EC Little Resolution In The Week Ahead

 

 

According to legend, the person who unraveled the Gordian Knot would rule the world.  No one succeeded until Alexander the Great took his mighty sword and sliced the knot in half.  A young boy saw him afterward, crying on the steps of the Temple of Apollo.  "Why are you crying?" the boy asked, "you just conquered the world.  "Yes," Alexander wept, "now there is nothing else for me to do." 

Investors are not as cursed as Alexander the Great. But what challenges investors now are not new problems but unresolved old ones.  The UK House of Commons vote that was expected next week now looks to be pushed out another week. Reports indicate that Prime Minister May brought nothing new with her request that the backstop is renegotiated. The backstop is in case there is no better agreement struck. They cannot have an expiry without giving the UK incentive to obstruct until it then.

The UK has been unrealistic from the get-go.  The Irish border makes the Gordian Knot look like a Cat's Cradle.  The UK seemed to think that the EU would sacrifice Irish interests to ensure an orderly departure. Though it is not remarked on much, it is nonetheless remarkable that the EC has not wavered on this. 

The UK was never a member of the Schengen Area, and it had more control over its own borders than it chose to exercise. The politicos have an easy whipping boy in Brussels. UK officials say that after Brexit they can enter into free-trade agreements with other countries. But it is not like the EU is standing still.

On February 1, the EU-Japan free-trade agreement went into effect.  The EU has free-trade agreements with Australia, New Zealand, Vietnam, Mexico, Canada, Mercosur, and Singapore. The size of the EU market gives it negotiating power in trade talks. The UK GDP is about $2.6 trillion. To say it does not have the EU's heft is to state the obvious, but to suggest that the UK can strike just as favorable agreements seems naive at best and disingenuous at worst. 

The Irish border issue cannot be resolved.  All of the stakeholders say the customs border cannot be between the Republic of Ireland and Northern Ireland.  The Democratic Union Party from Northern Ireland that allows the Tories to govern after losing its majority insists that the border cannot be between Northern Ireland and the rest of Britain. 

The non-binding referendum in 2016 instructed Parliament to leave the EU. Now it turns out there is no majority in parliament for any particular way.  Arguably, the House of Commons needs more instructions from the people and postponing Article 50 until after another referendum is one scenario. However, it was a very close decision last time and some irregularities. There is some risk that the Remainers would win. 

Despite the mess of Brexit, Labour continues to trail behind the Tories in opinion polls. Labour leader Corbyn has been unable to broaden his party's appeal, but he did offer another way to Prime Minister May.  He made five demands in exchange for Labour's support. One of them was staying in the customs union, which would resolve the knotty problem of the Irish border.  May is not ready for that yet. She sides with those Tories that believe that staying in the customs union is not a sufficient exit. 

Samuel Johnson said that when a man knows he will be hanged in a fortnight, "it concentrates his mind wonderfully." The March 29 departure is more than a fortnight away. The minds are not sufficiently concentrated.  Hope seems to decay at the square root of time and as the zero hour is approached, and alternative exits are blocked, the choice may come down to a no-deal exit and a later softer divorce.

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Read more by Marc on his site Marc to Market.

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Gary Anderson 3 months ago Contributor's comment

One of your best, Marc. The insanity of getting state owned enterprises to pull out of the Chinese economy, when their participation has lifted millions of Chinese out of poverty, is pure American insanity. The US is trying to manage capacity utilization in China. That is truly invasive. Meanwhile Huawei is not permitted to sell to the west. China really should go on its own, with the rest of the world. after Trump slaps massive tariffs on Europe, that union will see who is really making trouble for the world. Us!

Kurt Benson 3 months ago Member's comment

Yes, excellent article!