one with more to lose.

The European side has tended so far to sound quite hard-line. François Fillon, the leading candidate to be France’s next president, has said that he wants to see a speedy transition, with the UK’s financial sector losing its passporting rights. German Finance minister Wolfgang Schäuble has said the same thing and suggested the UK could still be paying into the EU for another ten years. Donald Tusk, the president of the European Council, said in October that the only options he sees are hard Brexit or no Brexit. The European Council on 15 December has reaffirmed that “access to the Single Market requires acceptance of all four freedoms”.

Elizabeth Martins – UK Economist – HSBC Bank plc