By Shane Cummings
Many major geopolitical events are currently dominating the news cycle. For investors in Europe’s markets, Brexit has particular resonance. We wanted to take a step back to provide you with a brief update on recent events related to ongoing Brexit talks—along with some background on Brexit’s origins.
During the week of July 9, the U.K. government saw the resignation of its Foreign Secretary Boris Johnson on the heels of David Davis’ resignation as Brexit secretary—two major departures from the ruling government. Both resigned due to major disagreements with Prime Minister Theresa May over Brexit negotiations.
The U.K. held its public referendum on Brexit on June 23, 2016, asking voters if they wished to ‘Leave’ or ‘Remain’ in the European Union. To the surprise of many both in and outside the U.K., the majority of voters supported ‘Leave’ at almost 52% to 48%. This triggered Article 50 of the Lisbon Treaty, effectively putting the U.K. on the formal path to leaving the European Union, of which it has long been an influential member. Since no member country has previously departed from the European Union, the process is largely undefined and has been subjected to protracted negotiations as the U.K. and the E.U. attempt to agree upon a host of major issues.
One key example: Deciding how the legal status of E.U. citizens living in the U.K. will change once the U.K. is no longer an E.U. member. With over 3 million E.U.-born migrants living in the U.K. (as of 2015), this could be a very large disruption to the status of many legal E.U. residents and the U.K.’s labor force.
Also, importantly, Brexit potentially resets the U.K.’s trade agreements with some of its largest partners. This could pose a major economic disruption due to the impact on goods and services traded with the continent. Will this, for example, create bureaucratic drag—with all Europeans traveling to the U.K. requiring additional screening, and all imported goods requiring a more exhaustive inspection? Will removal of current trade agreements result in tariffs being slapped on goods and services traded between the U.K. and the E.U.?
Hard-liners in the British government like Davis and Johnson were pushing for a “hard” Brexit – essentially pushing for the U.K. to sever its ties to the E.U. with no deal or agreement whatsoever. The stakes are high for the U.K. London enjoys the status of one of the world’s major financial markets. There is a lot to lose if major financial institutions decide to relocate to other financial centers like New York or Paris due to uncertainties over the U.K.’s ability to retain access to European trading markets.
The U.K.’s scheduled exit date is March 29, 2019. In the interim, there’s a considerable amount of pressure on the British government to reach some type of compromise agreement with the E.U. More noise and market volatility for British equities could arise as the deadline approaches, as well as volatility for the British Pound. We will continue to monitor the situation, and are hopeful that the parties involved in the negotiations will reach an agreement that doesn’t cause major disruptions to European trade.