12 January 2017
A Very Predictable Stance
Why the drop?
By John Watson
Here we go again. Up, up, up, up,…… cranking its way to the crest of a slope and then wheeeeee…. back down to October levels; the pound continues its imitation of the big dipper in a fairground. Well, there’s nothing surprising in that, I suppose. We were told that things would inevitably be bumpy after Brexit so there is no point getting excited about it now. If you wanted a quiet life you should have voted Remain. The odd thing, however, is the immediate cause of the fall.
Mrs May has broken her silence. Not totally, you understand. She has not leapt on the table and shouted; nor has she issued a long and detailed analysis of her negotiating position. She has not even got roaringly drunk and shouted it to bystanders as the police dragged her away. Alas no, she she has merely given a signal, telling Sky News: “We’re leaving. We’re coming out. We’re not going to be a member of the EU any longer.” Well, stap me vitals! That’s a shocker, to be sure. Who could have forseen that leaving the EU was a possible consequence of the Brexit vote?
By themselves these anodyne remarks would rival her famous mantra “Brexit means Brexit” as a statement of the blindingly obvious. They do not stand by themselves, however. What has spooked the market is the comment which went with them to the effect that the UK cannot keep bits of membership of the EU. Commentators regard this as an indication that we will be leaving the single market. The pound fell accordingly.
What is particularly strange is that this should have come as surprise rather than being already priced into the market. Mrs May has indicated that she will be revealing aspects of her negotiating position over the next month or so and that leaves her with a simple and binary choice. Although, obviously, anything she says will be hedged about with myriad qualifications, she either has to lead the country to expect that the Government is prepared to leave the single market or she will give the impression that continued membership of the market is either a red line or, at least, a sort of pinkish one. Let us look for a moment at those two possibilities.
By indicating that we do not expect to remain members of the single market, she opens up her position in negotiation. We and the EU will both start with WTO tariff barriers and the question becomes whether negotiators can find a way of improving on that position for the benefit of all parties. If they can, well and good. If they cannot, everyone gets poorer – not a triumphant result however you look at it.
If Mrs May makes remaining in the market a priority, then the EU has the whip hand in the negotiations. It can dictate aggressive terms on free movement of people, the role of the European Court of Justice, and other things about which the UK public feels deeply. “Fail to give us what we seek in these areas” they can say, “and your precious participation in the market will be lost”. That would leave the government between Scylla and Charybdis. On the one hand the EU would make demands on sensitive areas a condition for the U.K.’s market participation. On the other, if it caved in to the EU’s demands it would be seen as betraying those who voted for Brexit. That is not a sustainable position in British politics in their current state.
It follows that the government has no choice but to take the first position and the surprise is that this was not already built into the currency markets. How can Mrs May’s announcement have come as a surprise? Did the City really think that we would open negotiations with our membership of the single market as some sort of a red line? If so, it didn’t think about it very hard at all.
Actually, of course, the tariff barriers do not stand on their own. We are already hearing news of British manufacturing perking up because the fall in sterling has made it some 15% more competitive. That factor will offset any disadvantage flowing from tariff barriers, before you even come to any cunning plan under which tariffs on goods imported from the EU are recycled. On the other hand in areas such as services, a huge part of the UK’s economy, the EU can set up regulatory barriers which would be far more effective than merely financial ones. That is likely to hit the nation’s earnings hard.
Still, we are only at the beginning of the negotiations at the moment and it would be strange indeed if the government opened with a soft position – particularly as 2017 promises a stream of elections which could well transform the EU as an institution. Who could possibly be surprised, then, to see the stance being taken by Mrs May? Trying to forecast the political path which negotiations will take is almost impossible but as far as one can see from the last week or so it is something for which the City of London and other world financial centres are particularly badly equipped.
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