Adam Lemon Report for dailyforex.com:
The Brexit controversy has run for over three years but seems close to resolution as Britain goes to the polls to elect a new government, which if polls are correct, will finally execute Britain’s departure from the European Union within a few weeks. These events are likely to provide a fundamental / sentiment boost for the British Pound. If you want to trade the British Pound, you can with any of our top Forex brokers.
A History of Brexit
On the 24th of June 2016, the population of the UK woke up to the fact that they had voted, narrowly, to leave the European Union in a non-binding referendum which the government had, nevertheless, promised to respect as binding. However, it was far from clear on what terms such a departure would be made. No country had ever left the European Union before, and as a Leave vote was seen as so unlikely, little attention was paid to such details during the campaign. “Brexit” might be where the UK followed the path of Switzerland and was an EU state in all but name, through a looser association where it sought to retain the benefits of frictionless trade with the EU (at a price, both political and financial), to a clear and total break on WTO terms.
At the heart of Brexit lay a party-political struggle which had festered, mainly within the Conservative Party, since the UK first joined the then European Economic Community in 1973. A minority of Conservative MPs were opposed to membership of the EU, mainly as they see it as rendering the British state meaningless as more and more powers went to the EU, partly because they see the EU’s guiding policies as undemocratic and politically and economically unsustainable.
Whilst the Conservative government elected in 2015 rode to power on the promise of an in/out EU referendum, there was little wider public clamour for such a debate; the real reason for it was to allow the party’s leadership to get a rubber stamp to Remain and thus lance the boil of Euroscepticism once and for all. The leadership of the party and the Prime Minister of the day, David Cameron were confident that the UK would reject Brexit, killing two birds with the one stone. It was a huge miscalculation.
Brexit’s political conundrum
The EU referendum was not fought on party political lines, although the government and almost all major political parties were in support of remain. Individual politicians were free to campaign on either side of the debate. This saw the PM, most senior cabinet ministers together with the shadow cabinet arguing for remain against other ministerial colleagues, “mavericks” from the opposition party and UKIP. The government wrote to every household promising that the result of the referendum would be implemented. More than three years later, this promise has still not been kept and may never be kept.
Following the referendum result, the prime minister decided that instead of implementing the result he would resign. He was replaced by Theresa May. She decided that it would be the Conservative Party alone that decided on the shape and timing of Brexit rather than making it a cross-party consensus project. It also tied the hands of opposition MPs who disagreed with the strategies adopted by the ruling party and the “red lines” that it set in order to keep its pro-Brexit majority in Parliament happy.
Opposition MPs understandably did not want to be seen to be trying to overturn the referendum result (the largest democratic exercise in Britain’s history), so full-throated objection to Brexit was mostly muted. Mrs May went to the electorate in June 2017 seeking a sweeping majority which would allow her to implement the softer Brexit that she favoured, but as it happened, she lost her majority and could only govern with the support of Northern Ireland’s 10 DUP MPs who had their own “red lines” to add to the mixture. It also made her a hostage to fortune of the ERG faction within her own party.
Irreconcilable Differences
The majority of Conservative MPs campaigned to remain in the EU, so the tendency of the government initially was to try to seek a compromise “soft Brexit” which would allow frictionless trade to continue between the UK and its biggest trading partner. However, this would have meant staying in both the customs union and in the single market, something unacceptable to the pro-Brexit faction within the Conservative Party. As time went by, they argued that the UK could not possibly have an independent trade policy if it remained in the customs union and single market. What would be the point of leaving the E.U. while continuing to be bound by their most important rules without having a say in decision-making?
