To be sure, we’ve all had a long time to prepare for Brexit.
So long, in fact, that I no longer have to put the word Brexit in scare quotes. Thanks to the infinite wisdom of Nigel Farage (and a whole bunch of people who, based on Google Trends, didn’t have any idea what the EU was before they voted to leave it), Brexit is now a real proper noun. Just like Donald Trump is now a real President.
Judging by positioning, some folks aren’t particularly optimistic about the outlook:
And that makes sense.
Just ask Mike Amey, Pimco’s head of sterling portfolio management and man who you probably shouldn’t look to for profound market insights:
GBP should remain the most sensitive U.K. asset during Brexit.
Well, Brexit is another one of those geopolitical events that everyone is by now sick to death of thinking about (let alone talking about), but you’d better settle in because this is a two-year process.
Below, find a handy visual that should serve as a guide for what promises to be a rather precarious journey.
Yesterday (March 29), the UK government triggered Article 50 and thus fired the starting gun on a two-year negotiation towards the UK’s exit from the EU. These negotiations will be complex and contentious. The open question is whether they will prove constructive or adversarial.
In the context of political negotiations in general — and EU negotiations in particular — process is an important determinant of outcome. Keeping track of process is central to understanding whether we will end up with a mutually beneficial agreement or a Brexit that is unnecessarily costly for both sides.
Given each party has its own interests and domestic political constraints, EU negotiations inevitably require an element of compromise. By broadening the set of issues that the contracting parties can trade off against one another, two mechanisms underlying EU negotiations promote such compromise: (1) the principle that “nothing is agreed until everything is agreed”; and (2) the practice that agreement is only achieved at the last moment.
Applying these mechanisms to the Brexit negotiation may improve the chances of a constructive final outcome. But they imply that few concrete decisions will emerge in the coming months. In the meantime, businesses are left in limbo.
We identify three indications that would suggest Brexit negotiations are proceeding in a constructive rather than adversarial manner, increasing the likelihood of a benign outcome:
- Substantial discussions on a broader final agreement (including on post Brexit trading arrangements) start before agreement is reached on the mechanics of the exit itself.
- The EU-27 show flexibility over the timing (and thus immediate magnitude) of payments to settle the UK’s legacy liabilities to the EU, which would avoid them becoming an obstacle to constructive negotiation owing to domestic political resistance in the UK.
- Most importantly, the UK government shows a preparedness to accept ECJ jurisdiction over any transitional phase after Brexit, even if this entails a political climb-down from its established ‘red lines’.