The Brexit saga seems like it has no end—sort of like the digits of pi as we celebrate National Pi Day today. On Tuesday, March 12, U.K. Prime Minister Theresa May suffered a second rejection of her Brexit deal when the U.K. Parliament soundly voted down her revamped proposal, as expected. Another vote was then held yesterday on a “hard Brexit” (aka no deal) that would lead to the U.K. separating from the European Union (EU) without a formal agreement in place.
As expected, that didn’t pass either, which set the stage for yet another vote today on a possible short extension of the March 29 deadline, at which time the U.K. is set to formally exit the EU. The length of the potential extension is unclear at this point but could be as short as a couple of months or as long as a year or two.
These votes establish what U.K. policymakers do not want, but what they do want remains unclear. The Irish border remains the key sticking point. “The border between the country of Ireland, which is part of the EU, and Northern Ireland, which is part of the U.K., remains the key sticking point. It’s politically important that the border remain open, but an open border potentially weakens any Brexit arrangement,” noted LPL Chief Investment Strategist John Lynch.
So why does this matter? At the risk of contributing to your “Brexit fatigue,” Brexit matters because:
- A hard exit, though unlikely at this point, would likely drive the U.K. economy into a mild recession.
- Trade relations between the U.K. and the Eurozone are very close—closer than the U.S. and China. In fact, nearly 50% of U.K. exports go to the EU, so potential damage to that relationship would likely have a material impact on U.K. and European economies.
- Markets don’t like uncertainty, and prolonging this now nearly three-year ordeal heightens anxiety for businesses and consumers.
At the same time, no matter what the outcome, potential spillover to the U.S. and global economies is likely to be limited. Keep in mind:
- The U.K. composes only about 2% of global gross domestic product (GDP) and 4% of global trade.
- The U.K. has already announced that it would remove tariffs on 87% of its imports from all partners to lessen the hit in the event of a hard exit.
- London’s clearing houses will be permitted to settle derivatives trades for EU investors for at least 12 months after a no-deal Brexit, reducing risks to global financial markets.
- Companies and public officials have had plenty of time to prepare.
So where does this go now? Another vote on an amended agreement from Theresa May is likely next week and will probably fail. A hard Brexit is probably scary enough to prevent a hard Brexit from happening—even with yesterday’s vote, the U.K. could still tumble out of the EU without a deal it appears—but that fear may not be enough to get a deal done this month.
It may seem like this ordeal will never end—like the infinite number of digits of pi. We still expect an April or May agreement; but as this situation draws on, a do-over via a second referendum on whether to do Brexit at all becomes increasingly likely. The possibility of no Brexit at all should bring the pro-Brexiters to the table at some point. Stay tuned.
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