Nigel Farage, former leader of the UK Independence Party, recently arrived in Auckland on his worldwide tour as Brexit continues to be an ongoing and inconclusive discussion point both locally and globally. Farage was one of the most prominent actors in the successful Brexit campaign.
Reclamation of sovereignty was central to the Brexit vote, in particular the role of the European Court of Justice, immigration control and the UK’s financial contribution to the EU.
The UK government formally served divorce papers on the EU in March 2017, via Article 50. The UK has a weakened hand in the negotiations with a minority government. The ruling Conservative Party is in open conflict as the clock ticks towards ‘Brexit Day’ on the 29 March 2019. It was hoped that the terms of the divorce would be decided at the upcoming EU Summit in October, however, this looks more likely to occur in November at the earliest.
Divorce issues are multiple but, arguably, can be condensed down to three:
- People
- Money
- Northern Ireland
‘People’ refers to the UK citizens living in the EU and vice versa. Currently there are 1.3m British expats living in the EU. Spain is home to the largest community of British expats (319,000) with 1 in every 3 retired and there are 2.1m EU expats working throughout the UK.
‘Money’ refers to the UK’s outstanding financial commitments to the EU’s budget until the end of 2020, which is currently a net annual contribution of €10bn.
These two issues are both awkward and difficult to deliver politically, however, it is plausible to believe settlements on both can be agreed. Exceptions can be made, and bills can be paid.
In the referendum in June 2016, every region of England, bar London, voted to leave the EU. Northern Ireland and Scotland both voted to remain. This has increased the risk of a second Scottish independence referendum.
But for the Brexit negotiations Northern Ireland is proving the main obstacle.
The European Union has been vital in improving the circumstances of both Northern Ireland and the Republic of Ireland since both countries joined in 1973. The EU has provided more than €1.5bn of funds since 1995 to support peace initiatives, in addition to broader economic aid. Common European membership allowed demilitarisation of the region and created a seamless open border across which 30,000 employees travel daily. A hard Brexit could reinstall a hard border which has many negative implications, including notably for trade.
Guinness’s manufacturing process of its famous stout is an example. Each year, this requires 13,000 border crossings. A hard border could cause delays of between 30-60 minutes, which alone would cost NZD$2.3 million annually to the cost of Guinness stout production.
The EU have acknowledged that “in view of the unique circumstances on the island of Ireland, flexible and imaginative solutions will be required” to avoid a hard border. However, a solution remains as elusive as ever. The complexity for negotiations is to marry the relationship between Northern Ireland and Republic of Ireland with the UK’s future relationship with Europe. To a large extent the crux of the negotiations rests with future customs arrangements.
This is proving extremely difficult especially given the minority UK government’s agreement with the pro-Brexit Northern Ireland DUP Party. That has led to plenty of headlines but thus far no obvious progress towards the “flexible and imaginative solutions” required has been made.
The wide range of possible outcomes is a headwind for those markets most closely impacted, notably the UK and Europe. It makes having an educated conviction on those markets difficult. While the impact on global and Australasian markets may be limited, the outcome will to a lesser or greater degree still influence market risk sentiment. Given financial markets are aware of the risk, we may not see the same market shock as at the Brexit vote itself.