UK triggers Article 50 – now the hard work begins

Today Theresa May has triggered Article 50, slightly ahead of schedule. This is more than even the most enthusiastic Leaver could have hoped for at the start of the year. But as our recent report highlights, unusually smooth progress in these early stages is no guarantee of plain sailing ahead.

UK road is clearer, but potentially bumpier too
What we have learned about Brexit after the frenetic activity of recent weeks? Most important is that the UK government will not be aiming for a soft exit, maintaining access to the Single Market. This is not a surprise, as it was clear from last autumn that control of EU immigration was a priority. Abandoning one of the four EU freedoms ruled out the Single Market.

It also increases the stakes of Brexit in several ways. Politically, the decision is already bringing headaches, with the SNP calling for a second vote on independence in Scotland and Ireland’s border arrangements under intense scrutiny. The UK government appears in a very strong position, but has easily achieved its initial Brexit plans against very weak opposition and a strong mandate from the referendum. It has also been helped by a UK economy that looks much sounder than many had feared, outperforming the Eurozone over recent quarters. But this may be a fleeting comfort.

From an economic perspective, there are wide concerns about the lack of a safety net for the UK economy in two years’ time. The fall-back plan is reversion to WTO (“no deal is better than a bad deal”), the hardest Brexit with potential for the most economic disruption. The government is confident of avoiding this, but most commentators gauge their chances as only about even. This uncertainty cannot but influence occupier and investor sentiment in the near term.

Popular support for leaving the EU will also be tested once the hard bargaining begins. Most contentious will be the bill. In the referendum, voters were attracted by claims that EU money could be diverted into the NHS. No cost of exit was mentioned, let alone the £25-50bn now estimated and which must be settled before a trade deal can be struck. If this is compounded by unfavourable economic news, the government could be in a much less secure position as the next election looms.

Negotiations likely to be tough, though challenges are surmountable
So much for the UK perspective, what about Continental Europe? Economically, the Eurozone has started 2017 in the best shape for several years. Thus far, political response to Brexit has been measured, but also determined to protect the union in the face of rising populism. There is a chance that attitudes will soften if this years’ elections go well for pro-EU parties. But even then there will be little to gain from giving the UK an easy ride.

This will be a complex negotiation over a tight timescale with many potential pitfalls. The UK will want to link settlement to securing a trade deal, while EU leaders will want to minimise increases to their own contributions as a result of Brexit. But there are clear economic benefits to both sides in negotiating an amicable settlement and we remain confident that the right decisions will be made, though we expect negotiations to go to the wire.

While there are risks in the Brexit process, these challenges are surmountable and opportunities will emerge from the new settlement. Nonetheless, it will be important to keep a close eye on developments across the continent, as economic news, upcoming European elections and the global impact of a new US administration will continue to shape the context. Watch this space for updates.

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