Brexit Bulletin: The New Political Reality

  • The Queen’s Speech will lay out a Brexit-heavy program
  • Carney and Hammond share concerns about the economy

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Prime Minister Theresa May will make her first attempt to engage with Britain’s new political landscape on Wednesday as she publishes a Brexit-heavy legislative program.

Queen Elizabeth II will read out the plan for the next two years. It’s set to include a bill designed to convert thousands of European Union rules into British law and another to regain control of trade policy from the bloc.

Theresa May on June 19
Photographer: Simon Dawson/Bloomberg

“The election result was not the one I hoped for, but this government will respond with humility and resolve to the message the electorate sent,” May said in a statement. “First, we need to get Brexit right. That means getting a deal which delivers the result of last year’s referendum and does so in a way that commands maximum public support.”

The question is whether May can last as premier after losing her parliamentary majority this month. The first test is gaining support for the speech’s contents. Talks aimed at winning the support of Northern Ireland’s Democratic Unionist Party were still going on Tuesday evening.

Even then, May has to get her Brexit bills through a Parliament that increasingly doesn’t share her vision. At the same time, she knows the euroskeptics in her party will pounce if she moderates her approach too much.

Chancellor of the Exchequer Philip Hammond again flexed his muscles on Tuesday by calling for a smooth Brexit focused on the needs of the economy rather than on immigration, as May once wanted. While Hammond called for a transitional period, EU chief Brexit negotiator Michel Barnier said Britain would have to remain subject to the oversight of EU judges in that event, which could also antagonize May.

At least 30 Conservative lawmakers have indicated to the government that they will not accept leaving the EU without a deal, Sky News reported, citing a former minister.

More than 50 lawmakers from Jeremy Corbyn’s opposition Labour Party also signed a letter Tuesday calling for Britain to stay within the EU’s single market, again at odds with May’s ambition. Corbyn has already said he will seek to amend legislation on the Queen’s speech.

Carney Still Concerned

Bank of England Governor Mark Carney ended more than a month’s silence by reemphasizing his concerns about the impact of Brexit on the economy.

Having incurred some wrath a year ago by warning of Brexit’s risks, Carney indicated he’s in no rush to raise interest rates and said he wants to see how the economy responds to the “reality of Brexit negotiations.”

“Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption,” Carney said, in an apparent dig at Foreign Secretary Boris Johnson’s onetime claim that the goal of Brexit would be to “have our cake and eat it.”

Carney was speaking at the same event as Hammond, who also warned against letting Brexit prompt a “fragmentation of financial services.” Carney said banks may soon need to “activate contingency plans.”

Clearing Clash and German Warnings

The chancellor and governor also made the case against letting control of euro clearing slip away from London.

European Central Bank Executive Board member Benoit Coeure hit back by saying EU plans to ensure it has a leading role in supervising clearing houses after Brexit were a step in the right direction.

The European Commission’s proposals “would provide the supervisors and the relevant central banks of issue with the guarantees they need in order to monitor and address risks to the EU’s financial system,” Coeure said.

Separately, Deutsche Bank Chairman Paul Achleitner says Brexit means that Europe’s most important financial hub is distancing itself from the rest of the continent. “Brexit negotiations can’t turn into a pick-and-choose program for London,” he said.

Chancellor Angela Merkel also called on German business to refrain from putting sectoral interests ahead of a united EU front toward the U.K. Her main challenger in elections slated for September, Social Democrat Martin Schulz, called for a spirit of compromise by the EU and U.K. in Brexit talks.

On the Markets

The pound fell to a two-month low as Carney signaled he wasn’t in a hurry to raise interest rates.

Drawn-out negotiations which “involve a series of delays” is the likeliest scenario foreseen by the majority of 642 investors surveyed by Barclays. About 64 percent are skeptical the exit will be orderly and expect protracted discussions to sap the value of U.K. assets, in particular the pound.

Brexit Bullets

  • The U.K. government is planning to invite EU citizens to “register their interest” in obtaining permission to live and work in U.K., the Guardian reports
  • Standard & Poor’s may act on U.K. rating before Brexit talks conclude, says Moritz Kraemer, chief ratings officer
  • Allianz Global Investors says its U.K. workforce has doubled to 350 since the Brexit vote
  • New Irish Prime Minister Leo Varadkar says the U.K. seems to want a trade accord with the EU that won’t “leave them far off” the current arrangement
  • Britain’s car industry will be permanently damaged unless the government secures a transitional deal with the EU, says the Society of Motor Manufacturers and Traders
  • Applications for National Insurance numbers by citizens of eight eastern and central European economies fell to the lowest level since 2004, according to Oxford University’s Migration Observatory
  • VoteWatch Europe maps out views of political forces shaping the EU’s position

And Finally…

A year ago Societe Generale economist Brian Hillard was among the few City of London economists who saw a real chance that voters would back Brexit.

Now he’s looking into his crystal ball again to predict what form the divorce will take. He sees a 70 percent probability of a “hard Brexit” in which the government secures control over immigration and trade tariffs, which will require the U.K. to leave the single market and customs union.

Despite the recent chatter he sees just a 15 percent chance of a soft Brexit and 10 percent likelihood of no deal.

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