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Our previous Brexit blog was 7th February 2018 (see here). We have now passed six months to go until Brexit day. Our view since the referendum has been that both the Government and the official opposition would fudge for as long as possible any decisions on Brexit in the hope that the other party would tear itself apart. With less than six months to go, both parties are just about managing to hold their loose coalitions together, but do so they are both presenting versions of Brexit deals that have no possibility of success in the real world.
To continue the Alice in Wonderland theme, post Salzburg summit, the Prime Minister's Chequers Plan is as dead as the Dodo that washes up from the Pool of Tears. Unlike the Dodo, it was never really alive in the first place. Before Salzburg, Michel Barnier and the rest of the EU negotiaton team had already made it clear that there could be no cherry-picking, no partial membership of the single market. The Chequers Plan seeks exactly this and fails to address the challenge of the Irish border.
The UK have consistently taken the view that everything is a horse trade and negotiable. Unfortunately the EU see this as a choice of options and there is little division within the 27 on this. The choices are a Canada style free trade agreement (with an undefined but limited element of "plus"), or a Norway style EEA membership which comes with taking EU rules, accepting the European Court of Justice, free movement and payments to the EU budget.
Even if it was achievable, the Chequers Plan only seeks a single market for goods. The UK would be excluded from the single market for services including financial services. The risk of an acrimonious hard Brexit at the end of March next year is that there is no transition period and loss of access to the single market for financial services is instant rather than 31st December 2020. It is only the timing rather than the end destination that changes.
There are possible scenarios in which there is a dramatic change of direction, either a second referendum in which the decision to leave is reversed, or acceptance of a Norway model giving access to the single market through membership of the European Economic Area (EEA). Neither of these is on the table at the moment, so businesses cannot rely on this as an outcome.
Financial Services companies should be planning based on two scenarios, an agreement with the EU that excludes financial services that comes into effect at the end of the transitional period at the end of 2020 or a hard Brexit that results in the same scenario at the end of March next year. With Conservative politicians striving to out hard Brexit each other in anticipation of a leadership election, this is looking an increasingly likely outcome, despite the potentially catastrophic consequences for the country. Foreign Secretary Jeremy Hunt's speech comparing the EU to the Soviet Union was utterly cringeworthy, more on which later in this article.
So what does this mean for investment management?
"Alice laughed: "There's no use trying," she said; "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
Update in our newsletter here, 27.11.18