The world is not excited about Brexit. Whatever happens, it seems that most of the people who are willing to bet on it are betting that post-Brexit Britain will be worse than pre-Brexit Britain.
Why am I making this claim? Well, if you want to know what the world thinks about Britain’s Brexit plans, all you have to do is look at the performance of the pound. The chart below shows the dollar/pound exchange rate for the last four years.
___STEADY_PAYWALL___
The first red line is May 7, 2015, when the Conservative party won an election running on the promise of a Brexit referendum. The second red line marks February 22, 2016, when then-prime minister David Cameron announced that Britain would hold a referendum on whether to remain in the EU. The third red line marks June 23, 2016, when the referendum was held, and the British voted to leave the EU, 51.9% to 48.1%.
The pattern is clear. The pound fell from about $1.55 when the Tories came into power to about $1.45 when Cameron announced the referendum, as markets faced the possibility of Brexit. The referendum announcement buoyed the currency, suggesting markets were optimistic that the question of the UK’s relationship with Europe would soon be resolved. But the currency plunged once the referendum results were tallied, plumbing levels close to $1.20 as markets faced the reality of Brexit.
The pound slowly rallied from its late-2016 lows as it seemed Theresa May would manage to deliver a reasonable deal. It never regained its pre-referendum level, however, and lately, it has slumped back near its post-referendum lows as it is becoming increasingly unclear just what Brexit will actually mean.
The picture is the same if you look at an index of the pound against a basket of currencies.
Overall, the pound is down almost 20% since the fateful elections of 2015. The core problem here is uncertainty.
As things stand, there are four potential outcomes of the Brexit negotiations, none of which are impossible.
- May’s deal could succeed. The current deal, which took 18 painful months to negotiate, looks to be dead-on-arrival. May has failed to build a majority in support of the deal and was forced to postpone a Parliamentary vote on it to avoid an embarrassing defeat. However, the approaching March 29, 2019 Brexit deadline could concentrate minds and force lawmakers to line up behind the unpopular deal. Personal probability estimate: 15% chance
- The EU could agree to some tweaks and the bill may pass. European leaders may agree to some cosmetic changes to the current deal, enough to scrape it through Parliament. This is, by many people’s reckoning, the most likely outcome. However, a lot could go wrong here. The EU may not agree to any changes or to the particular changes that Britain wants – specifically, changes to how the deal addresses the Irish border issue. And even if the EU does give May what she’s looking for, there’s no guarantee Parliament would approve. Many die-hard Brexiteers would prefer to crash out of the EU with no deal than to cede any ground, and they have enough votes to derail the process. Personal probability estimate: 20% chance
- May could take extreme action. After seeing off a leadership challenge and securing her control of the Tories for at least another year, May could decide to go big. She could call a snap election to try and boost her Parliamentary majority or throw the deal out to a popular vote, asking Britons to choose between her deal or staying in the EU. Since her last snap election was a disaster and a referendum would require Parliamentary approval, this seems pretty unlikely. Personal probability estimate: 15% chance
- Parliament could take matters into its own hands. The possibilities here are endless, but unlikely. Labour could try for a vote of no confidence, but they don’t really have the numbers. Parliament could push for a second referendum, but hard Brexiteers are opposed to this possibility and it would be hard to get a motion passed. Parliament could try to extend the deadline for Brexit. That, however, would require permission from all 27 EU member states, who don’t seem keen for two more years of this. Parliament could even take charge of the Brexit process and push for a soft Brexit, although this is serious pie-in-the-sky territory. Each of these possibilities is very unlikely, but there is some chance that Parliament will do something. My personal probability rating: 10% chance
- Hard Brexit. Although most people don’t think this would happen, I don’t really see why not. Many hard Brexiteers have explicitly said that they have no problem crashing out of the EU with no deal in place. And, lest we forget, history is littered with examples of the unthinkable coming to pass: World War I and II, for example. Very often, in politics, deals are not struck at the last minute, and unsatisfying defaults kick in.Personal probability estimate: 40% chance
Whatever the outcome of the final dash to the deadline, there remains a more fundamental uncertainty – once this whole Brexit mess is sorted, what then?
It’s been years since British politicians did much besides argue about Brexit. It has plans to sign new free trade agreements, but those take time, and a lot of legislative energy will probably be taken up with replacing EU laws with the homegrown variety for the foreseeable future.
New solutions will have to be found to productivity and skills problems. Most of the issues that have constrained British growth over the last 15 years – lack of productivity growth, skills deficits, wage stagnation, working class discontent – will remain after the Brexit furore is done. The biggest difference will be that Britain cannot rely on preferential trade deals with its neighbours and imported European labour to patch up its domestic gaps.
In other words, the pound is weakening because markets suspect that, once Brexit is over, the real work will begin.
Author’s note: I provided my personal probability estimates just for interest. At this point, it’s anyone’s guess what the actual, final outcome will be.
