Why the UK Court ruling on Article 50 is terrible news for both the UK and Europe

Yesterday, the High Court ruled that the UK Government must consult Parliament before triggering Article 50 to leave the EU. Immediately after the result was announced, Gina Miller, the woman behind the successful court challenge announced that this was not about stopping Brexit, but ensuring the democratic process is followed. Quite.

The good news is that Mrs Miller is entirely right, that due process must be followed. The bad news is that just days before the UK celebrates bonfire night in remembrance of one Guy Fawkes’ failed plot to blow up Parliament, Mrs Miller may have pointlessly lit 17 million Molotov cocktails.

As it stands, the victory means that the UK Government will likely appeal within the next month. However, as several commentators have reflected, the case is quite water tight and an appeal looks likely to fail. 

This means that the decision to trigger Article 50 will go to a vote in Parliament, and this is where the paradox begins. 

The majority of parliamentarians are pro-Remain. The majority of the constituencies are pro-Leave. In the UK and Wales, 421 out of 574 constituencies (73%) voted to Leave the EU.  Had the EU referendum been counted under the FPTP rules that apply in General Elections, Leave would have won by 421 seats to 229, almost double to Remain, and voter turn out was the largest ever recorded in British history.

In an article for The New European newspaper, disgraced former Prime Minister Tony Blair recently recanted a conversation he had with a Labour MP;

“One Labour MP explained it very graphically to me. He voted remain. His constituency voted Leave. They voted in larger numbers than they did at the last General Election. All the pressure is one way; he thinks if he doesn’t conform to Brexit, he’s sunk.”

In the last General Election, despite Labour holding key seats in their traditional Northern heartland, they did so with very small majorities. Huge swings were seen towards UKIP, even prior to the emergence of Jeremy Corbyn and the referendum.  

Since the emergence of the neo-Marxist Jeremy Corbyn via activist entryism, and the relentless exposure of rampant anti-semitism within the Party, Labour has never been so unpopular. A recent poll suggests that just 16% of men in the UK will vote for Labour in the next election if Corbyn is still in power. The Conservatives have a double-digit lead in the polls, which is unthinkable under these conditions, when reading from the conventional political playbook.

This presents a dangerous situation for parliamentarians. 

Parliament approved the referendum in a vote that passed by 6:1, and in the build up to the referendum, the Government distributed documents clearly stating; 

"This is your decision. The Government will implement what you decide."

Regardless of the court ruling, perception is everything and these are the conditions that the British public voted under.

Most MP’s will likely vote to trigger Article 50 as it will be in their self-interest to do so if they want to keep their seats. However, due to the sheer incompetence of Corbyn’s tenure as leader, many MP’s might already expect to lose their seats whenever May calls for a General Election to validate her position as PM. This pessimism may lead to them voting to block Brexit as a final and parting act of defiance.

If this were to happen, the Government will have little choice to call for a General Election immediately, and there is a very real risk that the British political system will implode. 

The Labour Party will be decimated in its northern heartlands, to the point of becoming just an outlet for student activism, and the Conservative Party will likely suffer heavy losses too. The principle beneficiary will be UKIP and to a lesser extent the pro Remain Liberal Democrats. The most likely outcome will be a minority Conservative Government who needs support from UKIP to properly function. 

This means that British politics will have taken an extremely hard turn towards the far right, in a bid to uphold the correct Brexit process.

Each effort to derail, or slow down the Brexit process will be spun by the likes of UKIP and their peers as a metropolitan elite conspiracy to block the free will of the people. And they won’t necessarily be wrong. UKIP will be able to point to the judges and highlight that one founded a law firm specializing in EU practice, and another has close personal ties to Tony Blair. It will be the easiest sell in the world.

In recent hours, failed Labour leadership candidate Owen Smith has called for Article 50 to be amended to include a second referendum. It would be funny if not so depressingly dangerous.

As we stand, despite the rhetoric bouncing between London and Berlin, we are/were likely heading towards a transitional period of EEA membership, while the long-term technicalities of Associate membership can be negotiated. 

From a markets perspective, both May and Merkel have done very well at raising fears, meaning that the reaction to a Hard Brexit is probably already priced in. Sterling has been a good shock absorber In that respect, with the added bonus of long being considered vastly overvalued by the IMF and investment banks alike.

Wolfgang Münchau of the FT and Euro Intelligence eloquently summarized progress to date;

“The philosopher Friedrich Hegal described historical processes in terms of “thesis, antithesis and synthesis” – an initial phase where one particular view holds, then the opposite, followed by compromise. So far the Brexit debate appears to be dutifully following Hegelian logic.”

We have had the talk of bespoke deals, followed by talk of hard Brexit. The recent Nissan deal should probably be considered a strong indication that discussions are already underway, and ‘soft Brexit’ is likely, well... until the court ruling at least.

The prospect of political meltdown in the UK, followed by the ascension of hardcore Brextremists to Parliament means that hard Brexit is back on the menu and tough love and bitter pills will follow. This surely means that the UK will experience a tough, but ultimately beneficial couple of years of economic rebalancing. 

As we all know, the Eurozone is a systemically and structurally flawed entity, and despite the relative calm, no end goal is in sight; awful is the new normal. Both the German and Italian banking sectors appear to perpetually on the verge of crisis, while market whispers suggest that other nations may soon join them in the red zone.

Politically, the extreme right has a good chance of election in France, while in Italy, recent polls show ‘No’ gaining momentum behind its lead. Socially, tensions are fraying as the migrant crisis continues and threatens to escalate as Turkey ponders bringing back the death penalty and potentially invading Northern Iraq. 

Should a far right led Britain push for the hardest of hard Brexits, the sharp adjustment will cause economic shocks in both the UK, but also within the Eurozone. 

As seen in Russia, when people are politically motivated they can withstand economic pain for the ‘greater good’. The UK, as the provocateurs will suck it up. That does not necessarily stand true in the Eurozone. In the Eurozone, a recession could prove a catalyst for much more.

From a trading perspective, I will resist offering too much detail and leave that to the specialists, but the trends seem clear. Sterling is a political driven currency nowadays and needs to be viewed through that paradigm.

The UK has a huge balance of payments crisis on the horizon. This has emerged due to the long-term overvaluation of Sterling and subsequent effects of the Dutch disease on the UK economy over recent decades. I imagine that the BoE are very happy to use Brexit as an excuse to drive Sterling lower, and view a Brexit crisis as manageable but a balance of payments crisis not so. 

Likely, we will see the UK Gov’s appeal rejected, causing GBP to gravitate higher, followed by a sharp sell off whenever we get to the eventual point that the triggering of Article 50 is accepted. Once we get past the flash crash lows, the long term low for Cable is $1.05. This could be a possibility if Trump were elected and pledged to slash corporation tax to 15% from 35%, causing mass repatriation of offshore funds, and a dollar surge. Conversely, Sterling is a safe haven when the Eurozone wobbles. 

These are political times and we should remember that the FX market is acting as effective opposition to the May Government, due to Labour’s impotence. 

To wrap things up, I have been sanguine throughout the entire Brexit process so far, but the fall out from this well intentioned but poorly thought out legal process chills me to the bone.