Brexit: What happens now?Contributor Karen Ward
Karen Ward, Chief Market Strategist for EMEA at J.P. Morgan Asset Management and formerly Chair of the Council of Economic Advisers to Philip Hammond, outlines Teresa May’s proposed Brexit deal, and the terms of which were agreed with the leaders of the other 27 EU countries on the 25 November 2018.
Brexit hopes: When the prime minister began the negotiation process, she had a wishlist that tried to please the many factions in the Conservative Party, the UK parliament and the country.
Brexit realities: The list included conflicting demands: in particular, the desire to avoid imposing a border on the island of Ireland—and therefore to allow the free flow of goods in Ireland—without accepting EU rules and regulations.
The DUP perspective: The Democratic Unionist Party (DUP), which supports May’s minority government in parliament, has been clear that it does not want an Irish border, but also does not want Northern Ireland to be treated differently from the rest of the UK.
The Brexiteer perspective: The priority above all else for some parts of May’s own party is sovereignty—the ability of the UK to set its own rules and regulations.
The challenge of an independent trade policy: Hopes that some of the UK’s trade with the EU would be easily replaced following trade agreements with other parts of the world, notably the US, are looking challenging. Increased trade with the US would require an alignment of standards, but, particularly on agriculture, UK and US standards are very different. Washington’s America First stance has also made US trade relationships in general look less certain.
The deal on the table: The proposed deal has two key elements. The Withdrawal Agreement is a politically binding treaty that sets out the terms of the UK’s divorce from the EU, including the financial settlement, the rights of citizens, the transition period (to December 2020, or beyond if extended) and the backstop arrangements if a deal is not reached. The Political Declaration is a commitment by both parties to work on the terms of the future relationship.
The sticking point: The backstop—the trading agreement that the UK would fall back on if a final deal could not be reached by 2020. Under the terms of the proposed backstop, Northern Ireland would be treated differently from the rest of the UK, which would not be acceptable to the DUP.
The workaround: May and her EU colleagues stressed that the backstop is highly unlikely to come into effect. Instead, both parties will work to agree a future relationship that will override the backstop before the deadline.
What happens now: May must take the proposed deal to UK parliament. If it passes, it will also need to be ratified by the European Parliament and all 27 EU member states.
The likely outcome: We expect the deal to pass, although probably not on the first attempt. Significant market volatility is possible over the coming weeks as the various factions attempt to save face on parts of the deal that do not suit them. However, we believe that fear of the alternative—a second referendum or general election, potentially leading to no Brexit—will ultimately mean the Conservative Party and potentially other groups will back the deal.
The market repercussions: A deal would be positive for business sentiment on both sides of the Channel. We would also expect to see a broad-based recovery in sterling, contributing to the conditions for a quicker-than-expected normalisation of UK monetary policy.