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Brexit Update: What's the Deal?

Mon, Nov 26, 2018 - 3:44pm

What is Brexit and what will the impact be for the U.K., EU and for us, I mean… the United States.  

Brexit is simply the United Kingdom of Great Britain and Northern Ireland (U.K.) leaving the EU. In 1801 Ireland joined the Kingdom of England thus becoming the United Kingdom of Great Britain and Ireland. In 1922, however, the Republic of Ireland withdrew from the Union leaving only Northern Ireland.

On June 23, 2016 the U.K. voted on whether they should leave the EU. The vote resulted in 51.9 percent to 48.1 percent in favor to leave.

Across the U.K., England and Wales voted for Brexit whereas Scotland and Northern Ireland voted to remain in the EU.

On Mar. 29, 2017 Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty giving the U.K. and EU two years to agree on the terms of the split.

The chart below represents the number of Brexit tweets from the vote in June 2016 to today. Brexit remains a hot topic in the news. The most recent spike on Nov. 14 occurred when the withdrawal agreement was decided upon.

Source: Bloomberg

The key points from the withdrawal agreement between U.K. and EU are below:

  • Transition period: The U.K. will follow all EU rules with absolutely no U.K. participation in European Parliament, European Commission, or the European Court of Justice. However, the U.K. will have access to the EU databases for critical issues like security until future terms are negotiated. This transition period will last from Mar. 29, 2019 to Dec. 31, 2020.
  • Financial Settlement: The U.K. is expected to pay the EU at least £39bn over the course of a number of years.
  • Trade Deal: If, by the end of 2020, no long-term deal regarding a hard border between Northern Ireland and the Republic of Ireland has been reached, a backstop of a single customs territory between the EU and the U.K. will be set in motion. The U.K. would then be denied from executing any trade deals with other countries that would allow the U.K. to remove tariffs on goods.
  • Citizens’ Rights: U.K. citizens in the EU, and vice versa, will retain their residency and social security rights. Citizens who reside in an EU country throughout the transition period will be permitted to stay in that country after the transition (and vice versa).
  • Fishing: An agreement for the EU accessing U.K. waters needs to be settled. Numerous countries in the EU protested the U.K. having free access to EU markets without any assurance that the EU boats would have access into U.K. fishing waters. 

At the Brussels Summit on Nov. 25, the 27 EU leaders officially approved the agreement on the U.K.’s withdrawal. The U.K. is expected to leave the EU on Mar. 29, 2019, but the U.K. Parliament still needs to vote on Dec. 11 to approve the deal.

Many predicted there would be an economic crisis if the U.K. voted to leave the EU. Interestingly, however, U.K. GDP growth has continued to grow and hit its highest level this quarter since 2016. Bloomberg News conducted a survey that said the U.K. economy is expected to grow 1.3 percent in 2018, 1.5 percent in 2019, and 1.6 percent in 2020.

If the Brexit deal fails, there could be a slowdown in the U.K. economy which could lead into recession and further depreciation in the pound. The pound took a significant hit after the vote in June 2016 and has failed to recover; the news of the deal passing could give the currency a boost. (Now that I’ve returned from my trip to London, the currency has my blessing to appreciate.)

In an ongoing trade dispute between the U.S. and EU, President Trump continues to threaten tariffs on cars and trucks and the EU says if such tariffs are put into effect, they’ll impose tariffs of equal stature on U.S. goods.  However, discussions on a free trade deal with the U.S. and EU are progressing but there are still issues to work out.

Should a deal not be reached, there could be detrimental consequences for both countries’ economies. According to the U.K. government, if Brexit happens, a trade deal with the U.S. would be in the works.

Until the mid-December vote in U.K. Parliament, it’s all a waiting game. Should the deal not pass, the U.K. could still leave the EU without a deal. Prime Minister May is doing everything in her power to make sure a no-deal scenario does not play out. She plans on using the time up until the vote in December to convince the people that this is in fact the best and only deal.

For more on what’s at stake and the process ahead for Brexit, check out Macro-Nutrients: Brexit, A Neutral Rate & The Trump-China Face Off at G-20.

About the Author

Associate Wealth Manager
Financial Sense Wealth Management
crystal [dot] kessler [at] financialsense [dot] com ()
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