17th January 2017
May’s Brexit speech – what did we learn?
Theresa May’s most eye-catching comments today were that the UK would be leaving the European single market. Ordinarily that might have hurt the pound but a weekend of leaking and briefing was sufficient to mean that sterling moved higher as the Prime Minister spoke – a deft feat indeed.
We also learnt that she is planning for the UK to leave the European Customs Area. The customs area is an arrangement whereby there is a common tariff on goods coming from outside that area, unless alternative free trade arrangements are put in place. In a speech which the Prime Minister said focused on “the ends as much as the means”, there were uncertainties remaining on both topics, and this is a key point.
While we are now on track for a “hard Brexit”, it was not made clear how we will get there. There was very little revealed about how we will trade with Europe between the departure from the EU and the agreement on new trading arrangements. Trade deals typically take a long time to agree.
In a speech that was both conciliatory and confrontational, May seems to be relying on other British contributions to Europe aside from trade, namely our armed forces on the continent, our intelligence services that feed into EU member states and our joint fight against terrorism to highlight our ongoing contribution to the EU and our shared values. All the while she remained light on detail on the economic aspects and the mechanics of our departure.
Success or Failure: Britain’s perspective
Ultimately what will make or break the Brexit deal will be the willingness of business to invest. For all the better economic statistics which the government can trumpet, it is businesses which create most jobs, not government. So businesses need to be assured it is in their interests to invest in Britain.
There were encouraging words about the government’s commitment to free trade. May has worried some potential investors by saying she plans to go further than existing EU rules on workers’ rights and said she plans for workers interests to be heard by company boards (presumably referring to a former pledge to ensure workers representatives are required on corporate boards).
The experience of the last decade and different recovery trajectories of economies has revealed that flexible labour markets are what encourage companies to invest. Conversely, tougher employment legislation and the threat of tariffs on trade are fairly significant potential barriers to investment and so these elements will not be music to businesses’ ears.
The factor which might be encouraging to business is the prospect of a European corporation tax war. It is a lure for companies to offer competitive tax rates to attract companies to invest and create more jobs – and that may be necessary if negotiations become sticky.
The great sticking point?
Ultimately we want to create a free trade deal with the EU, and generally speaking trade deals can be concluded if they provide mutual benefits. But the UK’s plan to stop paying into the EU budget yet still conclude a free trade agreement which provides much of the benefit of membership may be a stretch.
European partners will be aware that maintaining a single market is something which they had agreed to do together with Britain and with everybody making a financial contribution. Allowing the UK something which looks a lot like free access may be viewed with extreme caution by some EU countries, because if more members want to have a similar deal i.e. free access to the single market, then the costs will continue to rise for those remaining states until such time as the arrangement becomes uneconomical.
We should not be surprised if we hear sceptical noises from Europe in response.
By Guy Foster, Head of Research
Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.
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