On Wednesday Britain formerly gave the European Union notice that it will be leaving the Union. This is an overview of what the process entails, and what it may bring about for currency markets – and in particular the pound.
What is Article 50?
Article 50 of the Treaty on European Union is part of EU law which came into force in 2009. The law, which is only five paragraphs long, spells out the procedure for a member state wishing to withdraw voluntarily from the EU.
What is the process for a member to leave the EU?
- The process begins when the member state formerly notifies the EU of its intention to withdraw – this is known as triggering Article 50.
- From the date of notification, the member state has two years to negotiate its exit from the treaty.
- The departing state may not be a part of EU discussions regarding its departure.
- The two-year negotiation period can be extended only if all member states agree.
- Any exit deal must be approved y 72% of the remaining states, representing a minimum of 65% of the population.
Is it reversible?
The final paragraph of Article 50 states that after a member has left the union, they may apply to re-join, just as any new member would. Applications for membership are covered by Article 49 of the treaty.
What needs to be negotiated and done?
- The UK will need to negotiate a new deal with the EU.
- The UK will also need to negotiate bilateral trade agreements with any countries it wants to trade with.
- As EU laws fall away, the UK must implement some new laws of its own.
A ‘Hard’ versus ‘Soft’ Brexit
A Soft Brexit would result in the UK having a similar relationship with the EU to the one it has now. It would no longer be represented in the EU parliament but would have a similar trade relationship and similar control, or lack thereof, of the movement of people.
A Hard Brexit would mean the UK would have full control over its borders but would have to renegotiate trade deal with member states.
In other words, a Hard Brexit would make the UK comparable to any other country in the world, while a Soft Brexit would leave the UK in a similar position to the one it is in now.
A possible timeline of events:
29 March 2017 - UK government formerly notifies EU of intention to leave.
End April - EU summit of leaders of remaining members.
May - EU Commission given mandate to negotiate exit with UK.
May - European Commission publish guidelines for negotiations.
September - UK government begins introducing legislation to replace EU laws with UK laws
End of 2018 - Negotiations complete
Jan/Feb 2019 - EU and UK parliaments vote on deal
March 2019 - UK formerly leaves EU
- For the UK, negotiations will be a trade-off between having the favourable trade deals currently enjoyed, and having control over its borders.
- The status of EU citizens living and working in the UK, and of UK citizens living and working in Europe are a concern to millions of affected people.
- The UK will probably have to pay a “divorce bill” of anywhere from 21 to 62 Billion pounds. This amount will be to settle the UK’s share of EU debt. This is likely to be a sticking point in negotiations, and the EU may want agreement on this before negotiating trade deals.
Implications for the pound
- The weakness we have seen in the pound since the referendum is as much a function of uncertainty as of actual loss of value.
- As the future relationship takes shape the pound should benefit from increased certainty.
- However, volatility is likely to continue if not increase as key arguments are made on both sides.
- Analysts at Nomura have said a Hard Brexit is not priced into the pound. This analysis implies that a Soft Brexit would result in pound appreciation, while a Hard Brexit would see losses for sterling. In the long term either scenario could be good or bad for the pound – it depends on how the process is managed, and how the UK sells itself to investors.
- The future value of the pound will not only be determined by the UK’s relationship with Europe.
- The biggest downside risk is the loss of trade with the UK’s largest trading partner.
- On the other hand, the weaker currency and a fresh start could make the economy very attractive to foreign investors.
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