The Island of Ireland
Being in the single market and the customs union, trade between the EU and the UK is frictionless. The UK only shares one land border with the EU: the border between the Republic of Ireland and Northern Ireland. However, should the UK leave the customs union, customs inspection on at least some types of goods, livestock or produce crossing the border would be a natural outcome. The EU leadership and the Irish government, both hoping to prevent Brexit from happening, seized upon this as Brexit’s weak spot. The Irish government and Irish republicans in Northern Ireland began to speak of any kind of hard border on the Island of Ireland as a breach of the deal which ended the long-running armed conflict in Ireland in the 1990s. Mrs May’s solution to this problem was to sign up to a backstop accord in her withdrawal agreement which would see the whole of the UK’s customs arrangements line up with those in the EU until and unless a new free-trade agreement made them superfluous. Critics of this arrangement claimed it gave the EU a veto on the UK’s departure. Ultimately, the ERG and the Democratic Unionist Party combined forces with opposition parties to prevent the withdrawal agreement drawn up between the May government and the EU from passing into law. This put the prime minister in an untenable position. She resigned, to be replaced by Boris Johnson as leader of the Conservative party and as prime minister.
Boris Johnson’s Brexit
Boris Johnson’s central issue in his bid to become party leader, and therefore prime minister, was that the “backstop” arrangement that May had negotiated to resolve the problem of customs inspections on the island of Ireland was unacceptable. This gambit won him the backing of the ERG. Simultaneously, he reiterated May’s promise to the DUP that no British prime minister would accept any partition of the UK and therefore the UK and Northern Ireland would leave the EU together.
The EU had made it plain that they would not re-open the negotiation process that had led to May’s EU withdrawal bill, but in the end, in order to avoid a “no deal” Brexit and because what Johnson was asking for was something May had already rejected when offered, they relented. In essence, Johnson’s deal differed from May’s to the extent that the “backstop” arrangements no longer covered the whole UK, but applied just to Northern Ireland which, to all intents and purposes, would remain in the single market and customs union with the EU. This created a “border in the Irish Sea”, the very thing May and Johnson had pledged to avoid – the DUP were furious.
With time running out to the end of October deadline which Johnson had vowed to respect, parliament agreed to two pieces of legislation, the Letwin amendment which essentially stated that the Withdrawal Bill could not be passed until all elements of it were approved and the second reading of the Johnson version of the EU Withdrawal Agreement, setting it on its way to becoming law. The commons, however, rejected the programme motion that came with the bill since it only allowed three days of scrutiny for it to pass all its stages.
Johnson’s reaction to the setback was to withdraw the bill (he had no choice in the matter), but rather than agree to a longer programme motion which allowed more scrutiny of the bill and opened up the prospect that amendments he did not like would be attached to it, he pushed again for a general election. In the end, with support from the SNP and Liberal Democrats who feared that the Labour leadership could not control its pro-Brexit rebels, an election was legislated for to take place on the 12th of December 2019.
Current Brexit Legal Position
As a result of the Benn Act, the UK’s departure from the EU has been delayed until the end of January 2020. As a matter of law, unless something is done to change it, the UK will leave the EU on that date without a deal and cease to be a member of the bloc on February 1st, 2020. There would be no transitional period and the UK would fall back to trading with the EU on WTO terms, inevitably generating a range of customs inspections at its borders with the EU and the imposition of tariffs on a range of goods traded between the two. Officially, neither the UK nor the EU want this to happen, but if no further agreements are reached, this will be the legal position.
2019 Election Brexit Scenarios
Whilst political parties are at pains to claim that the 2019 general election is not just about Brexit, it remains the big issue. Brexit cuts across traditional party lines, with some voters who would never usually dream of voting Labour seeing Labour as their best chance of remaining in the EU and traditional Labour voters who want to see Brexit delivered seeing that their best chance for this lies in supporting Boris Johnson’s Conservatives. That conundrum makes this election unusually difficult to predict. The fate of the Brexit process will depend on the outcome of the election and there are only a few plausible outcomes.
A Conservative Majority Government: if Johnson is returned to power with a meaningful majority in Parliament, it is expected that his EU Withdrawal Bill will become law quite easily. This would happen between the resumption of parliament and the end of January, allowing the UK to leave the EU with a deal which would grant it a transitional period until the end of 2020. Johnson has pledged that he will never agree to extend the transitional period, so that would only leave approximately 11 months to agree a comprehensive free trade agreement with the EU. He claims this would be easy since the UK and EU are currently aligned on trade, but the EU would want the UK to closely adhere to existing standards and regulations, while other major trading partners, such as the USA, would want to see the UK break away more clearly such that bilateral trade between them is facilitated. In 2018, about 45% of UK exports were to the EU, and about 18% to the USA.
