Surely now, surely, the conversation will move on from “Hard” vs “Soft”. From Supreme Court rulings. From Remainer Hope vs Leaver Disaster. It’s going to happen. The UK is leaving the EU. It therefore has to leave the institutions of the EU, all of them. The single market, the customs union, the ECJ. It then has to re-draw its own relationship with the EU and with the rest of the world. Leaving the single market doesn’t mean failing to achieve single market access; leaving the customs union doesn’t mean failing to trade with anyone in the EU, ever. Leaving the ECJ might be the poison pill in what starts off in any negotiation as the toughest position. “Yes we are off, we are prepared to create new deals, but the body that rules over all of you, won’t rule over all of us in our engagement with you”.
In fact this final point means that the real risk now is not hard/soft/clean/grey….. but orderly vs disorderly. Yes, the exit negotiations can take up to 2 years. But what if the UK just says it’s out, and provokes the EU to stop it? What if the EU says we can negotiate with you, but not if you’re never going to accept the European Court of Justice oversight, so the deal is off? Who sues who in this divorce? And more importantly, who would be the judge that divides up the assets?
Not to mention that we now have Trump telling us that leaving the EU is a “great idea” and that “I believe others will leave”. Oh and that for a UK trade deal, “We’re gonna get something done very quickly”. This is a man who has torn up the rule book already and he’s not even in power yet. He’s called up Taiwan. He’s talking to Russia. He’s not taking questions at press conferences, doesn’t believe his intelligence services, and he won’t be bound by ‘protocol’. Not to mention that he likes deals, and he likes winning. Will he wait 2 years before he can even start talking to the UK about America’s trade deal? Will he wait 2 months?!
And what about the chance of a Le Pen victory in France? If Britain is making progress on a trade deal with the most important nation in the world, is that not grist to her mill of France leaving the EU? OK, you say there’s less than 40% chance she wins… but that’s still a 40% chance that one of the biggest negotiating partners within the EU wants to tear up the allegedly straightforward post-Article 50 exit process itself! Meanwhile Trump wants to slap a 35% tax on BMW if they attempt to export their cars from Mexico. It would be to his benefit if the EU self-immolates over a disorderly Brexit, as he would have even more power over them.
[Of course, we should also recognise that he wouldn’t want the UK getting too strong either, so at some stage he would then threaten to strike a better trade deal with Germany than Britain, for example….]
The point here is that trying to trade this as a simple mathematical equation isn’t going to work. Just today, Blonde Money was told that the leaks over the weekend about May’s speech showed that “immigration > single market access”. As Thatcher would say, No, No, No.
If we really did try to write this as an equation we would end up in the fourth dimension. The market now sits here and waits for what May reveals in her speech. But her speech is not designed for the market. The line that Tory MPs have already been told to take is “The country is coming together”. This suggests that her speech is designed to be Prime Ministerial, re-setting the narrative, and forcing the House of Lords to put up or shut up when they come to pass Article 50. No doubt this is why the speech has been set for a few days before the Supreme Court ruling is expected. This means that if anyone in the market is expecting more details, they must surely be disappointed. This speech is not aimed at us. It’s aimed at reassuring her detractors she has a plan, and at forcing Parliament to do her will. If anything, Cable doing just 2 big figs overnight rather than the 7 of the October flash crash will strengthen her hand. No need to fear a calamitous currency drop – which anyway doesn’t (yet?) seem to be causing any harm, nor indeed does it really bother the government.
More significant therefore could be Carney’s hastily-called speech tonight on “Policy Issues Affecting the Bank of England”. Is this him trying to head off criticism at the pass – now that the declining pound, plus his extra rate cut and QE, are stoking inflation?
Either way, there is now a significant risk premium that needs to be built into GBP… if he was going to take back the rate cut and QE, is that really good for the currency to have such an unreliable boyfriend in charge??