On June 23rd 2016, the people of the UK voted on whether the country should leave or stay in the European Union. The “Leavers” beat the “Remainers” by 51.9% to 48.1%, triggering social and economic shockwaves felt around the world. Earlier in March, the UK Parliament confirmed the result of the referendum by voting with clear majorities in both of its Houses for a Notification of Withdrawal to be delivered to Brussels. On Wednesday March 29th, Prime Minister Theresa May finally did so, triggering Article 50 and a maximum of two years of negotiations with the continental bloc over the terms of the ‘divorce.’
Every country’s right to withdraw from the European Union is enshrined in the 2007 Lisbon Treaty. As the European Parliament has stated: “A Member State, which decides to withdraw, shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.”
Yesterday, Prime Minister May sent such a letter to the European Council. She wrote, “it is in the best interests of both the United Kingdom and the European Union that we should use the forthcoming process [discussions about the future relation with the European Union] to deliver these objectives with as little disruption as possible on each side…
…We want the United Kingdom, through a new deep and special partnership with a strong European Union, to play its full part in achieving these goals. We therefore believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the European Union”.
What’s Next?
Now that the UK has triggered Article 50, the European Council (without the UK) will set out guidelines for the withdrawal negotiations, which must be agreed to unanimously. These guidelines will cover a range of technical issues concerning the agreement. The European Council will then hand the negotiations over to the European Commission and the Council of Europe. The Commission will draw on its legal, technical and policy expertise, allowing a more detailed road map for the negotiations to be drawn up, which must be agreed to by the Council of Europe and a qualified majority vote of EU members (not including the UK).
On April 29th, the EU Summit on Brexit will be held, beginning a process that will culminate in the ratification of the withdrawal treaty in October 2018, enabling the UK to leave the European Union once and for all in March 2019.
There are various possible future arrangements between the UK, and l the EU:
• the “Norway model” - membership of the European Economic Area (EEA)
• the “Swiss model” - membership of the European Free Trade Agreement (EFTA) in addition to various bilateral deals
• the “Canadian or Singaporean model” - a bilateral free trade agreement
• membership of the World Trade Organization (WTO)
They are not the only future relationship options. The UK could also combine different aspects of the above models to better target a high degree of access to the EU’s Single Market, while controlling immigration.
Is Higher GBP Volatility to be expected?
The evolution of Brexit negotiations is likely to cause significant price fluctuations on a variety of GBP-based currency pairs, like the GBP/USD, EUR/GBP, and GBP/JPY, as well as UK-based indices like the FTSE.
After Brexit, the GBP lost more than 15% of its value, and still remains very weak. This is certainly beneficial for UK exporters, but it penalizes consumption of goods from abroad, resulting in a loss of income for importers. This has led to price rises to make up for the shortfall, affecting products made by Microsoft, Peugeot, Apple and others. Inflation has also risen, as the Office for National Statistics showed with its Consumer Prices Index (CPI) for February, which reached +2.3%, up from a figure of +1.8% in January.
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