Most observers think that it will be impossible to agree a free trade agreement in under a year – the EU / Canada deal took 7 years to negotiate. If this is so and Johnson honours his pledge, the UK would leave the EU without a trade agreement on 1/1/21 – a “no deal” scenario preferred by the ERG and the Brexit Party. However, it seems very unlikely that Prime Minister Johnson would truly contemplate a “no deal” Brexit, i.e. without a trade deal.
A Labour Majority Government: If Jeremy Corbyn’s Labour Party wins the election, he is pledged to enter into swift renegotiations with the EU. In his desired deal, he would seek to remain in the EU customs union (precluding the UK’s ability to negotiate 3rd party trade deals), maintain preferential access to the single market, and to stay closely aligned to EU regulations (notably on worker’s rights and environmental protections). This would almost certainly require continuation of the freedom of movement of people. Once a deal was agreed, his position is that it would then be put to the electorate in a referendum between the new deal and remaining in the EU – a policy of a second referendum. In the course of the election campaign he has revealed that he would remain neutral in such a referendum, but it remains to be seen how the party he leads would campaign.
A Liberal Democrat Government: Something even the Liberal Democrats have stopped talking about and is seen as bordering on impossible. Should they form a government under Ms Jo Swinson, their first act would be to unilaterally revoke Brexit, setting aside the referendum result of 2016.
A “Hung” Parliament (no one party has a majority): Should the outcome of the 2019 election mirror that of the 2017 vote and leave neither of the two major parties with a working majority, another hung parliament would ensue. Given Johnson’s decision to allow a de facto border to be established in the Irish Sea which would impose some form of customs formality and scrutiny on trade between the rest of the UK and Northern Ireland, it is highly unlikely that the DUP would agree to support a Conservative minority administration. Indeed, they have said they would consider supporting a minority Labour administration on the proviso that Jeremy Corbyn stood down – but that is a highly unlikely scenario. At the moment, polling suggests that the Brexit Party may not win any seats, but if they were to do so, Johnson could probably rely on their support in forming an administration. A Conservative minority government would face the same problems that the May and Johnson administrations already have. It is likely (but totally unpalatable to Johnson) that the only resolution could come through a second referendum.
The Minor Parties
The SNP are likely to emerge as the largest party in Scotland, returning MPs to Westminster, but being Scottish Nationalists, they don’t stand for election outside of Scotland. The SNP are fiercely pro remain and would consider supporting a Corbyn-led government whilst probably stopping short of formally entering into a coalition with Labour. The price of them backing a Labour minority government would probably be the granting of a further Scottish Independence referendum, although, ironically, doing so may well prevent any Brexit which would weaken support for an independent Scotland.
Of the other parties, the Liberal Democrats are likely to emerge with (potentially) a significant number of seats. Plaid Cymru (in Wales) and the Green Party are also staunchly pro-remain and therefore likely to back an administration offering a further referendum on Brexit. The problem is that like the DUP, the Liberal Democrats would not be willing to work with Labour if it continues to be led by Mr Corbyn.
Corbyn’s future as leader of his party must be questionable if he fails to win the election – he would have presided over two failed campaigns (2017 & 2019) and dismal performances in both the local and European elections. Whilst he enjoys near fanatical support with some sections of his party, he has the worst personal approval rating of any leader in the country’s history with the electorate. He is 70 years of age and might be persuaded to retire, if that was the price of a minority Labour administration, perhaps. However, committed socialists in democracies such as Jeremy Corbyn are rarely known to resign or retire voluntarily.
Betting Market Odds on the British General Election 2019
Some people say that the bookmakers who take bets on the outcome of elections know more than polling companies on the likely outcome of the vote. If that is so currently, the Conservative Party are odds-on to form a majority government. The bookmakers Paddy Power as at 9th December put the probability of a Conservative majority in Parliament at 75%, of a “hung” Parliament at 21%, and of a Labour majority in Parliament at 4%.
