latamen
Brexit saga set to drag on until June or longer

Brexit saga set to drag on until June or longer

15-03-2019 | Insight
Investors are bracing for the prospect of a delayed or canceled Brexit, as the saga looks set to drag on for at least another three months.
  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

Speed read

  • British PM to ask for extension to leaving EU after 29 March
  • Two votes in Parliament still fail to back withdrawal agreement
  • Request may come up at European Summit on 21-22 March

Prime Minister Theresa May is set to ask the European Union for an extension to leaving the bloc on the currently set date of 29 March, having twice failed to get her proposed withdrawal agreement through the British Parliament. It has raised the prospect that Article 50 – the process used to leave the EU – will be extended or even withdrawn.

“The most likely outcome is a delay, and the longer this delay, the greater the chance that there won’t be a Brexit’ at all,” says Robeco Chief Economist Léon Cornelissen. “For financial markets, the prime issue is the avoidance of a hard Brexit – a disastrous outcome that still remains very unlikely.”

It follows two key votes by the House of Commons to try to resolve the impasse and allow the UK to leave the EU with some sort of trading agreement. A vote on Wednesday 13 March rejected the idea of leaving the EU without a deal, ruling out a so-called hard Brexit. However, the vote is not legally binding, and a hard Brexit will still occur by automatic process of law on 29 March, unless active steps are taken to prevent it.

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

European Summit ahead

On Thursday 14 March, British MPs voted to ask the EU for a delay to Brexit so that the political problems associated with getting it through Parliament can be ironed out. This could take place on the next European Summit, scheduled for 21-22 March.

May has said she will ask for a delay to June 30, if a majority of the House of Commons approves her withdrawal agreement – at the third time of trying – in a vote scheduled for Wednesday 20 March. The first attempt on 16 January led to the biggest defeat for a government motion in British history; following a rebellion by 118 Tory MPs, she lost by 230 votes. A second attempt on 12 March was defeated by a lower margin of 149 votes, after some Tories relented, believing that her deal was better than Brexit being canceled.

“If her third (maybe followed by a fourth) attempt fails again, she has threatened to ask for a much larger delay, putting the whole prospect of Brexit into doubt,” says Cornelissen. “It is doubtful that enough hardline Eurosceptics can be convinced to accept the withdrawal agreement after all, but it cannot be ruled out either.”

“In this case, the UK would leave the EU on 30 June, thus after a short ‘technical’, politically insignificant delay to ensure an orderly process. Markets will probably react positively to the reduced uncertainty, though the withdrawal agreement says nothing about the future relationship between the EU and the UK.”

It’s still only ‘round one’

“We’ve only seen the end to round one of the Brexit process. Negotiations on the future relationship are theoretically supposed to end in December 2020, but will probably take much longer as is usual in these type of negotiations. Apart from that, the new relationship will be worse than the current one, which gives these negotiations a rather peculiar character, and increases the difficulties of reaching a national consensus.”

“For the foreseeable future, we would expect a Brexit in name only, which bodes well for the UK economy, which would prove more resilient, while sterling and UK assets in general would benefit.”

Sterling has been in the doldrums ever since the original Brexit referendum in June 2016. From a peak of 1.44 euros to the pound in July 2015, it has slumped from around 1.30 euros at the time of the referendum to a low of 1.08 in August 2017. It has since ticked up to around the 1.17 level amid hopes of a resolution to the saga.

Even longer delay

If May does not succeed in pushing the unpopular withdrawal agreement through on 20 March, she has said she will ask for a longer delay. EU leaders have to unanimously agree on any extension.

“EU Council President Donald Tusk is pleading for a long delay, so that the UK can make up its mind again,” says Cornelissen. “But other politicians worry that this would enable a crisis without end around Brexit. In the end, European leaders will probably agree on an extension, possibly initially for a shorter period to keep up the pressure. As a measure of last resort, the UK government could unilaterally engineer an extension of indefinite duration by withdrawing its Article 50 notification.”

“In any case, European leaders won’t want to take the blame for a hard Brexit, as the negative economic and logistical consequences would hurt the European economies as well. And it would be especially negative for the Irish Republic, as the immediate need for a hard border would rise.”

Border controls

The Irish border issue is a major sticking point, since leaving without a deal would mean the need for customs posts to collect tariffs and check the quality of goods traveling into and outside of the Single Market. The meandering 300 km frontier is extremely difficult to police, and keeping it open is a condition of the Good Friday Agreement that brought peace to the province.

“The UK has already stated that in case of a hard Brexit, it would unilaterally keep the border open probably, primarily to prevent a return of the ‘Troubles’,” says Cornelissen. “But the EU and the UK have a legal obligation to protect their external borders, and leaving the backdoor open indefinitely isn’t a feasible long-term strategy. It would mean the need for customs posts to collect tariffs and check the quality of goods traveling into and outside of the Single Market.”

“In the grim negotiation climate in the event of a hard Brexit, the EU would probably insist on keeping at least Northern Ireland in the internal market, effectively creating a border in the Irish Sea. It would also insist on the UK continuing its contributions to the EU budget.”

“So, a hard Brexit absolutely doesn’t mean starting with a clean slate. A hard Brexit is a very unattractive option for both parties involved and remains highly unlikely. ‘Realpolitik’ would most likely prevail, and the UK would be offered an extension. This saga is going to run on for a while longer.”

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