Brexit Risk Scenarios and Dangers

THERESA May has thrown the dice in a final gamble to get her European Union withdrawal deal over the line.

The beleaguered prime minister is well aware that Parliament, businesses and investors local and foreign fear the economic consequences of leaving the EU without a deal. The last, perhaps final throw is her approach to Labour leader Jeremy Corbyn. The hope is a Tory Labour national interest accord on a new withdrawal proposal to the EU.

Short, medium and long term risks

For businesses and investors there are several risk scenarios. First, the UK parliament does not agree to a proposal that is acceptable to EU leaders. By legal default, the UK would leave without a deal. If there is no agreed adjustment period, there would likely be economic dislocation for both the UK and Continental Europe. In the short run there would be a sigh of relief if the EU accepts an extension leading to a likely “soft Brexit”.

Germany’s DAX has rallied considerably since the beginning of the year, but is still well down from the highs of last year. he economy is performing poorly and Brexit remains a risk so the danger is a “bull trap” in a longer bear market.

The problem, however, is that Mrs May has so deepened the divisions in the Conservative Party that she has opened the door to a Labour electoral victory. The medium and long-term risks for businesses and investors, is that Mr Corbyn and his cabinet are hard line socialists. Their party manifesto aims for nationalisation of key industries, a surge in spending, steep taxation hikes and a likely increase in state debt. With the UK economy already slowing down, the danger in the next year or two is a sharp decline in foreign investment, a further slide in the pound and inflationary recession.

As the UK is a significant importer of European goods, such an outcome is a worry for the EU. Italy is already in recession and Germany and France are hovering on a downturn. Moreover, polls show that French, Italian, Austrian and German nationalist populists are gaining ground. The coming late-May European elections will be a testing ground.

Sanguine Markets are In Denial

With Brexit dominating both the political and economic agenda, both the currency and stock markets have seemed remarkably immune to the risks. If Mrs May accedes to Mr Corbyn’s demands for a customs union with the EU and guarantees for workers, it would amount to a “soft Brexit”. But Mr Corbyn’s party is also divided. Labour constituencies in the north of England, midlands and Wales voted for Brexit in the 2016 referendum. In contrast, London and Scotland, with numerous Labour supporters, voted Remain and are demanding a second referendum.

Italy’s stock market has also revived this year, despite the nation’s recession. Similarly to Germany and other European markets, the index is still well below the 2018 peak. The danger is that this is a bear market rally.

Northern Ireland and the “Backstop”

And then there is the Northern Ireland conundrum and potential risk. The Democratic Unionists (DUP) propping up Mrs May’s minority government refuse to back her Brexit deal because they fear its “backstop” insurance deal could cause cracks in the UK’s union. But the DUP doesn’t speak for the entire Northern Ireland as the majority voted Remain. Already there are signs of renewed violence, but hopefully the Good Friday Agreement will hold.

All are to blame for the Brexit Mess

Mrs May is the focus of opprobrium, but all are to blame – from David Cameron for holding a referendum, hard-line Brexitiers and Remainers, a cynical Labour leadership, to an intransigent EU. Parliament (the vast majority of MPs are Remainers) gave sovereignty to the people and by a small majority the people voted for Brexit. The majority rules but the wishes of the minority have also to be considered. Mrs May tried to straddle the two and the result, so far, has been failure.

© Copyright Neil Behrmann. This editorial was first published in The Business Times, Singapore
Neil Behrmann
is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. See reviews of both books :

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.