Monday, June 26, 2017

Brexit One Year Later: 5 Ways The U.K. Could Now Leave The EU

A ‘hard Brexit’ is still the most likely outcome, SocGen says


By Sara Sjolin
MarketWatch
June 26, 2017

A full year after the U.K.’s Brexit referendum, the divorce talks between Brussels and Britain finally kicked off last week, but the outcome of the final agreement remains extremely uncertain.

The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after U.K. Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process.

Little progress has been made in the three months since the Brexit clock started ticking, however. That’s partly because of the out-of-cycle or “snap election” held on June 8, which produced a so-called hung government where the ruling Conservative Party lost its majority. That is seen as making it more difficult for May to push any “hard Brexit” plans through parliament.



“The shock 8 June U.K. election result has raised hopes of a reassessment by the U.K. government of its negotiating priorities that could have a major impact on the likely outcome of those talks,” Brian Hilliard, chief U.K. economist at Société Générale, said in a note.

“We examine five possible Brexit scenarios, but, sadly, our conclusion remains that the U.K. is likely to face a significant reduction of access to EU markets after Brexit,” he added.

Here are SocGen’s five scenarios:

1. A hard Brexit — 70% probability


Under this scenario, the government agrees to take full control of immigration, which almost certainly means the U.K. will lose access to the EU’s Single Market. Brussels has made it clear Britain can’t have the Single Market benefits without signing up for free movement of people.

Société Générale points out that the Conservatives and Labour — which both offered immigration control in their manifestos — jointly won 82% of the votes in the general election, making it very likely government will prioritize this in the negotiations. Hilliard says this is the most likely scenario.

2. A soft Brexit — 15% probability

However, there are also rising calls to secure access to the Single Market to help businesses sell their services and products seamlessly and tariff-free to the rest of the EU — which is now the U.K.’s biggest export market.

That could result in a Norway-style model, where the U.K. gets membership of the European Economic Area and retains its trading ties with the EU.

“This would be a difficult model to sell to the U.K. parliament and voters because it requires adherence to the EU’s four freedoms (which prevent limits on immigration) and the payment of large contributions to the EU budget,” Hilliard said.

3. Cliff edge — 10% probability

May has repeatedly said “no deal for Britain is better than a bad deal.” This leaves open the possibility that the U.K. leaves the EU on March 29, 2019, with no agreement on trade, movement of people or security and defense, if the two sides remain too wide apart.

The rhetoric has calmed a little after the snap election, but the “no deal” scenario remains a real risk, according to Société Générale.

“Even now, we still do not think that the U.K. government fully appreciates how weak its negotiating position is and thus how unpalatable the shape of the mooted deal might be. That is why, even with the reality check from the election, there is some risk of the U.K. negotiators walking out of the talks when the true awfulness of the likely outcome is fully understood,” Hilliard said.

4. No Brexit at all — 4% probability

This might seem like a highly unlikely scenario, but there is a risk that the U.K. gets surprised by how hard it is to negotiate a satisfying divorce and realize it’s better to stay in the union, SocGen said.

That means there’s a possibility the final deal will be rejected by parliament, prompting the government to inform the EU that Britain no longer wishes to leave. This could also mean another referendum.

5. Back to the drawing board — 1% probability


What if the government puts the final Brexit deal up for a referendum and the voters reject it?

Then the U.K. negotiators are obliged to keep deal talks alive and if they fail to reach a conclusion before the 2019 deadline we are looking at the “no deal” scenario 3, according to Société Générale.


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