Britain has been in the news this past week with the fate of Brexit up in the air once again. Prime Minister Theresa May's tenure is on life support, challenged by three things: her own party, Brussels and time.
Within her own party, two key British politicians heavily involved in the Brexit process resigned over the past week — David Davies, chief Brexit negotiator, and Boris Johnson, the foreign secretary.
Both politicians are so-called “hard" Brexit proponents, meaning they prefer a complete divorce from the European Union but want Britain to have the authority to set its own terms on trade and immigration.
May, in contrast, proposes a “softer" Brexit, where — among other things — Britain retains free trade between the U.K. and EU and abides by certain EU laws. Hardliners protest that such softening would no longer be a true Brexit. Hence this week's high-profile resignations which are challenging May's political leadership. Of course, even the softer proposal that May has put together needs to first be agreed by EU politicians. If it is not, then a different proposal would have to be derived, including consensus within her party — clearly a monstrous task.
In conjunction with all these challenges, the clock is ticking. If there is no agreement between the U.K. and EU by the deadline of March 28, 2019, then the existing Free Trade Agreement will expire and World Trade Organization rules kick in. That would mean immediate tariffs on U.K. exports and imports, which is considered bad for the U.K. economy that already runs a large current account deficit — at least in the short-run.
Given all of this negativity, one would think that the British pound or the U.K. stock market would fall. But it didn't.
Our View: Markets seem to have decided that some middle road is what will happen here — a softer Brexit that May favors. If you think back to the Brexit vote, that probably makes sense. The vote for Brexit was not overwhelming — it was 52 percent to 48 percent. The U.K. was and remains much divided over this. Nothing will please everyone, but a negotiated middle ground probably seems best.
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