Nine things you need to know about a ‘hard Brexit’
Investors’ concern about a ‘hard Brexit’ has sent the pound to a three-decade low – but how does it differ from a “soft” option?
The UK’s prime minister, Theresa May, is thought to lean toward the “hard Brexit” camp. (Photograph: Anday Rain/EPA
Just when you finally grasped the meaning of “Brexit,” the subject grows more complicated. In London and the capitals of continental Europe, political leaders are preparing to discuss the terms and conditions of the UK’s coming separation from the European Union. Two broad options are being shorthanded as “hard Brexit” and “soft Brexit,” with the UK’s prime minister, Theresa May, thought to lean toward the “hard Brexit” camp.
1. What’s a ‘hard Brexit?’
It’s a shorthand reference to one possible outcome of negotiations between the UK and the EU – the UK giving up its membership in Europe’s single market for goods and services in return for gaining full control over its own budget, its own law-making, and most importantly, its own immigration. If that happens, British leaders will be under pressure to quickly land a new trade pact or individual industry-by-industry deals with the EU. Otherwise, companies will be subjected to standard World Trade Organization rules, which would impose tariffs on them. Banks would lose the easy access they now enjoy to the bloc.
2. How would that differ from a softer Brexit?
A softer form would see the UK maintain some tariff-free access to the single market of some 450 million consumers. The UK would likely still have to contribute to the EU budget, allow some freedom of labour movement and follow some EU rules. That’s what Norway does, as a member of the European Economic Area but not of the EU.
3. Why does it matter?
Investors worried about a “hard Brexit” sent the pound to a three-decade low after May and colleagues in her Conservative Party gave hints that their preference is a clean break. The fear is that the economy would suffer as trade with the UK’s biggest commercial partner fades, leading to weaker growth, lower investment, faster inflation and a harder time plugging Britain’s record current-account deficit. The Confederation of British Industry and British Retail Consortium are among business groups warning against a severing of ties with the EU’s trading zone. Banks are particularly nervous. Leaving the single market could cost them so-called passporting rights, which allow them to offer services in the EU but have bases in London.
4. What has May said?
Describing the exit deal she wants, May said on October 2nd: “I want it to give British companies the maximum freedom to trade with and operate in the Single Market, and let European businesses do the same here. But let me be clear: We are not leaving the European Union only to give up control of immigration again.” Those are among her comments that have been taken as signalling that curbing immigration will be her top priority in Brexit negotiations rather than guaranteeing free trade.
5. Does parliament agree?
By eventually bowing to pressure to let parliament debate and probably vote on her Brexit plan, May signalled she’s aware that even her fellow Conservatives remained worried about the consequences. Several of them spoke out in favour of parliamentary scrutiny. Bottom line: The centre-ground in parliament is probably around a softer Brexit than the one May is apparently pursuing with her emphasis on border controls. What May is still refusing to allow is a vote on whether to trigger the exit. A court is reviewing whether she has the prerogative to do that alone.
6. Why are the UK and Europe negotiating their break-up?
On trade, customs, defence and the global flow of capital, the EU and its cross-channel neighbour are destined to continue doing business, post-Brexit. But since no country has left the EU before, there’s no clear model to follow, and lots to pick and choose from. May says she wants a “bespoke” deal designed especially for Britain. Quitting the single market would mean negotiating industry-by-industry trade deals, with some sectors, such as finance, already calling for transitional arrangements to be put in place to bridge the gap between leaving and a new permanent relationship.
7. How did ‘hard Brexit’ get coined?
Distinguishing between “hard” and “soft” Brexit began even before the June 23rd referendum. In one early reference, John Wraith, head of UK rates strategy for UBS AG, told Bloomberg Radio in February that “a softer Brexit” would be “fairly friendly” and mean “rapid reestablishment of trading agreements,” while a hard Brexit would mean “some tough negotiating and the establishment of trade barriers”.
8. So which will it be – hard or soft?
In an October 10th note, Morgan Stanley economists put the chance of a “hard Brexit” at 70 per cent, up from 55 per cent in their prior analysis. At Algebris Investments, strategist Alberto Gallo sees a 60 per cent chance of a “hard Brexit” and warns that would lead to a recession and wipe £140 billion off the economy, the equivalent of 7.5 per cent of gross domestic product.
Stewart Jackson, an aide to Brexit secretary David Davis, has said the government won’t compromise on budget payments, immigration, lawmaking and freedom from the jurisdiction of European judges. European governments, on the other hand, are united in saying there can be no single market membership without free labour movement.
9. Is there a middle ground?
Ultimately there will be a long negotiation with compromises likely on both sides. A middle ground would see the UK concede on immigration curbs with the EU granting some specialised link to the single market in return. Banks, for example, would get a bespoke deal based on having similar regulations to rivals in the bloc.