James Knightley, Senior Economist at ING, notes that the British Prime Minister Theresa May has confirmed that the UK will leave Europe's single market, but will seek a deal that gives the greatest possible access, warning Europe will suffer too if agreement can’t be reached.
“Prime Minister Theresa May has set out her vision for Brexit and has confirmed that the UK will “not seek membership of the single market, but the greatest possible access to it”. This would include elements of the single market, but not all i.e. free movement of labour, in what would be a “bold and ambitious” agreement. She added that the final deal would put to a vote in parliament – both the House of Commons and the House of Lords.”
“She assumes that in the negotiations all participants will be “economically rational”. However she acknowledged that some European officials may want to make an example of the UK. She stated that such actions would amount to “calamitous self-harm and not [be] the act of a friend”. In this regard she added that “no deal for Britain is better than a bad deal” and that if there was no deal, the UK can still trade (under WTO rules) and that (in a not particularly veiled threat), the UK has the freedom to set tax rates to attract foreign businesses. Moreover, not signing a deal with the UK would disrupt European supply chains and create barriers to exporting to the UK from Europe. She urged European officials not to “make Europe poorer to punish Britain”.”
“In terms of the deal, she still assumes that both the divorce and the new trading environment with the EU can be agreed within the 2 year window set under Article 50. She dismissed the notion of an “unlimited transitional period”. Instead she wants a “phased process of implementation” that would allow a “smooth and orderly Brexit”.”
“However, we feel that this is an optimistic assessment. The UK doesn’t really have 2 years to negotiate, as outlined by Michel Barnier , the EU’s lead Brexit negotiator. There will be a 1-3 month period of preparation at the beginning and then 4-5 months at the end where the deal has to be approved by all of the national parliaments in the EU along with the UK parliament. This leaves just 15-18 months for real negotiations. As we saw with Wallonia and the Canadian-EU trade deal there are risks of delays – in any case Canada’s own trade deal took seven years to negotiate. We also have to consider that the election calendar in Europe is not particularly helpful in this process.”
“We now await the response from Europe…”
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