Brexit - UK still struggling to make it happen

A threat to exit from the EU without a deal would only be credible if the U.K. prepared for the hardest of Brexits—and incurred the very costs it is trying to avoid.

The U.K. has spent six months debating where it wants to go. But now, with just three months until Prime Minister Theresa May intends to formally start the Brexit process, it is grappling with a new question: How to get there?  In any negotiation, process is power—and there is growing anxiety in the British government that it may be forced to accept a Brexit process that will give the EU the upper hand. Some officials privately warn that under those circumstances, the U.K. could even abandon the process altogether, taking the nuclear option of walking away from the EU without any deal.

What the U.K. wants is a Brexit process that would allow it to negotiate both its formal divorce—dividing up its shares of the EU’s assets and liabilities—and its future trading relationship with the EU in tandem. It wants to wrap up both deals within 2 years. That would allow Mrs. May to go into the 2020 election claiming to have delivered Brexit. This sequential approach is politically toxic for the U.K., particularly in the light of reports that the EU will demand up to €60 billion ($63 billion) from the U.K. as the cost of a divorce.

The U.K. government therefore faces a paradox: Its threat to walk away from an Article 50 divorce is only credible if it starts preparing for the hardest of Brexits—and, in doing so, incurs the very costs it is trying to avoid. Yet if it can’t credibly make this threat.

This situation continue to weight heavily negatively on the country, that is why we continue to be short on the GBP and especially on GBP/USD and GBP/AUD.

Hardly anyone outside the British government believes this is realistic. Most observers believe it would take the EU at least four years to negotiate and ratify a deep and comprehensive trade deal, given that 37 national and regional parliaments in the EU would need to vote on it. Under this parallel Brexit process, the U.K. would likely have to remain in the EU until well beyond 2020, so Mrs. May would have to go into the election with the U.K. still under the jurisdiction of the European Court of Justice and obliged to respect the right of EU citizens to live and work in the U.K.

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