A Plan for Brexit

With the start of Brexit negotiations looming, the British government has only the most tenuous grip on power. Amid paralyzing uncertainty, how can the main actors — Prime Minister Theresa May, opposition leader Jeremy Corbyn, and government leaders across the European Union — make their way forward?

The main thing is to agree to reach a deal of some kind before the U.K. officially leaves the EU on March 29, 2019. If this doesn’t happen, the result will be a chaotic exit that would be terribly damaging for the U.K. and pretty bad for the EU as well. It’s a needless risk. The way to avoid this so-called cliff-edge scenario it is to aim for a transitional accord that allows as much time as necessary to design a longer-term relationship.

Granted, achieving even this limited short-term deal won’t be easy. But it’s possible, and in some ways recent events may help.

May’s immediate problem is she has no majority in Parliament. To get the necessary legislation passed, she will need either to unite her bitterly divided party or gather cross-party support for her Brexit proposal.

At the moment, the latter looks more feasible. To that end, she should propose for Labour’s consideration a transitional arrangement, based on membership of the European Economic Area. This would allow membership of the EU’s single market, financial-services “passporting” and other valuable trade preferences, but it would also involve free migration to and from EU countries and leave the U.K. subject to EU lawmaking with next to no political representation.

That’s a constitutionally unattractive and indeed unthinkable long-term arrangement — but workable as a short-term expedient, and vastly better than the cliff-edge. May could never unite her party around this idea: Hardline Tory euroskeptics would have a collective breakdown at the very thought. That’s where Corbyn comes in.

The Labour opposition could and should back a proposal along these lines. After all, it’s a variant of the softer Brexit members have been vaguely advocating — an approach that prioritizes economic stability at the price of recovering less national sovereignty from the EU, especially over immigration. Corbyn could sell this as a win to his supporters, and it would be. May could grit her teeth and let that happen, emphasizing the need for national unity.

But what would Europe make of such an approach? Until recently, the EU might have deemed it too forgiving, even though it would minimize the risks to its own economies. Yet the desire to punish the Brits for their uprising may be waning. May’s electoral humiliation, following the crushing of David Cameron, might be seen as punishment enough. Even without further reprisals, Brexit is looking less and less appealing as a model for others.

The U.K. economy is limping, with rising inflation and slowing growth: The price of Brexit may be stagflation. Meanwhile, Europe’s confidence is on the upswing. Most of its economies are finally doing better. Populist insurgencies have been fended off in France and the Netherlands, and are stumbling in Italy. The startling success of Emmanuel Macron and his new party in France’s elections seems to herald a new era of European progress and reform. There’s no need for EU politics to stay in a defensive crouch when it comes to Brexit.

Make no mistake, Britain’s in trouble. But there is a silver lining. In the U.K., May’s humiliation makes compromise with Corbyn necessary; in the EU, Macron’s triumph makes generosity toward the U.K. possible. Somewhere in there is a path out of this mess.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell