Scottish First Minister Nicola Sturgeon made headlines recently when she called the Brexit negotiations a “slow moving car crash."
It is hard to argue with her. While the official word from government is that they are “making progress," recent reporting has said that negotiations are at a standstill.
This weekend an EU summit is being held on the matter. The draft communique for that meeting clearly states that progress must be made on each of the following major areas of contention:
- Northern Ireland
- Citizen rights
- The financial settlement - in other words how much should the U.K. pay the EU to leave the European Union.
Of course, as so often happens in cases of separation, money has become the major sticking point. The U.K. has offered to contribute €20 billion to the EU budget for 2019 and 2020 but the EU is insisting that €60 billion is closer to the right number.
German Chancellor Angela Merkel has made it clear that no other negotiations will take place until the “Divorce Bill" is finalized. If that is accomplished – a tall order in itself – negotiations can proceed to citizens' rights and Northern Ireland. Only after that point can talks begin over trade agreements between the U.K. and EU.
For financial markets, what's most important is how companies will prepare for Brexit. Timing is vital here: In order for businesses to adequately plan for a “hard" Brexit, meaning a clean break between the U.K. and the EU, they should start a year or more ahead of the drop dead date of March 2019. The clock is ticking, and if no progress is made on negotiations by the end of 2017, many companies will start preparing for a hard Brexit scenario as a default.
While British Prime Minister Theresa May and her divided cabinet are struggling through these negotiations, Bank of England Governor Mark Carney finds himself in a box as well. U.K. inflation this week hit 3 percent for the first time since 2002 and with a relatively tight labor market, the BoE seems poised to raise interest rates at least once this year. Additional rate hikes will surely be a tough sell with so much uncertainty surrounding Brexit.
Our View: No one expected Brexit to be easy. But the British public certainly expected more from its current government. The Scots minister was right in labeling this an unfolding disaster - and unfortunately it doesn't seem that adequate leadership exists to remedy the situation.
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