Brexit: It may be more political than economics

Brexit: It may be more political than economics

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It seems that Brexit will continue to heave and weigh on global markets for some time to come.

Boris Johnson slipped saying he never expected the “Leave” camp to win and hence had not thought of what was entailed in actually leaving the EU. Therefore, it’s hardly surprising to see Michael Gowe turning up as the main PM candidate from the “Leave” camp; not that Gowe looks any more inspiring when it came to leading UK on its way out of the EU.

The EU President Juncker said yesterday that, if some one from the “Leave” camp became PM then “it would be seconds ” to trigger the exit process.

The Top US Diplomat Kerry said that, the “Brexit may not happen”. Well happen or not, that may well be what the US wants.

After all it’s not only the UK and the EU but also the US who has a lot to lose in this entire mess. Needless to say, when the US sneezes the rest of the globe cannot but help catching a cold.

However, what then could be the possible way forward?

Looking at the vague manner Article 50 of the Lisbon Treaty reads, I do not believe that when it was drafted, anyone actually expected for it to ever get invoked. Nevertheless, it seems to have found sudden life now.

Article 50 says ” Any member state may decide to withdraw from the Union in accordance with its own constitutional requirements”.

Article 50 requires the withdrawing state to give “notice” to the European Council of its intention to leave and commence negotiations. On the other hand, the European Parliament will specify the boundaries of the agreement within which the Council is authorised to negotiate. The agreement has to be approved unanimously by the European Parliament.

In short, all cards are in the hands of the EU. Obviously, it was drafted with the clear intention of making it as difficult for the withdrawing partner as possible.

Cameron has resigned and very cleverly postponed the process of triggering Article 50 to the next PM, who logically has to be from the “Leave” camp.

The EU is most disappointed with Cameron for opening up a Pandora’s Box by announcing the Referendum without consulting them. Most of the 27 countries are not expected to be patient or very accommodative with the U.K.

In my view, Cameron wilted under pressure of the “Leave” opposition within his Party to live up to his election promise to hold this Referendum; which on the face of it seems a huge gamble on the future of the UK to save his position but, to be fair to him may never have expected this outcome.

The next 3 months is most likely to see considerable activity by the youth who have voted to stay in the EU. More importantly, many amongst the retired who also voted for “Leave” are unlikely to support the break up of the U.K after now seeing that, Ireland, Scotland and Gibraltar rather secede from the UK than leaving the EU.

Boris Johnson is already in retreat mode and anyone who has seen Michael Gowe in EU debates will know he has no ability to intellectualise his position and his jingoistic populism may not work for much longer. After all not a single economist or global financial agency has supported him. Nigel Farage is the UK’s equivalent of our Kejriwal and is unlikely to hang on to his anti establishment audience for too long.

Interestingly it’s not widely known that, the “Referendum” has no legal validity and the U.K Parliament is not bound to accept its verdict.

The Article 50 therefore cannot be triggered without the UK Parliament approving it. The Referendum at best is a mere “advisory” and given the minor win, the U.K. Parliament could justify voting it out.

Realising that the reality of the situation is far worse than foreseen, its possible many from the erstwhile “Leave” camp in the Conservative Party change their mind on Gowe as PM and may well ask Cameron to come back.

This way Cameron will have decimated his opposition within his own party and be in a stronger position to represent the Conservative Party in seeking Parliament acceptance of his newly negotiated agreement with EU. The Labour Party also has a strong “Remain” camp.

One can therefore see why Cameron has vehemently ruled out another referendum. He resigned but stayed on for 3 months whilst continuing to keep the pressure on his opponents i.e the “Leave” camp within the Conservatives by saying the people’s verdict has to be accepted.

On the other hand the EU President Juncker has praised Cameron and expressed a wish to stay in close touch with him.

However tough the EU talks, the Article 50 does not empower the EU to trigger it and push UK out. Therefore, the U.K may as well take a long time debating the outcome of this Referendum and assigning it straight into the closet of history.

This may in reality be only a crisis largely internal to the UK even though, while it persists will continue to rock the global economy by its sheer capacity to spread economic and geopolitical uncertainty.

I would therefore, place my bets on what the US Diplomat Kerry says.

The EU could well emerge a stronger institution with the U.K fully and finally settled within it.

The U.K has too much to lose – economically and geopolitically. The US also would hate to lose the UK as its representative on the EU table and instead end up having to take side between the EU and the U.K.

In the shorter and possibly medium term, we will see global currencies under pressure due to flight for safety into the US Dollar. I would see US yields falling and the Fed having to keep aside any plans to increase rates and normalise their monetary policy for some time to come. It is also most unlikely that, the EMs could escape a fall out in an overall depressed global economy.

Of course, Greece never really went away and we are still trying to understand the depth of the Chinese debt. Then there are elections in Germany, France and Italy over the next 12 months.

The Indian fund managers may be well advised to exercise caution when presenting India as a “safe haven” in their desperation to drive retail investors to fill their coffers by investing in equity mutual funds.

In such times its best for retail investors to keep all investment decisions on hold and build a cash pile to take advantage of any “market correction” lending an opportunity to enter the equity asset class at reasonable valuations ( I am afraid, they are presently on the expensive side).

Could one safely say ” this too shall pass”? I would believe so. Patience may possibly prove a virtue for most retail investors.

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One Reply to “Brexit: It may be more political than economics”

  1. The feeling one has got from Europe consistently was that Britain was never wholeheartedly in The EU. The accusations that The UK sat on the fence and jumped in and out found merit as The UK always maintained it’s separate identity and did not want to be “clubbed in”.
    However The small businesses that relied on exporting Duty Free to The EU will face the consequences.
    The Financial Capital status is also expected to take a hit larger than what was envisaged earlier.
    Despite the above I feel this is an opportune time for an India. UK FTA Free Trade Agreement as it will not be weighed down by the much delayed / hyped India EU FTA which has been bogged down by issues on both sides.

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