Brexit Bulletin: Unhappy New Year

May’s first crisis of the year reveals some key takeaways about the challenges of delivering Brexit.

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Brexit clearly means headaches for Theresa May.

Just one week into 2017 and the prime minister has already lost her ambassador to the European Union. Not only that, but the departing broadside issued by Ivan Rogers – and the way he was replaced – have given voters and investors some key insights into how her government is run, and what that means for the chances of a successful Brexit.

Theresa May, U.K. Prime Minister

Theresa May is getting ready for one of the most complex negotiations that she, or anyone, has ever faced. 

Chris Ratcliffe/Bloomberg

In a lengthy letter, Rogers revealed even he didn't know the government's objectives, bemoaned its "muddled thinking" and implied May is deaf to "uncomfortable'' advice.

Negotiating skills are in "short supply," the forming of a team for the talks needs "rapid resolution" and communications between British officials in London and Brussels must be "strengthened," he said. He threw in the advice that "free trade does not just happen."

May acted quickly to fill the gap by appointing career diplomat Tim Barrow, ignoring calls from some quarters to pick a pro-Brexit politician but still finding someone that "Leave" campaigners seem to like.

Calm is again restored. For now. But there are four main takeaways:

  1. This week again suggests the U.K. by design or default is heading towards a "hard Brexit" in which it prioritizes controlling immigration and law-making over free trade. If Rogers is right in his assessment of the problems so far, it could be on the way to a disruptive Brexit as a result of inadequate preparations.
  2. May's team revealed what could become a critical weakness: they care what people say, and hate losing control. By moving with uncharacteristic speed to appoint Barrow, the premier hoped to silence criticism that she lacked a Brexit plan and to regain the initiative after being blind-sided by the resignation of Rogers.
  3. May is now under renewed pressure to start revealing more of her Brexit thinking. She will have the opportunity to do so in upcoming speeches.
  4. Finally, this has been another in which disorder reigned inside Team May even before it sits down with the EU. The sense of disunity is underlined by Friday's Financial Times report that the chief civil servant in the Brexit ministry opposed the choice of Barrow.

By contrast, the rest of the EU is showing little sign of discord, with its governments sticking to the same lines: warning against "cherry picking" and refusing to start "negotiations without notification." Jonathan Faull, who retired this month as one of the bloc's top civil servants, told the BBC on Thursday that single market access isn't "for sale."

As Mujtaba Rahman, a managing director at Eurasia Group, told clients on Thursday:

"The government simply looks like it's in chaos – something the Europeans will take note of, and something that does not bode well for [its] ability to navigate the minefield that is EU politics."

The Special Relationship

One piece of good news for May is that relations with U.S. President-elect Donald Trump may be improving.

Bloomberg reported overnight that in December she dispatched her two most senior aides – Nick Timothy and Fiona Hill – to build bridges with Trump's team as she makes plans to meet him for first time.  

The prime minister had suffered the personal embarrassment of being outflanked by her political rival Nigel Farage, the former U.K. Independence Party leader, who met Trump within days of his November victory.

Seeking a Deputy for Carney

As well as juggling Brexit, Chancellor of the Exchequer Philip Hammond has just two months to replace Bank of England Deputy Governor Minouche Shafik.

The challenge for Hammond is that Brexit may dictate the winning candidate has international experience as well as insight into markets and the finance industry. The Bank and Governor Mark Carney have run into criticism from pro-Brexit campaigners who say it showed bias before the referendum and were too bearish on the economy afterwards. 

Grant Lewis, an economist at Daiwa Capital Markets and a former Treasury official, said:

"This is a very difficult role to fill given what’s coming... Every appointment is now viewed through this Brexit prism. I don’t necessarily envy the person taking the role."

Chief Economist Andy Haldane on Thursday acknowledged that criticism of economists for failing to anticipate the economy's resilience to the Brexit vote or 2008's financial crisis was a "fair cop." A new report from Cambridge University economists also criticized the Treasury for being too pessimistic and Morgan Stanley economists said on Thursday they were "eating humble pie" having failed to anticipate how much consumers would keep spending after the referendum.

While Haldane still predicted consumers would "throttle back" on spending in 2017, pro-Brexit lawmaker Steve Baker was quick to praise him, prompting some speculation he could succeed Carney in 2019.

Brexit Bullets

  • Siemens demands Brexit clarity before expanding in U.K.
  • The House of Lords will not "sabotage" Brexit process, new Speaker tells Daily Telegraph
  • Jamie Oliver blames Brexit for closing restaurants 
  • Verhofstadt seeks to lead European Parliament
  • British farming stands to be one of the big winners from Brexit, according to the Centre for Policy Studies study
  • Man born in London to German parents told to take citizenship test to secure a passport, Guardian reports
  • Senior civil servants demand pay rise to deal with "unsustainable" Brexit workloads, Press Association says
  • Norway Prime Minister tells Reuters U.K. lacks negotiating experience, fears "very hard Brexit"

On the Markets

Pound investors are increasingly ignoring signs of strength from the U.K. economy as political risk dominates the currency's outlook, Bloomberg's Chiara Albanese reports. 

Sterling showed little reaction on Thursday after a gauge of the services sector beat the median forecast of economists in December to rise at the fastest pace in more than a year.

"Politics is trumping the data," said Steven Barrow, currency strategist at Standard Bank in London. "We tend to see the pound move more when Brexit issues arise and I suspect it will stay this way for some time. Many are skeptical of current economic strength."

And Finally...

If you thought 2016 was a busy year for European politics wait until you see what 2017 has lined up.

Bloomberg's Ian Wishart goes through the calendar to detail the key dates, including elections in France, Germany and the Netherlands.

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