March 14, 2019

A Middle Ground Brexit May Never Work

This week, the UK Parliament took three additional votes on Brexit, and the results are making the market wonder whether Brexit will ever work. They also reflect the current status of a dysfunctional UK Parliament.

The first vote was held on Tuesday to determine whether the Parliament would approve the Withdrawal Agreement that Prime Minister Theresa May had pre-negotiated with the EU. It reflected a soft Brexit, where the UK would pay a divorce settlement and some dues, but free trade would continue between the UK and EU with no customs imposed on UK exports. It was rejected by a wide majority.

The second was held on Wednesday to determine whether the politicians want to leave the EU with no agreement at all—basically a hard Brexit or a case to crash out of the EU on the deadline date. This meant there would no longer be a divorce settlement and no more payment of dues to the EU. It also would have meant no more free trade between the EU and UK, with customs likely to be imposed on UK exports. That was also rejected.

The last vote was held on Thursday on whether to extend the deadline of March 29. The vote to delay Brexit passed 412 to 202, showing that they understandably want to buy some more time. But how long can you keep on kicking the can forward when neither side wants to agree on a middle ground solution?

Keep in mind, the EU still needs to approve this extension, which would most likely be determined next week during its EU Summit. There's also the question of whether or not a UK representative should attend the EU Parliament in May.

My View: Basically, UK politicians are completely divided between the hard Brexiters — who want a complete divorce from the EU — versus the Bremainers — those who want to remain in the EU. The votes this week showed that the last thing both sides want is a middle-ground solution.

When two completely opposite ideologies do not want to compromise in a democratic system, the system becomes dysfunctional, and ultimately the economy and people suffer. A lot of the damage has already been done, as we see business migrating away from London.

Until now, the British pound (GBP) has been relatively quiet, probably because a compromise Brexit deal was expected to be approved. But the more we understand the reality, this middle-ground scenario is growing increasingly distant, in which case we would be left with one of two extreme scenarios to resolve this Brexit conundrum.

They are:

  • A possible call for a general election to reshuffle the votes. In this situation, the GBP could rally.
  • The EU's patience is tested and they do not agree to an extension, pushing the UK out of the EU with no agreement. In this situation, the GBP is likely to collapse.

No one knows which scenario will play itself out. All we can do at this point is warn our clients who have GBP exposure that there is possible volatility ahead for that currency.

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