By Gökhan Kurtaran
London letter, week beginning Jan. 9

Hard Brexiters vs. soft Brexiters

The U.K. is on its way sooner or later to leave the EU block as per the result of June’s EU referendum and the political leaders of the country.  However, the timeframe and shape of the new relations will undoubtedly be decisive for the future of the U.K. and the EU. The main divergence among the decision makers is whether to have a hard Brexit, or a soft one that would enable the establishment of new links and agreements to secure passporting rights of financial institutions based in London.

The U.K. Prime Minister Theresa May in her first major interview of the New Year to Sky News said, “Often people talk in terms as if somehow we are leaving the EU but we still want to keep parts of the membership with the EU. We are leaving. We are coming out. We are not going to be a member of the EU any longer.” 

Whether this statement was made to satisfy hard-core Brexit supporters’ wish to move on a hard Brexit or not, it does not seem to be welcomed by the markets. May’s fresh hints that the U.K. is heading towards a hard Brexit have sent sterling to its lowest level for two months on the first trading day of the week.

Sterling was down against the dollar by a cent at just below $1.22 in overnight trading, its lowest level since Oct. 31 as markets resigned themselves to the fact that the U.K. is to exit the single market. The pound has also suffered against the euro, shedding almost 1 cent as it slipped to €1.155.

Since the referendum, sterling has already dropped by nearly 20 percent becoming the world’s worst performing currency in October.

One of the main reasons for the market’s strong reaction to May’s comments was the indication that the U.K. is leaving not just the membership but also the single market which sets common rules and regulations for trade in goods and services, while providing free movement of capital and access to markets of nearly 500 million people.

However, according to Chancellor Philip Hammond, the U.K. should seek to remain at least partially a member of the customs union to allow for trade in goods to continue without border checks and tariffs.

The Supreme Court’s final ruling on whether May can trigger Article 50 by March without needing Parliament’s vote or not is expected to be made this month.

Markets will be eyeing this final decision. With or without the approval of Parliament, triggering Article 50 will give Britain two years to set up a new form of relationship with the EU to secure its trade links and access to the single market.

09 Jan,2017