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How Would You Like Your Brexit?

This article is more than 4 years old.

The market has no idea what is coming down the pike on Brexit.

Although market consensus has Theresa May prevailing with something resembling her Brexit deal, it’s a wishy-washy base case at best.

The odds of a hard Brexit are increasing. But no Brexit at all is also a possibility and is not off the table.

Some say there is a risk of the Conservative Party splitting up over this whole fiasco, as they were the party that asked for this referendum in the first place back in 2016. And yet, not even they can get a plurality on board with May’s planned agreement to leave with the EU.

All of the key issues in the indicative votes from yesterday were shot down: no hard Brexit. No new referendum on Brexit. No this. No that.

Rumors in the market today have the U.K. Parliament opting for yet another vote tomorrow. That vote is only regarding the withdrawal agreement. What good that will do in the end is anybody’s guess.

Prime Minister Theresa May said yesterday that if her deal is signed she will walk away and give the controls to someone else in her party to manage Brexit going forward. She has been handed one vote of no confidence after the next since November.

Speaker of the House John Bercow said last week that May cannot keep bringing her plan up for a floor vote in hopes that she succeeded at lobbying party members to vote in favor of it. Any new vote requires changes to the deal, which likely have to be approved by Europe. And Europe is totally done with this.

Should a vote related only to the withdrawal agreement take place, the Northern Ireland political party known as the Democratic Unionists have made it clear that the terms of the withdrawal agreement are not acceptable. This goes back to a decades-old peace agreement with the Irish Republican Army that allows for the free flow of people between Northern Ireland and the Republic of Ireland, which is part of the EU and euro zone.

See: Brexit: Back To Square One — Bloomberg

Parliament May Revisit Its Latest Votes — Market Watch

Anxiety Hits “Fever Pitch” For U.K. Businesses — Yahoo!

“If May’s deal fails to pass tomorrow and given the failure of the parliamentary indicative votes on all eight potential Brexit strategies, the next signpost for the U.K. is April 12,” says Agathe Demarais, principal economist at The Economist Intelligence Unit on Brexit. By then the U.K. will have to either revoke Article 50, pursue a hard Brexit or ask the EU for a longer extension than the two months extension May got from them last week.

Seeing how the U.K. parliament rejected all eight potential Brexit strategies in the indicative votes, including a do-over vote on the 2016 referendum to see if the electorate has changed its mind (and what if they haven’t?!), EU negotiators have to look at the U.K. government now and see a bunch of Keystone Cops. There is nothing the EU can offer them that will settle things.

Demarais noted that the EU has made it clear that it “has no mandate to help the U.K. solve its internal political struggles.”

A second referendum was the most popular option of the eight indicative votes, though it was still voted down. Over 5.5 million people signed a petition posted on the U.K. Parliament’s website asking for them to revoke Article 50 and stop Brexit. The government then responded saying that Brexit would continue, despite putting the option for a second referendum up for a vote in the House of Commons yesterday.

Shan Nair, president of Nucleus, a Naples, Florida-based consulting and outsourcing firm for companies expanding abroad says he signed the petition for a second referendum. “I don’t think it’s a foregone conclusion that there will not be another referendum on Brexit,” he says. “This is crunch time.”

Many U.K. businesses will have to tend with visa issues once Brexit passes. So far, there is a reasonable assurance that foreign hires can still work in the U.K. and will be classified as permanent residents. There will be a post-Brexit period for people to live and work in other countries and get their resident card. After that period, new visa issues will take place for those looking to work in the U.K., and vice versa.

“The clients I’m working with are still sitting tight because they believe there will be a soft Brexit,” says Nair. “A hard one will be damaging for the U.K. and for Europe and the Brits know it; no matter how much they bluff, they know it. They are the second-largest economy in Europe so disappearing from the EU is a big deal.”

Most companies are looking to set up shop in The Netherlands or Belgium once the dust settles on Brexit because those are the easiest places to deal with customs and tax issues, especially instant repayment of VAT taxes.

“I don’t understand why May hasn’t tried to negotiate some kind of deal with the U.S. as a backup plan. They could have said to Europe, ‘Look, we are going to become a massive tax haven next to you guys so let’s not make this difficult.’ She is the Neville Chamberlain of the 21st century,” Nair says about the former British Prime Minister known for his attempts to appease Germany at the outset of World War II.

On one hand, May is seen by the Europeans as a realist—conciliatory. They don’t like Brexit, but they have been able to get her to bend. Back home, May is seen as a traitor to Brexit by many of its voters. Remainers dislike her because she represents Brexit in the first place. No one who represents Brexit will be embraced by those who voted to remain in the EU.

And so with Parliament unable to agree on anything, the hard Brexit is as likely as no Brexit. The euro zone will be hit either by a crash out of the U.K., auto tariffs by the U.S. or a worsening China trade-war scenario. So far, China seems benign. Turkey might prove to be a bigger problem for them. There are a lot of headwinds blowing for euro economies.

There is also an impaired German banking system and an impotent European central bank. Any shock to the Western European economy could morph into debt-deflation for bondholders, says Brian McCarthy, strategist for Macrolens, an investment research firm in Stamford, Conn.

“If Parliament can’t come to some kind of an agreement, then a hard Brexit has got to happen,” he says, just thinking out loud. “I think the Europeans are becoming more aware that this is the most likely option. The market has really struggled to contemplate a hard Brexit because there’s been no preparation for it.”

Investors will be hearing more horror stories, like the breakdown of customs enforcement in the immediate aftermath of Brexit. No one is convinced that a Yellow Vest-like protest movement would spread throughout the U.K. in the event Brexit is killed.

What’s an investor to do?

Shorting the pound would be similar to shorting the euro, but shorting the euro is better in case the Brits pull a rabbit out of their hat. A good Brexit deal—and May’s is as good as it gets—would strengthen the pound quickly, but any Brexit, especially a hard one, would shrink the euro and pound against the dollar.

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