How do you like your Brexit? Hard, Soft or Fantasy?
At the Conservative Party Conference in Birmingham, British Prime Minister Theresa May announced that the United Kingdom Government will trigger Article 50 of the Treaty on European Union (TEU). The triggering of Article 50 begins the process of the UK leaving the European Union, and is scheduled to occur in March 2017. This starts a two-year timetable for the UK Government to negotiate its withdrawal from the myriad of EU institutions, agreements and treaties, as well as trying to ensure some favourable access to EU markets. This will not be an easy task: already the stakeholders in the European Commission, the European Parliament and Malta, who will hold the rotating Presidency of the European Union in early 2017, are drawing up the battle lines.So how do you like your Brexit?
The Hard Exit
Many of those who supported Brexit will be demanding that the UK regains control of immigration from EU Member States. This would, in turn, lead to the UK losing its access to the EU Single Market, the largest trade bloc in the world. This has been foreseen by the recent negotiations between Switzerland and the European Union where Switzerland, following a referendum, attempted to limit EU migration to the country, but found that if they went ahead with this they would find themselves at a disadvantage in trading with the bloc.A hard exit will have a huge effect on British exports, which would face tariffs when exporting to the EU, and would also hit the financial services institutions in the City of London, who would lose their ‘passporting’ ability to the single market. This has led to Dublin, Frankfurt and Paris positioning themselves as the go-to destination of choice for these banks and financial institutions following a hard Brexit.As a result of a hard exit, the UK would have to renegotiate Market Access with many of the markets it currently has access to by virtue of its membership of the EU. This includes membership of the World Trade Organisation, where subsidies to farmers and other state supports could be under threat by Russia, China and some African members. The UK would also have to renegotiate treaties with Turkey, Mexico, South Korea, Columbia and Peru to preserve their access to those markets, as well as the current treaties being negotiated with Canada, India and the United States.
The Soft Exit
The soft exit is very similar to the deals that exist between the European Union and the European Economic Area, which includes Iceland, Liechtenstein and Norway, as well as the many bi-lateral deals between the EU and Switzerland. This would guarantee free movement of persons, goods, services and capital within the European Single Market, and would allow the UK all the perks of membership of the European Union in the economic sphere but would not allow the UK to influence any of the rules or regulations coming out of Brussels, a downside highlighted by Norway and other EEA member states during the referendum campaign. A soft exit would not be acceptable to many of those who campaigned for Brexit.This soft exit would preserve the UK’s access not only to the European market, but also to the financial sector which is key to the City of London. It would also ensure that exports remain competitive and would not have to face tariffs, as well as help keep some of the access to the markets that have a free trade agreement with the EU. This again would mean that the UK would have no say in the negotiation or the signing of these agreements, as the the European Commission would remain as their representative on trade matters.A number of other forms of association with the European Union have been suggested, but they broadly fall in line with a Hard or Soft exit.
The Fantasy Exit
There is also the fantasy exit, that is the preferred exit strategy for many of those who campaigned for the UK to leave the European Union. This fantasy exit would allow the UK to limit immigration from European Union, while at the same time preserve its privileged access to the Single Market. With Europe under siege politically from the Right and Left, its politicians will not want to be seen to dilute the fundamental freedoms of the European Union, and will hope to ensure that the freedom of movement of people is linked to the freedom of movement for goods, capital and services.
The Reality
Since the announcement of the intended hard exit from the EU, the pound sterling has declined on international markets. It has declined from the £1 buying €1.36 on January 1st, to £1 buying €1.11 on the 16th of October. This decline will only continue as long as a hard-line on exit is taken by the UK Government. This will be met by an equal hard-line being taken by the EU Commissioner’s negotiator, Michel Barnier, the European Parliament’s negotiator, Guy Verhofstadt, and Joseph Muscat, Prime Minister of Malta.The next few years will not be easy for the UK as they negotiate their exit from the EU, and they deal with the new reality of borders & restricted market access, and the effect they will both have on its economy.