Brexit kick-off: a historic day for the EU anticlockwise

Teresa May Francois Hollande 2017

Informal meeting of EU Heads of State or Government – February 2017. From left to right: Ms Theresa MAY, UK Prime Minister; Mr Francois Hollande, President of France. Shoot location: Valetta – MALTA. Shoot date: 03/02/2017. Copyright: European Union.

The beginning of the two-year negotiations is about to begin as UK submits today the letter to the EU today informing the latter about the decision of the British people to leave the bloc. However, it is still too early to say whether a deal will be reached within the timeframe that is set in Article 50 since two years is a very short time when dealing with such a very complex agreement.

Financial markets haven’t also fully weighted the consequences of Brexit and the British pound is about to experience a volatile period as it has dropped significantly in comparison to the U.S. dollar since the UK referendum. Britain’s hard stance regarding the upcoming trade deal with the EU will surely be influencing the sterling.

Furthermore, the manufacturing body of UK (EEF) has expressed its great concern that a no-deal will have disastrous effects on the British economy. According to EEF, the UK should definitely reach a secure agreement with full WTO membership allowing a free movement of goods and people.

Will Brexit hurt the UK economy?

According to the HIS Markit, only 29% of the British citizens believe that Brexit will boost the national economy in the next 10 year-period when about nine months ago the majority of the public opinion (39%) were supporting that it would be better for the economy to leave the EU. Thus, it is high likely that this sentiment will change many times during the harsh negotiations between the UK and the EU.

Furthermore, the manufacturing sector is about to be influenced negatively since it will not have access to the single market. The EEF published a report, responding to the UK Prime Minister’s recent statement that “no deal for Britain is better than a bad deal for Britain”, mentioning that businesses could probably face WTO tariffs of more than 5% on exports to the continent without a trade deal with the EU.

It is very crucial both for the EU and the UK to reach a mutual trade agreement since the EU is the largest manufacturing partner of Britain and the UK manufacturing sector employs 2.7 million people and accounts for 45% of the exports.

Brexit increases financial uncertainty

There are lots of uncertainties in the financial world and Brexit is surely one of them. According to Nomura, the Japanese financial holding company, “one of the main factors affecting sterling is the risk of a hard Brexit, which would mean that the U.K. would leave the EU without any agreement and raising all sorts of uncertainty, including on trade and financial services”.

The German Finance Ministry is also worried about a “Hard Brexit” and whether the EU and UK will manage to reach a deal in the predetermined period of time. The analysis of the German Ministry concludes that there will be an impact on the stability of the financial markets if Britain will not strike a deal with the EU. According to the report, such an event could trigger serious problems in the banking system with British banks not to be able to offer services in the EU and EU banks will have no access in London. Germany is following a hard stance on the Brexit procedure and will force the UK to meet all its obligations including paying to have access to the EU Single Market.

Negotiations will be long

It is understandable that the EU will be pushing Britain to the edge in order to reach a bad agreement for the UK discouraging the rest of the EU members to follow UK’s route. However, UK is a very strong economy and it will exhaust all possibilities to come up with a deal of its interest.

One thing is for sure though: negotiations are most likely to last for a long time, something that will lead to further uncertainty. Already banks and other businesses have been relocating jobs outside of London and the UK. The good performance of the UK economy in the aftermath of the referendum has started changing as inflation increased to 2,3% in February over the previous year and consumers are influenced by the pressure of higher prices.

All in all, it seems that the uncertainty will keep on rising in the UK and the EU as there is still no economic and political Brexit plan by both parties.

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