The UK has triggered Article 50, now what?
What is Article 50
Article 50 is part of the Lisbon Treaty (2007); it was included in the agreement as the formal way to begin the process of exiting the European Union. Put simply, by triggering Article 50 Theresa May has officially started divorce proceedings for the United Kingdom, from the European Union. Prior to this point the UK has been unable to start negotiating the terms of its exit, but now Article 50 has been triggered, Brexit is official and the exit process can formally commence, which is likely to take up to two years.
What happens after Article 50 is triggered
When Article 50 is triggered, a two year negotiation period begins between the departing member state, in this case the UK and the EU. Procedures forbid any prior negotiation between the outgoing member and the EU before the official triggering of Article 50. This was a frequent topic amongst news outlet that the UK attempting to address certain topics relating to its exit Before officially starting the proceedings, but the EU has made it clear that they will not solicit any attempt at negotiations prior to the official triggering of Article 50.
The countdown has now begun; negotiations between the UK and the EU are limited to two years from today. In theory these discussions can be extended, but that would require agreement by all 27 member states, making the possibility of extended negotiations unlikely.
What deal does the UK want
The UK has spoken of leaving the single market, the pro Brexit camp established they wish to limit the amount of immigration from other EU countries and take back full control of it boarders. The problem the UK faces is that it needs to exit the single market and customs union, in order to negotiate its own bilateral trade deals.
The EU has made it clear that they will not allow the UK to cherry pick its terms, in other words, they will not be permitted to have their cake and eat it too. Politically it makes sense for the EU to make it difficult for the UK during exit negotiations and to give it a worse deal than when it was a fully-fledged member. This is in order to deter other members from leaving the club too, the EU (or at least some members) will most likely make an example of the UK by taking a tough stance.
What happens if no deal has been reached after the two year time limit? The answer to this is WTO rules would probably apply, which actually do not happen automatically but could definitely be an option. The world trade organisation is focused on trade and is the default kind of option when no agreement is made between two parties. The problem with WTO rules are that they have certain tariffs on products or services is quite high, especially much higher than currently at zero with the EU. Certain sectors could even see a 20% increase in cost.
Making products or services just 10% more expensive could mean that you price yourself out of a market and therefore couldn’t continue to compete against others. A result could be jobs less taxes for the state and loss of jobs.
Long Term and Short Term losses for the UK
The short term loss to the UK economy is the so called divorce bill. The UK has committed to billions in spending on EU-wide projects up until 2020 and on top of that to pensions of officials. Exact numbers on how large this divorce bill will become is still unclear. Numbers have been floated up to a range of €70 billion.
Long term losses for the UK could be losing its position as gate way into Europe. London’s financial sector has enjoyed its position as world financial hub. Some banking jobs have already moved to other European sites. If banks in the UK will start having issues (regulatory or tax cost) doing business in Europe in the future, it might even be possible that they relocate altogether to another location. This would result in huge tax losses.
When considering all the obstacles that the UK and EU need to pass to get to an acceptable solutions, volatility looks likely to rise in these markets until a deal is finally concluded. The closer we get to the end of the two year period and if no agreement has been signed we might see a stronger fall in the markets. On the other hand markets would appreciate if the two parties could agree on a deal as soon as possible.
Markets in general do not like uncertainty but traders might see some opportunities to short the markets during these periods (Click here for an educational article on how to profit from falling markets). We might also see more unexpected announcements like Scotland potentially holding a second referendum before EU negotiations are completed adding to the already existing uncertainty.
“In the midst of chaos, there is also opportunity” Sun Tzu
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