Brexit Update - Tuesday, January 14

Three and half years after what was initially a non-binding referendum, the UK has seen its way to leave the EU. The House of Commons passed the necessary legislation last week as Tories enjoys a parliamentary majority. The House of Lords takes up the measures now. Although the Conservatives do not have a majority and a vigorous debate is expected, the unelected body is most unlikely to block Brexit.  

What happens next? The UK will formally exit the EU at the end of the month.  It enters an 11-month standstill phase. Nothing changes. The UK and the EU will negotiate their new trade relationship.  Here is where the risks are to be found.  

First and foremost, after Brexit was bedeviled by embarrassing delays and setbacks, and Prime Minister Johnson, having re-gained majority, insists that the trade talks are completed by the end of 2020.  This is an ambitious timeframe and may speak to the government's limited agenda. It is insisting on two big things:  it will not accept free movement or commit to regulatory equivalence. Even if the negotiations are smooth and the best case materializes, the UK's access to the EU market will be either more limited or more expensive and, most likely, both. This has important implications for businesses who use the UK as their entry into the Continent.   

The new EC President von der Leyen, the EU's Brexit negotiator Barnier, and several other European officials have pushed back against Johnson's schedule. However, for different reasons, German Chancellor Merkel and French President Macron may insist on a less confrontational approach. The attitude after the UK election seems to be fully accepting the facts on the ground. The UK is leaving the EU.  Let the new era begin. Up until now, the EU has shown a remarkable unanimity in the tortured Brexit course. There have been no defects from the united front.   

Second, the Irish border remains a thorny problem. In effect, the UK has promised to operationalize a computer system for the special arrangement of the Northern Irish border and does not have the support of any Northern Irish political party. However, until a final trade agreement is struck, the details of the border arrangement cannot be finalized: a genuine conundrum. 

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Read more by Marc on his site Marc to Market.

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