Opinion Polling on the British General Election 2019
Opinion polls did badly at both the prediction of the Brexit referendum itself and at the 2017 election. In the current election, most polling is broadly in line with what the betting markets think with most starting out predicting a Conservative majority from a double-digit lead over Labour. However, there is some evidence that this lead may be narrowing. Nevertheless, with a little more than one week to go before polling, the opinion polls conducted over the past week are still showing an average Conservative lead over Labour slightly higher than 10%, which would be more than enough for a solid victory even taking into account the complications of Britain’s constituency-based electoral system.
Recently, the electoral register for people wishing to be included in the vote for the first time has closed. It saw a surge of more than 3 million new registrations with 65% of these below the age of 35 years. It is believed that younger voters are more likely to support parties either seeking to remain in the EU or wanting a further referendum.
Lastly, the UK electoral system uses a constituency, “first past the post” model which means that the candidate with the highest number of votes in a constituency is elected as its member of parliament. The national totals that the parties gain nationally have no relevance in determining the outcome. Many constituencies are regarded as safe seats where the sitting MP has such a large majority that it is all but certain he or she will be re-elected. This turns the focus of the election onto marginal seats where the sitting MP only has a small majority and the outcome is uncertain, can be swung by campaigning and is susceptible to changes in “the national mood”. In such seats, there is a strong prospect there will be an amount of “tactical” voting, with Brexit Party or Conservative Party supporters voting for whichever is best placed to win locally, while the same happens between almost all of the opposition parties. It is these so-called “battleground” constituencies which will determine the outcome of the election and the fate of Brexit.
Winners, Losers and The Pound
It seems clear that the most likely outcome is a Conservative victory leading to a Brexit deal which takes effect at the end of January. What would this be likely to mean for the British economy?
Simply put, companies which do not trade with the European Union are likely to be the biggest winners after Brexit. Many retailers will see their operating costs fall and this sector of the economy will probably be the major beneficiary of Brexit.
Consequently, the biggest losers are likely to be the banking and car industries. The car industry uses a just-in-time supply model and ships components back and forth across Europe numerous times before a final vehicle is produced. Many models made in the UK are destined for the EU market. It is likely that delays due to customs inspections, requirements related to proof of origin and the application of obligatory tariffs will seriously disrupt the industry in the UK and in the EU. The current production model will not work if frictionless trade is disrupted, placing UK jobs at direct risk.
The British Pound has been remarkably resilient since the Johnson Withdrawal Agreement was delivered. It is likely that there will be an upturn of inwards investment if it becomes law, but this will not be a flood since the nature of the trading relationship with the EU will still remain to be set over the coming months. The political timetable for a trade deal with the EU is unrealistically tight. Should the Conservatives win the election with a workable majority, Johnson is pledged not to extend the foreseen transitional agreement which ends in December 2020. Should he do so, the UK will leave the transitional period to a “no deal” Brexit which would see the Pound plummet. However, it is far more likely that Johnson will cross that bridge when he comes to it than create a “no deal” Brexit.
If the election produces a Conservative majority in Parliament, unless it is wafer-thin, this should be positive for the British Pound, which at the time of writing has been ranging between 1.2750 and 1.3000 for the duration of this election campaign. This is not because Brexit is seen by the market as good economic news for the U.K. but because the market has been craving certainty as the endless Brexit quagmire has rolled on for over three years, and with a Conservative victory would almost certainly get it. This could lead to the GBP/USD currency pair rallying as high as 1.3400, or even 1.3500 or 1.4000 quite rapidly.
The other realistic outcome is another “hung” Parliament with no workable majority. Even here, Brexit could still happen, as the numbers for the Conservative Party would probably be at least a little better. However, the U.K. could find itself in this scenario back right where it was, with parliament voting down every possible option to resolve Brexit and asking the EU for more extensions just to kick the can down the road. Britain’s democracy has already been sorely tested by the contradiction between the people’s verdict in the 2016 referendum and the actions of Britain’s Parliament and political parties which have mostly refused to respect that verdict. A continuation of this situation with no obvious resolution would be likely to lead to a second referendum, and you might ask why that would resolve anything when the first referendum didn’t. In this outcome, it is likely that the Pound will fall well below 1.2750, perhaps even as low as the 1.2200 area.
