latamen
 UK moves ever closer to a ‘soft Brexit’

UK moves ever closer to a ‘soft Brexit’

10-07-2018 | Insight

Britain is likely to remain half in and half out of the EU after more high drama in the Brexit saga, says Robeco Chief Economist Léon Cornelissen.

  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

Speed read

  • Two key Cabinet ministers quit over PM’s soft-Brexit proposal 
  • UK is still moving towards a Brexit-In-Name-Only as time runs out 
  • Four alternatives from new elections to crashing out are worse

It follows the resignation on Monday of two of the most senior British Cabinet ministers, in protest at proposals by UK Prime Minister Theresa May to essentially stay in the EU’s Single Market for goods. 

Brexit Secretary David Davis and Foreign Secretary Boris Johnson both quit the Conservative government following a weekend Cabinet summit that had attempted to thrash out a compromise plan. May wants to maintain a frictionless market and retain an important role for the European Court of Justice while restricting freedom of movement – a so-called soft-Brexit. 

Davis and Johnson support leaving the EU entirely on the due date of 29 March 2019, creating a ‘hard-Brexit’ with no access to the Single Market or Customs Union. However, this creates a massive problem in how to police the border between Northern Ireland and the Republic of Ireland if the UK leaves the Single Market without an alternative in place.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Moving to a BRINO

“The upshot is that the UK is moving inexorably to a Brexit-In-Name-Only (BRINO), which is the most benign outcome for investors,” says Cornelissen. “Quite simply, the alternatives are far worse, despite what the EU would probably call the latest ‘comedy’ in this long-running saga.”

“May has failed to kick the can down the road any further, but she does now have a 120-page white paper (still to be published) finally offering a soft-Brexit strategy, and that’s very positive. She has given up on many of the ‘red lines’, and it is a step in the direction of a BRINO, though of course it has also created risks for the government in that it won’t appease the hard-Brexiteers.”

“The beauty of the idea is that it would solve the Irish border problem, but the EU will still see it as cherry picking because it includes the desire to curtail the free movement of labor, which is another red line for the EU. So, she will need to make even more concessions to get it agreed.”

“And time is running out, as there needs to be sufficient progress by October on the three priority subjects of the Irish border, what to do with millions of expats, and the final divorce bill. Otherwise the UK faces crashing out without a deal.”

Alternatives are worse

Cornelissen says compromise – both within the warring Conservatives and with the EU – is inevitable because the four alternatives for the government are far worse.

“Firstly, there is now speculation about a leadership challenge within the Conservative party, and even calling fresh elections in the UK. Both are unlikely, as the hard-Brexiteers probably won’t be able to get the support of 48 Members of Parliament needed to challenge May, and it is even more unlikely that a hard-Brexiteer would take the reins of the Tory party. The far more likely scenario is that the UK government will struggle on.”

“Secondly, some say there is now room for a second referendum on leaving the EU, which also seems highly unlikely, as public opinion has not moved sufficiently against Brexit, although demographics are slowly changing the balance in favor of Remain. And time is too short for a well-organized referendum now.

“Thirdly, the UK could ask for a delay in leaving the EU on 29 March, which in theory is possible if all other EU member states agree – though this is also highly unlikely, since the EU would say that this ‘British comedy’ has lasted long enough, and it may be viewed as a negotiation tactic that would be rejected anyway.”

“Finally, crashing out of the EU with a no-deal Brexit in March 2019 is unthinkable; trade would basically come to a standstill, travel would be disrupted, and sterling would crash. The UK government hasn’t made any preparation for this, so this option has to be ruled out. A hard Brexit would similarly be devastating to the UK economy and we basically have to rule out this option as well.”

Keep calm and carry on

Muddling through is still preferred by markets, and is the only practical option available, Cornelissen says.

“What is much more likely is the UK government will eventually give in to EU demands, at least for the time being, so that some sort of progress towards a deal can be made that is sufficiently credible. And then of course we’re basically back at standstill, pending a more definitive trading arrangement between the EU and UK, which could take years to negotiate.”

“It seems there is much truth in an old quip about the UK, that it would spend the first ten years trying to get out of the EU, and the next ten years trying to get back in.”

“In the meantime, investment will be harmed and sterling will continue to be seen as a risky currency. All eyes will start to focus on what the Bank of England will do when it next meets to set rates on 2 August. Markets are currently pricing in a 74% chance of a rate hike at the next MPC meeting, which is understandable given the recent rhetoric, but is still unlikely in our opinion, partly given the ongoing uncertainty hampering long-term investment. On the other hand the number of vocal hawks on the MPC is rising, so you never know.”

Subjects related to this article are:

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree