Brexit: Surviving outside the single market?

On Tuesday 17 January 2017, British prime minister Theresa May laid out her much-awaited plan for Brexit. Christophe Lalandre, Managing Director of Lombard Odier in the UAE, discusses why we do not see a concrete scenario through which these goals could be achieved.


In anticipation of the hard-line stance that Mrs May was widely expected to adopt, markets were particularly anxious in the run-up to the 40-minute speech. However, judging from the movements of sterling during the speech, the market appeared to be reassured by the statement and its undertones of flexibility. However, in our view, the UK remains on the road to a pretty hard Brexit.


As a result, we maintain our view that 2017 and the beginning of negotiations between the UK and its European partners will mark the start of a long and painful adjustment process for the country.


Indeed, Mrs May painted a positive picture of the country outside of the European Union (EU), saying that this is not a move towards protectionism, but rather a new start at the centre of the global economy. She stated that the decision to exit the free market gives the UK the flexibility to decide what kind of deal and relationship it wants to have with all the countries in the world rather than being dependent on Brussels’ lawmakers. But we do not see a concrete scenario where this goal could actually be achieved.


In summary, Mrs May’s goal for the UK is twofold: (a) restrict immigration from the EU to the UK, so curbing the free movement of people and (b) remove the UK from the European Court of Justice’s jurisdiction, therefore giving the UK full freedom to set-up and follow its own rules. In this context, she also officially accepted that without the free movement of people, the UK cannot partake in the union’s three other freedoms – i.e. free movement of goods, services & capital. While recognising that her proposals are incompatible with membership of the single market, she reiterated her aim to gain broad access to it.


The problem is that she also announced her intention to negotiate free-tariff agreements with the EU while remaining very vague on how she intends to achieve it, which looks to us very much like wanting to have the advantages of being part of the single market without paying for it.


And it seems unlikely that the EU will be open to such agreements, especially given May’s position on eliminating most of the UK’s contribution to the EU budget. In terms of bargaining power, it is worth bearing in mind that the EU is a much more important trade market for the UK than the UK is for the EU.


As such, we expect the EU to adopt a hard stance during the negotiations, keeping the currency under pressure – which will in turn stoke inflation – and reduce households’ purchasing power. This dynamic is likely to thrust the Bank of England into a fresh dilemma as it is forced to choose between fighting inflation with higher rates (at the expense of growth) or supporting growth during the adjustment with easy policies (at the expense of inflation).


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