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How will the UK's exit from the EU be achieved?

Britain is battling the Brexit demons in a big way. The head of the International Monetary Fund (IMF), Christine Lagarde, is urging a speedy resolution to Britain’s exit from the European Union to limit the economic, political and social fallout of further procrastination. Markets of course thrive on uncertainty, and there is plenty of that swirling about in the aftermath of the Brexit vote.
The chief investment adviser for Allianz, Mohamed El-Erian, has cautioned that Britain will have to act quickly to secure alternative trade agreements with European countries as a buffer to the devastation caused by a Brexit. Failing this action, Britain will be languishing in the twilight zone where uncertainty and volatility cripple economic growth prospects. He dubbed this Plan B.
The problem is that the UK leadership has recently been in disarray. Prime Minister David Cameron has simply refused to touch the EU exit process, leaving the task to his successor, now known to be Theresa May. As it stands, negotiations with the EU are at a standstill. Divorce proceedings can only begin once Britain invokes Article 50 of the Treaty of Lisbon. According to this set of legal proceedings:

  • The first step in withdrawal proceedings begins with notification of intent to the European Council (EC). This agreement will be in accordance with Article 218/3 of the Treaty on the Functioning of the European Union.
  • It can take upwards of two years for the separation to conclude. This period can be extended however if the EC in consultation with the member country – the United Kingdom – agrees to do so.
  • If the UK withdraws from the EU and wishes to rejoin the EU, that request will be subject to Article 49 of the Treaty of Lisbon.

Can the new PM initiate a Brexit without Parliament?

According to government lawyers, the Prime Minister of Britain can invoke Article 50 of the Lisbon Treaty without a parliamentary vote. Oliver Letwin, the Cabinet minister tasked with heading the government’s Brexit unit, has stated that the royal prerogative places the onus for triggering exit proceedings solely on the PM as the head of the government. This has nothing to do with the monarchy which has always maintained a neutral stance on Britain’s membership of the EU.
There is growing concern in UK political circles that a decision to push for a Brexit should be held back until the end of 2017. The reason for this: French and German elections will be taking place in the coming year and a Brexit is a highly contentious issue. Further, it is uncertain who the UK would be negotiating with if a political vacuum exists in two of the most important EU member countries – France and Germany. It is also important to note that Letwin made it clear the UK government has absolutely no plans in place to deal with the Brexit issue.

Will the Bank of England cut UK interest rates?

The Bank of England (BoE) has tools at its disposal to shore up the value of the pound, maintain stable employment and achieve the inflation targets of the Treasury. However, even the BoE is limited in its ability to resolve the quagmire in which Britain now finds itself.
Since 2009 the prevailing interest rate in the UK has been 0.50%. The BoE’s Monetary Policy Committee meets this week to decide whether to maintain interest rates at this level or instigate a cut. While analysts speculate over which of these options might better serve the broader UK economy, the ongoing economic impact of the Brexit vote can surely not be resolved simply by monetary policy.
Despite the royal prerogative remaining a viable option in the Brexit saga, Oliver Letwin is of the opinion that Members of Parliament should be actively involved in the Brexit issue. If not, a full repeal of the European Communities Act of 1972 would need to take place. As we delve further into the reality of a Brexit, the bigger picture of a legal nightmare begins to unfold. Indeed, the Brexit decision is not watertight: it could be reversed by a second referendum or an Act of Parliament.

UK could find a new route to the single market

Britain may have another window into the EU community and all the benefits it brings. It is known as the European Economic Area (EEA) agreement. Presently, Norway remains a signatory of this agreement and this grants Norway full access to the EU single market. However, given the discord sown by Britain’s decision to opt out of the EU, a decision to opt into the EEA may be met by staunch resistance from EU member states.
If any of those 27 EU states vetoes Britain’s membership of the EEA, the move is null and void. There are also four member states in the European Free Trade Area that could throw a wrench in the works for the UK. It’s a crapshoot for the UK, and perhaps not one on which to spend years of effort and expense if any single nation can sideswipe the country’s efforts to re-engage with Europe.
Brett Chatz
Intertrader Direct
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The content of this article is the personal opinion of the author and not Intertrader Direct. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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