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Mrs May’s Moment Of Candour

On Tuesday, Theresa May set out her plan for Brexit in a 40-minute speech at Lancaster House. This is our take.

The Speech. It was well-written and set out with clarity how the UK government will approach Brexit. After months of “Brexit means Brexit”, a plan has emerged blinking into the daylight. In truth, much of it was feel-good guff but one point was abundantly clear – control over immigration and freedom from the European Court of Justice are paramount. Presumably the prime minister is seeking maximum political gain and hopes no one will notice the economic pain.

To summarise, she proposed four principles and twelve objectives. The four principles were certainty and clarity at every stage, a stronger Britain, a fairer Britain and a more global Britain. The twelve objectives were:

  • Certainty wherever possible.
  • Control of our own laws.
  • Strengthening the United Kingdom.
  • Maintaining the common travel area with Ireland.
  • Control of immigration.
  • Rights for EU nationals in Britain, and British nationals in the EU.
  • Enhancing rights for workers.
  • Free trade with European markets.
  • New trade agreements with other countries.
  • A leading role in science and innovation.
  • Cooperation on crime, terrorism and foreign affairs.
  • And a phased approach, delivering a smooth and orderly Brexit.

So far, so good. The speech was largely conciliatory towards the EU and was welcome news for the markets and businesses in filling a policy vacuum.

The Problems. However, the speech was also riddled with difficulties.

For example, there was a contradiction between rejecting “anything that leaves us half-in, half-out” and seeking a customs agreement which allows “current single market arrangements in certain areas”. In other words, we shall be out of the EU but we would like to buy BMWs on preferential terms and sell you financial services. That looks rather half in, half out to us.

In another instance, there was wishful thinking that “we will not be required to contribute huge sums to the EU budget”. EU officials currently think that Britain’s exit fee will be about €40bn to €60bn and any partial access to the customs union will of course require an annual payment.

And so on and so on.

Problems With Europe. Mrs May’s clarity had the disadvantage of shining a light on problems ahead. Echoing Boris Johnson’s have-cake-and-eat-it line, she assumes that the EU comes to the negotiating table full of generosity and goodwill. That seems highly unlikely. Michel Barnier, the chief EU negotiator, has made plain that it will be divorce first, trade deal second. It will be March 2019 before the UK can discuss buying BMWs.

And even when Britain gets to discuss trade, several European ministers have made clear that there will be no “cherry-picking”. You are either in or out. Both Norway and Switzerland have found that the EU negotiates tough deals.

Problems At Home. Ignoring the irony that Mrs May is keen to preserve one union while leaving another, she spent some time reassuring Scots, Welsh and Northern Irish listeners. Both the Scottish and Irish questions will be key sub-plots of the Brexit process.

And Mrs May promised a vote for both Houses of Parliament but made no mention of what happens if Parliament votes No. Three-quarters of MPs favoured Remain so it is hard to see much enthusiasm to vote Yes. Presumably the intention was to confirm that there will be parliamentary scrutiny. This is welcome but is unlikely to be an easy ride.

Market Implications. Despite a big sterling bounce and a 107-point FTSE fall on Tuesday, the markets were in reality quite calm. Near term, sterling may remain soft which should be good for the FTSE 100 but bad for gilts. However, at some point, the negotiations will turn acrimonious in which case equities may tumble and investors will flee to the safe haven of gilts. Overall, caution re sterling assets is warranted.

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