Brexit Bulletin: A Clean Break
Prime Minister Theresa May will put Britain on the road out of the European Union’s single market on Tuesday, saying she doesn’t want a relationship that “leaves us half in, half out.”
In a blow to businesses and banks, May will use a much-anticipated speech in London to explicitly say she expects to quit the bloc’s single market for goods and services, according to a person familiar with the matter.
May will rule out “partial” or “associate” membership, preferring instead a “new and equal partnership” after Brexit.
“The United Kingdom is leaving the European Union,“ she will say. “My job is to get the right deal for Britain as we do.”
The promise of a clean, hard Brexit will go down badly with banks and raise pressure on May to secure a transitional period after Brexit so they and other businesses can adjust.
UBS Chairman Axel Weber said at the World Economic Forum in Davos that while his “working assumption” is banks will cut jobs in London it’s still too early to enact contingency plans.
Prior to the release of excerpts from the speech, the Confederation of British Industry warned against a “disorderly crash landing” and the British Bankers’ Association said a transition is needed to “help avoid a sudden and damaging disruption to services.”
May will cast the speech as her completed and final plan for negotiations, in which she will target full control of immigration and ending the jurisdiction of the European Court of Justice over British laws.
She will be less definitive about Britain’s membership of the European tariff-free customs union, indicating a hybrid model may be the best option.
With the road ahead coming into focus, Bloomberg View’s Mark Gilbert argues why a “hard Brexit” was always on the cards for May.
Watch May’s speech and see full coverage from Davos on Bloomberg.com today.
Trump Helps Out
Donald Trump gave May a helpful hand from across the Atlantic as she prepared to spell out her Brexit vision.
The U.S. president-elect told former Conservative cabinet minister Michael Gove that he was open to a fast trade deal with Britain. That handed the prime minister evidence that her country has alternative markets to trade with, write Bloomberg’s Tim Ross and Rob Hutton.
It also adds weight to the argument she is likely to make again on Tuesday: That the U.K. can reinvent itself as a global free-trading nation. She also now has more a reason to leave Europe’s tariff-free customs union, membership of which prevents the U.K. from striking trade deals with others.
“Donald Trump’s signal that a trade agreement will be a priority shows that the U.K. has options beyond the single market -- and that changes the dynamic of the negotiation,” said Stephen Booth, acting director of the Open Europe research institute.
But will it happen, and how soon? According to the Peterson Institute for International Economics, which analyzed 20 American trade deals, it took the U.S. on average more than three-and-a-half years to go from formal negotiations to implementation.
And is it worth it? The U.S. bought just 17 percent of U.K. exports in 2014, less than half the 44 percent that went to the EU.
Meanwhile, Trump’s overture may irritate European leaders. German Foreign Minister Frank-Walter Steinmeier said the President-elect’s remarks were “not helpful.”
The International Monetary Fund and Bank of England have been given a rough time by those who voted to leave the EU after the economic pain they forecast failed to materialize following June’s referendum.
On Monday, the IMF offered up another morsel to its critics by raising its forecast for economic growth this year to 1.5 percent from 1.1 percent, while the central bank’s governor, Mark Carney, highlighted “signs of continued solid consumer momentum.”
Still, the economy is slowing from its growth rate of 2 percent in 2016 and the IMF cut its 2018 projection to 1.4 percent from 1.7 percent. Carney also said consumers face fresh headwinds and that supply shocks like the Brexit decision imply lower growth and higher inflation to come.
“We still do foresee that further down the line, particularly as consumers adjust to lower real incomes...the economy will slow,” IMF Chief Economist Maurice Obstfeld told Bloomberg Television.
On the Markets
The pound fell and U.S. Treasuries rose following the release of May’s comments.
As the currency trades around its lowest since October, there is still little by the way of consensus for its likely trajectory. Year-end estimates in a Bloomberg survey range from $1.09 to $1.38. The median forecast is at $1.25, which implies a 3.5 percent rally from the current level. The most bearish forecast would leave the pound at its weakest since 1985.
May’s speech will add to the roll-call of historic events held at Lancaster House, which her office described as a “venue emblematic of British global leadership and diplomacy.”
It housed a 1944 commission established by the U.K., U.S. and Soviet Union to prepare for the aftermath of World War II. It was also there where South Africa announced it would become a republic in 1961 and Zimbabwe later declared its independence from the U.K.
In popular culture, the building was used to portray Buckingham Palace in the television series “The Crown” and “Downton Abbey.”
Of late, it’s perhaps most famous as the site for European Central Bank President Mario Draghi’s 2012 speech in which he said he would do “whatever it takes” to protect the euro.