Guide to Brexit – Deutsche Bank

Research Team at Deutsche Bank points out that after Article 50 is triggered, sequencing is the key that opens all doors to Brexit and the current timeframe to conclude negotiations is unrealistic particularly if the deal requires ratification from all EU national parliaments (a mixed agreement).

Key Quotes

“The UK and EU27 must find a way to conclude a transitional deal without a lengthy sign-off process or the UK will drop out of the EU in March 2019 with no deal.”

“A transitional deal will be tricky but not impossible. Turkey shows the customs union is not intimately bound to the Single Market. The EEA Treaty might also provide a template. But the UK will have to accept budget contributions, pooling of sovereignty and compromise on freedom of movement.”

“Politics is the main risk. Behind the bluster, Secretary of State Davis has struck a more moderate tone in parliamentary testimony. But we are concerned the current strategy for a broad-based trade deal by 2019 risks jeopardizing the chances of a transitional agreement. The government’s wafer-thin majority in parliament has also yet to be resolved. Eurosceptic Conservative MPs and the right-wing UK press will push for a clean break, constraining Prime Minister May’s ability to compromise. An early general election would dilute their influence.”

“Politics will be equally problematic for the EU27. With populism increasingly felt across the continent, the EU must take account of the threat a successful Brexit would present of the European project. The differing national interests of EU27 states will be a theme of talks. Most importantly, Brexit negotiations are just one of several competing priorities for the EU over the next two years.”

“Economically, the UK must prevent a sudden exit from the customs union in March 2019 or risk seeing huge disruption to existing business models. It is also in the UK and EU’s interest to seek short-term regulatory equivalence for financial services, but this will be unsustainable long term due to regulatory divergence and the risks the City would pose for the Eurozone. The future for other service industries, making up over thirty percent of UK exports, looks bleak unless an EEA approach is pursued.”

“The UK’s ability to conduct third-country free trade deals is at best a redherring and at worst a waste of time and energy. They will face political, technical and structural headwinds. The primary focus of the negotiations must be to conclude a deal with the EU. Only once this is achieved should attention be turned to the rest of the world.”

“UK economic growth following last year’s referendum confounded pessimistic forecasts, but is unlikely to continue. There is growing evidence of the real income shock. The Bank of England seems to feel under pressure from rising inflation and robust growth to hike rates, but with little evidence of rising wages, caution on monetary policy is likely to prevail in the near term.”

“Medium-term, the success of a post-Brexit UK will rest on the industrial strategy. This is particularly true if net migration begins to fall, weakening demographics. The strategy should maximize the UK’s strengths in high tech manufacturing and education, but is not yet ambitious enough.”

“The market should hope for the best but plan for the worst. Time constraints, the scale and complexity of talks and the threat that a soft deal represents to EU means the UK faces an uphill battle to avoid a hard outcome. The political difficulties only look resolvable with an early UK general election. Our base case is that the UK will eventually compromise, but this will depend on a weakening economy and market pressure, with a full cliff-edge Brexit likely to be fully priced at some point in the next two years.”