Breaking up is hard to do: Brexit talks to be long, taxing
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One would like to think that the United Kingdom’s upcoming snap election on June 8 will pave the way for a smooth U.K. exit from the European Union. However to think so, as evidently Prime Minister Theresa May seems to think, would be to engage in highly-wishful thinking.

Irrespective of how favorable an election result May might achieve, that election will not change the underlying complexity of the U.K.’s exit negotiations and the seemingly irreconcilable red lines that both the U.K. and the EU have announced in anticipation of those negotiations.

Nor will it change the fact that the U.K. will be conducting those negotiations against the backdrop of close to the largest external current account deficit that the country has had in the post-war period.

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May is entertaining the reasonable hope that she will achieve a landslide victory in the June 8 election. That outcome would seem to be highly probable given the present disarray in the opposition Labor Party. May is also hoping that a large parliamentary majority will give her greater flexibility in the upcoming negotiations with the country’s European partners.

  

However, for that to be the case, it will be necessary that a large majority of her own party who might be elected to parliament would be in favor of a soft Brexit. Failing that, which is all too probable given her party’s need to compete with the hardline UKIP party, any effort on her part to be more flexible in the Brexit negotiations would run the risk of a party revolt within her own ranks.

Even if May were to succeed in obtaining a more compliant U.K. parliament, it is highly improbable that the very complex Brexit negotiations could be completed by March 2019, or within the two-year maximum period for such negotiations envisaged by the Treaty of Lisbon from the date on which May triggered Article 50 of the treaty.

For a start, no serious negotiations could get underway until Germany’s September 2017 elections are complete. Following those elections, the highly-contentious issue of the size of the U.K.’s exit bill from the European Union would first need to be resolved before negotiations on the U.K.’s future trade arrangement with Europe or on Europe’s future relations with the City of London could be started.

As an indication of how complex the issue of the U.K.’s exit bill will be, all one need do is to consider the presently very large gap between the EU and the U.K.’s position on this matter. The Europeans are claiming that the U.K. would need to pay as much as €60 billion to the EU while the U.K. is insisting that it does not need to pay anything to Europe on leaving.

The announcement of red lines by both the U.K. and its European partners also does not bode well for rapid progress in the highly-detailed exit negotiations that will eventually need to take place. For her part, May has stated that in any exit arrangement, the U.K. must regain full control over its borders and must free itself from the jurisdiction of the European Court of Justice.

For their part, the U.K.’s European partners have made clear that for the U.K. to be granted access to the European Single Market, it must agree to the European requirement of the free movement of goods, capital, services and people.

All of this would seem to cast a long shadow over the U.K.’s economic prospects over the next few years. This is especially the case considering that the U.K. economy will need a continuous large inflow of foreign capital to finance its gaping external current account deficit.

If there is one thing that investors abhor it is uncertainty. Yet, that is precisely what investors in the U.K. should be bracing themselves for over the next two years, which will be characterized by great doubt as to the final terms that the U.K. might eventually get from its European partners.

Not knowing whether the U.K. will, in the end, have access to the Single Market, companies will not want to have part of their European supply chain located in Britain. In addition, not knowing whether they will have passport rights to the European financial market, London-based financial firms will increasingly start moving at least part of their operations to the European continent.

For the sake of the U.K. and Europe, one must hope that the large differences that now characterize their relative Brexit positions will soon be bridged. Sadly, however, all the clues seem to be pointing in the opposite direction.

 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.


The views expressed by contributors are their own and not the views of The Hill.