Deal, No Deal or Second referendum?

3

Deal, No Deal or Second referendum?

 

Aricle By:

Manish Singh, CFA
Chief Investment Officer
Crossbridge Capital LLP

January, 21th, 2019.


Last week, Annegret Kramp-Karrenbauer the head of the ruling Christian Democratic Union (CDU) party in Germany and the likely next Chancellor, as well as over two dozen other German luminaries from the fields of politics, art, industry and sport issued a plea to the UK to change its mind and stay in the European Union (EU). The letter published in The Times of London marks a significant shift in Berlin’s tone. It talks about the role of Britain – “we realise that the freedom we enjoy as Europeans today has in many ways been built and defended by the British people” and its continued importance to Europe’s future – “Without your great nation, this continent would not be what it is today: a community defined by freedom and prosperity.” And goes on to implore –“We would miss Britain as part of the European Union, especially in these troubled times. Therefore, Britons should know: from the bottom of our hearts, we want them to stay.”


A bit too late in the day, I’d say. Where were these good people before the referendum in 2016? That was the time for the esteemed leaders of the EU to give then UK Prime Minister David Cameron a worthy deal that he could sell to the British people. Instead, they gave him a bag of crisp hot Brussels air which Cameron tried to present to the British voters as a “great win,” and was repudiated.

 

The realisation is dawning on many in the EU that a No Deal Brexit would hit the EU very hard and is therefore an undesirable outcome.  After hoping and wrongly presuming that the UK would cancel Brexit (a ludicrous thought that only highlights the gulf in understanding between the UK and the Continent), it is only now – after being convinced of the likelihood of collateral damage in its own country – that Germany is taking a more conciliatory approach. The realisation is finally dawning on many in Europe that a No Deal Brexit would hit the EU very hard and is therefore an undesirable outcome.


Anyone with any interest in Germany and the EU and where they’re headed, would be well served to read the masterful analysis of the topic in the book Berlin Rules: Europe and the German Way. It is written by Sir Paul Lever, former British Ambassador to Germany and a senior member of the European Commission in Brussels who attended all European Council meetings from February 1979-85. In its institutional form, he suggests that the EU looks and “will continue to look like Germany” and that its “leadership of the EU is geared principally to the defence of German national interests.” His conclusion is that Germany will prevent the creation of the “all-powerful European super-state that ” and in 20 years’ time many (Brits) will have forgotten Britain was ever a member of the EU to make them regret their choice” and “others… may wonder what all the fuss was about.” I recommend the book highly.


Last week also saw UK Prime Minister Theresa May suffer the largest parliamentary defeat in British political history, as the House of Commons rejected her Deal on Europe by 432 to 202 votes. By any yardstick, the defeat that May suffered is entirely of her own making. Tin-eared, distant, and reticent don’t even begin to define the approach she took to agreeing a “Withdrawal Agreement” with an intransigent EU. May couldn’t persuade a starving man to eat with the approach she has taken thus far. Tories must fear a terrible drubbing at the elections, if May continues as PM. Thankfully, she has promised she won’t lead the Tories into the next election.

 

So, what’s next?


To those who say “No Deal” is off the table or Brexit could be cancelled, I say this – No deal is not “on the table” but it is in the Statute Books. The European Union (Withdrawal) Act 2018 was passed through both Houses of Parliament and became law by Royal Assent on 26 June 2018. 498 of 650 MPs voted to trigger Article 50 i.e. a clear and overwhelming commitment to leave the EU. Over 80% of MPs subsequently were re-elected in 2017 on manifestos pledging to implement Brexit. Legally, in the absence of an agreed deal, the UK, therefore, will leave with “No Deal” on March 29, unless the Article 50 deadline is extended by the mutual agreement of the EU and the UK. A No Deal, however, doesn’t mean “crashing out” as some like to fear monger. It just means agreeing a set of side deals and a temporary return to WTO rules for trading, until new trade deals and arrangements are worked out between both parties.


As I said on Bloomberg TV last week- I still believe that the UK will leave the EU with a deal. An extension of Article 50 is likely to give enough time to conclude a deal. There will be a transition period in which the UK will be part of the customs union and at the end of the transition period, the EU and the UK will move on to a Free Trade Agreement (FTA). As far as the UK is concerned the “freedom of movement” of workers is a red line and will not be up for negotiation.

 


The EU doesn’t want a No Deal scenario. Nor does the UK for that matter. A No Deal would be very inconvenient for the UK in the short term, as details of new arrangements are worked out, but it would be a growing tragedy for the EU to lose a nation it has a big trade deficit with. Besides a No Deal at, minimum, means:

 

Immediate halt to the £39 billion “divorce payment” to the EU
No further annual contributions of £13 billion to the EU budget
The EU’s entire exports to the UK – £341 billion last year would be put at risk
A severe macroeconomic calamity for Ireland
This, at a time when the economic woes of Germany (the driver of the EU 27) are growing as it is hit by weaker exports to China and elsewhere, as well as softer demand at home. A German slowdown is already ringing alarm bells in Brussels and at the European Central Bank (ECB).

 

Weaker German growth is very bad news for the rest of the European continent, where many economies are linked to the demands of the German export machine and German consumers. For instance, Germany is France and Italy’s top export destination with 15% of total French exports and 12.5% of total Italian exports going to Germany. A slowdown in Germany would hit France and Italy hard. The possibility of a No Deal or messy Brexit, populism and unrest in France, mounting US protectionism and the slowdown in China all are major headwinds for Germany and the Eurozone. China is Germany’s largest trading partner ahead of the US. If that’s not enough, cast your mind back to last July and the Trump-Juncker conference that temporarily diffused the risk of damaging tariffs on EU auto exports to the US, in return for the EU pledging to work to achieve “zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.”

 

Fast forward 6 months, and the EU is now being accused by US officials of dragging its feet on trade talks in the hopes of waiting out the Trump administration. It won’t end well if you know what Trump is like. President Donald Trump is about to conclude a trade deal with China. With the Mexico-Canada and China deals completed, all efforts and urgency will go into taking on what Trump likes to call the EU’s “unfair trade deal” with the US that “robs” the US and treats it like a “piggy bank”. Expect fireworks soon.

 

I see a second referendum as the least likely outcome. A general election is more likely than a second referendum. We know that the country is divided roughly down the middle – half favouring Leave and half favouring Remain. A new referendum will only frustrate those who voted to leave and waste valuable time and resources. Even if there were a second referendum, in my opinion, Leave is likely to win again. In a tweet, Robbie Gibb, Director of Communication at 10 Downing Street reminded us as much – “1.9 million Leave voters say they would now vote to Remain. But 2.4 million Remain voters would now vote to Leave. The country hasn’t changed its mind.” Remember also that the voters were told the Brexit referendum was a “once in a lifetime vote” and 3 years is not a lifetime by any stretch of the imagination. For many in the UK – whether Remainer or Brexiteer, a second vote amounts to a violation of democracy.

 


As for GBP/USD, the UK economic data on a relative basis is getting better and the US is unlikely to raise rates until the summer given concern about the economic slowdown in the US. Therefore I see GBP/USD getting to 1.32 by June, creeping up to 1.36 or higher by September and 1.40 or higher next year.

 
Link to the newsletter: https://www.crossbridgeconnect.com/january-2019-market-viewpoints/

 
--------------------------------------------------
Manish Singh, CFA
Chief Investment Officer
Crossbridge Capital LLP
9 South Street
London W1K 2XA

By Social Club Member
18 Feb '19
0
Good article.... !

You are not logged in. To share a comment you need to be logged in.
If you are not a member yet you need to register first.