Brexit Bulletin: The State We’re In

Does the smallest civil service since the 1940s have the capacity to deliver Brexit?

Brexit: What Happens Once Article 50 Is Triggered?

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Prime Minister Theresa May is poised to enter the political battle of a lifetime with the smallest army of civil servants since the 1940s.

Prime Minister Theresa May leaves Downing Street in London on March 23.

Prime Minister Theresa May leaves Downing Street in London on March 23.

Photographer: Jack Taylor/Getty Images

With fewer than 400,000 mandarins on hand, the British state needs to divorce from the European Union and forge a new trading relationship with its biggest market. It must also strike commercial deals with other nations, transpose European laws into British ones and create new regulatory bodies and systems for policing immigration and managing customs.

Such demands — on top of the day-to-day requirements of keeping the nation safe and providing healthcare — leave the nation’s top civil servant, Jeremy Heywood, acknowledging that “the challenge of Brexit has few, if any, parallels in its complexity.”

As Bloomberg’s Alex Morales asks on Tuesday, the question is whether a bureaucracy shrunk by fiscal austerity can rise to the challenge, as May on Wednesday triggers two years of talks with her 27 European counterparts.

Catherine Barnard, professor of EU law at the University of Cambridge, said:

“The reality is that this can’t possibly be done in two years because it’s such a vast undertaking. As the government turns over each individual stone, they realize that there are quite a lot of stones underneath and none of them can be dealt with very easily.”

24 Hours to Go

Officials on both sides of the English Channel are finalizing their negotiating positions with just a day to go before May invokes Article 50 in a letter to the EU.

Appearing on the BBC on Monday night, Brexit Secretary David Davis again challenged the 50 billion pound bill EU officials say they are poised to impose on the British.

Britain will pay “nothing like” that sum of money for which there has been “no explanation,” Davis said.

Still, the Guardian said pro-EU members of the ruling Conservative Party are lobbying May to pay a fee to speed up talks on a trade deal.

U.K. officials are readying for an emotional backlash from the EU, with one government official concerned May hasn’t done enough to charm her counterparts, Bloomberg’s Tim Ross reported on Monday. Davis is planning a round of shuttle diplomacy to persuade other EU countries to grant a friendly divorce.

1490653683_David-Davis-

David Davis, Brexit secretary.

Luke MacGregor/Bloomberg

Complicating May’s plans, Scottish First Minister Nicola Sturgeon is expected on Tuesday to win backing in the regional parliament for her plan to pursue a second independence referendum. In Northern Ireland, political parties were given more time to form a new power-sharing administration.

The Other Side

EU officials are still debating whether their draft guidelines for the talks should mention a transitional phase to ease Britain’s departure from the EU, according to a person familiar with the matter.

Some member states don’t want to talk about a transition to maintain leverage, said the person, who spoke on condition of anonymity. Others view the issue as an inevitable discussion point that should be addressed from the start, the person said.

For now, there is agreement that EU President Donald Tusk’s draft will focus on how the U.K.’s divorce will be handled rather than the post-Brexit environment. Topics will include how to calculate the bill, the rights of citizens throughout the bloc and the future of regulators such as the European Medicines Agency.

In a sign she’s hardening her stance, German Chancellor Angela Merkel on Monday said there is no rush for the EU to respond to the British.

Business Braces

Also readying for the talks are British businesses, which are making last-ditch demands that the government keep their interests in mind. Bloomberg News spoke to executives, lobbyists and analysts from a range of sectors to discover what they want most from an eventual Brexit deal.

Concerns include the risk of tariffs on exports to the EU, disruptions to supply chains and the potential loss of European workers.

Brexit Bullets

  • European diplomats in London say the U.K. government is stepping back from its threat to exit without a trade deal if talks break down, Guardian reports
  • The Bank of England names Brexit among the main risks to U.K. financial stability and says the orderliness of the negotiation will determine how much of a threat it poses
  • Siemens says it’s going to continue to invest in its U.K. operations despite the “unclear” future
  • The European Central Bank says it needs the power to oversee branches of foreign lenders doing business in the euro area to minimize the risk of regulatory arbitrage after Brexit
  • Oxford Economics sees a 41 percent chance of no post-Brexit trade deal and a 48 percent chance of a free trade pact. Teneo Intelligence says the “most likely outcome” is a transition deal with a fixed expiry date
  • Qatar plans to invest 5 billion pounds in the U.K. over next 3 to 5 years, Finance Minister Ali Shareef Al Emadi says 
  • Two House of Lords panels complain about the “quality” of the government’s response to their report on the options for post-Brexit trade
  • Credit Suisse Chief Executive Officer Tidjane Thiam says “we have time to think” about Brexit and the bank has “quite a few options”
  • Virgin Atlantic Airways is preparing for a loss this year as a slump in the pound since the referendum weighs on bookings and cut-price rivals ramp up U.S. capacity

On the Markets

The biggest exchange-traded fund tracking euro-area shares saw its largest inflows since the Brexit vote last week. The iShares MSCI Eurozone ETF gathered $518 million as the Euro Stoxx 50 Index held steady while stocks in Britain slumped.

The pound broke above $1.26 for the first time in nearly two months on Monday, driven mainly by a weaker dollar. Its ability to rise further may be limited by the political uncertainties of Brexit, analysts said.

Bloomberg Gadfly’s Edwards Evans writes that it’s the aftermath, rather than the triggering of Article 50 itself, that poses the greatest risk to sterling.

And Finally…

Brexit Barometer weather GIF

Meet the Bloomberg Brexit Barometer. Launched on Monday, it’s a custom-made index of key measures of the U.K. economy designed by Bloomberg Intelligence. It will be updated daily and the more it goes up, the better the state of the economy.

On Monday it stood at 30.1 compared with a post-referendum low of minus 13.1 and September’s high of 51.6.

Also, check out our new video guide to the basics of Brexit.

For more on Brexit follow Bloomberg on Twitter, Facebook and Instagram, and see our full coverage at Bloomberg.com

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