By Gökhan Kurtaran
London letter, week beginning Oct. 17

 - Remaining in single zone crucial for U.K. economy

U.K. Prime Minister Theresa May has still not come up with a draft plan for explaining how the divorce decision of the U.K. from the European Union will be implemented as the markets await further clarification such as how the single market agreement would be replaced. At the moment the possibility of the U.K.’s decisive exit from the EU, a hard Brexit, is creating anxiety as to how it will affect the single market as there does not seem to be any clear plan as to how the U.K.’ $2.8 trillion economy can gain access to the EU market of 500 million people. 

 According to a Financial Times study released last week, Britain faces an EU divorce bill of up to 20 billion pounds. In addition, the European Union's budget is emerging as one of the biggest political obstacles to a Brexit deal. The study says more than 30 billion pounds of shared payment liabilities will need to be settled in EU accounts in the divorce settlement.

 Moreover, sterling has slumped to its lowest levels on record, diving below levels when free-floating exchange rates were introduced in the 1970's, according to data compiled by the Bank of England (BoE) last week. Sterling is now weaker than the depths it hit during the financial crisis and Britain's ejection from the European Rate Mechanism in 1992. That essentially already creates many problems for U.K. importers. 

Last week, one of the largest U.K. retail chains, Tesco, had to pull hoards of products from its online stores due to a price dispute with Unilever. Marmite and some Ben and Jerry's products were not available on online for a few days as the plummeting pound caused manufacturers to demand price increases which Tesco resisted. Even though the dispute was resolved after a few days and the products were brought back online, it was a most visible example of how the weak pound might pressure importers.

Furthermore, there is more news on the western front. The European Council Chief, Donald Tusk, said a hard Brexit is the only option for the U.K. Only a week after the pound hit a 31-year-low against the dollar, Tusk’s comments were perceived as being quite harsh as May's government appears to be struggling to come up with a draft plan. All that is known so far among all the uncertainty is that the Prime Minister is willing to trigger Article 50 by March 2017.

According to a new Financial Times report, the U.K. government has not fully ruled out making future payments to the EU to secure privileged access to single market for the City of London to continue trading across EU. However, this might cost billions of pounds per year, and it is uncertain how these demands will be welcomed by France and Germany. Both Paris and Frankfurt are eyeing more shares from the City of London following the Brexit decision. 

There might be more political uncertainty in the coming months as Scotland's first Minister Nicola Sturgeon demanded special status for her country after the Brexit, announcing plans for a new independence referendum bill to keep the pressure on May. The U.K. government’s reaction is important in determining whether Scotland will once again go ahead with another independence referendum.

17 Oct,2016