Article / 14 March 2017 at 13:07 GMT

The four million people who fear Brexit the most

Head of Editorial Content / Saxo Bank
Denmark
  • Westminster blocks amendment seeking rights for UK-resident EU nationals
  • 1.2 million Britons live in the EU; reciprocal rights a key Brexit issue
  • EU negotiator offers an olive branch to Britons in Europe
  • Hardline PM May clearly seeking further concessions from the EU
  • Pound could decline further before any real certainty arrives
  • Passporting, trade, and tariff issues outweigh reciprocity for markets

Brexit
Literal crystal balls aside, the future of the Brexit talks between the UK and EU 
appears far more cloudy than clear. Photo: Shutterstock

By Michael McKenna

United Kingdom prime minister Theresa May “has crushed parliamentary resistance to Brexit”, reports the Financial Times as MPs and peers have acquiesced to her starting exit negotiations with the European Union.

While Monday morning saw rumours emerge that Article 50 of the Lisbon Treaty would be triggered this week, the latest statements from government officials indicate that May will wait until the end of March before invoking the key clause.

Despite both this slight delay and the more significant demand by Scottish first minister Nicola Sturgeon that a second Scottish independence referendum be held in light of the nation’s overwhelming support for the Remain option last June, May’s parliamentary victory clears the way for negotiations with the EU to begin in earnest.

On Monday, sterling rallied from the 1.2175 area to just north of 1.2250 against the dollar; GBPUSD declined to 1.2110 early on Tuesday, however, as the complex machinations surrounding Brexit wend their way through Westminster.

A series of movements 

Like the election of Donald Trump, the Brexit vote was taken by many to be a rejection of a certain historical circumstance, one whose name depends on your feelings towards it. Detractors tend to call it “globalism” or “neoliberalism”; proponents prefer “the open society” or (somewhat more neutrally) “the liberal international order”. Whatever your preferred nomenclature, though, both sides generally agree that it is an order characterised by large-scale population movements.

At the 2016 Davos conference, both the idealistic and the pragmatic sides of this policy were on display, with World Economic Forum host Klaus Schwab pointing to low commodity prices, automation, and high Middle Eastern and sub-Saharan birth rates as factors that will likely lead to enormous waves of migration.

In response to Schwab’s demographic projections, the forum then saw Canadian PM Justin Trudeau state that "we need societies that recognise diversity as a source of strength”, while Beth Brooke-Marciniak of EY proposed that corporations lend their weight to this accomodative trend by “leading the charge […] to create a more inclusive society”.

This is the main plan of one side of the current political divide: populations displaced by demographic and commercial trends will move about the world, and those places most economically able to accept them will respond with programmes of diversity and inclusion. 

On the other, you have leaders like Trump, Marine Le Pen, or former UKIP leader Nigel Farage, who routinely shocked champions of inclusion by saying things like "any normal and fair-minded person would have a perfect right to be concerned if a group of Romanian people suddenly moved in next door."

Exits and entrances

The idea that the Brexit vote represented an on/off switch for mass immigration, however, was routinely denied by officials in the run-up to and aftermath of the vote. Writing in the Guardian on February 3, Conservative MP Stephen Crabb offered one of the strongest rebuttals of Brexit’s ostensibly nationalist purpose, stating, among other things, that “no minister has yet been able to point to any group of foreign workers currently here who should not, or would not, be here in post-Brexit Britain”.

In Crabb’s view, in fact, “there could be another rude awakening for the public when they realise that Brexit will not mean a cut in immigration after all”.

Insofar as Brexit’s legal impact relates solely to the European Union, the main question and negotiating point surrounds the rights of EU nationals in Britain and British nationals in Europe.

There are 1.2 million Britons living in the EU and around 3.2 million EU nationals living in the UK. On March 10, EU negotiator Guy Verhodstadt said that British citizens should be allowed to hold on to the benefits of being in the EU, noting that "all British citizens today have also EU citizenship” and adding that an arrangement is needed for those citizens who request it.

On Monday evening, however, British MPs voted against protecting the rights of EU nationals in the UK by 335 to 287, striking down a House of Lords amendment to the government’s Brexit bill demanding that EU citizens and their family members residing in the UK “continue to be treated in the same way” post-Brexit.

Despite the vote, Brexit secretary David Davis continued to insist that the UK would reach a “swift” accord with the EU regarding both UK-resident EU nationals and EU-resident Britons. It would appear, however, that Westminster was not willing to allow the House of Lords to be the entity that decides this.

Sterling linings?

In the wake of Monday’s vote, and given that UK officials remain confident of some sort of deal, one thing remains clear: Westminster wants this deal to occur over the negotiating table with the EU and not within its own parliament.

While the precise nature of the concessions London will seek in exchange for the rights of the large bloc of EU nationals in the UK and the somewhat smaller one of Britons in the Union is still unclear, it is increasingly evident that this will prove a key, and perhaps the key, sticking point in the Brexit negotiations.

For financial markets and the pound, however, the future is less clear. Whatever GBP’s appetite for certainty, says Saxo Bank head of forex strategy John J Hardy, the certainty sought by EU and British nationals does not overlap entirely with that sought by sterling traders and investors as a whole.

“You have a whole raft of issues beyond [the reciprocal rights of EU and UK nationals], particularly tariffs, trade deals, and passporting issues relevant to the financial sector,” says Hardy.

Adding that these issues could arise as bargaining chips within the greater debate on reciprocity, Hardy says we could be well into 2018 before the Brexit negotiations achieve any meaningful accord on these matters.

In the meantime, Goldman Sachs managing director Silvia Arganga has told Barron’s Asia that:

“EUR/GBP upside is also supported by the macro outlook and political developments in the UK. There are signs that momentum in UK economic activity is weakening and we expect lower growth in coming months. Article 50 could be triggered as soon as this week and news that European leaders will not make the divorce easy should lead to a more negative risk premium being built into the currency.”

As of press time, GBPUSD appears to be posting a bearish flag, so both pound longs and UK-resident EU nationals may face further challenges before the nature of post-Brexit Britain and its currency become clear.

GBPUSD
Brexit

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Source: Saxo Bank 

Michael McKenna is an editor at Saxo Bank

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