The Looming UK Brexit Mess

After the misguided referendum three years ago, the Brexit end-game is about to begin. In the UK, it means political division and fiscal erosion. Moreover, global growth prospects will not remain immune to turmoil in the world’s fifth largest economy.

Initially, London’s goal was to wheel and deal the best possible deal with Brussels. That became more difficult after mid-January when the House of Commons rejected PM May’s EU withdrawal agreement. The rejection compounded the odds for a risky and disorderly no-deal Brexit scenario.

The risks for volatility are also fueled by the impending European Parliament election in May 25-26, which is likely to strengthen Euroskeptics, anti-immigration forces, and radical right and left, at the expense of mainstream parties.

Behind official posturing, Brussels would likely prefer London to revoke the Article 50 of the EU Treaty, avoid Brexit and stay in the EU until UK lawmakers can agree about a future course. Yet, a no-deal Brexit scenario can no longer be excluded.

As the Brexit looms, political fallout is spreading. Recently, eight Labor members of the parliament left the party in protest at Jeremy Corbyn’s leadership to form a breakaway party. Days later, three Conservative MPs quit Conservative Party denouncing May’s “disastrous” handling of Brexit and its shift to the right.

The ex-Conservative MPs joined the former Labor lawmakers on the opposition benches in Parliament. Labor and Conservatives could face more resignations, with members of the new Independent group saying they expect more MPs to join them.

Some scenarios

London must cope with three Brexit scenarios by the March 29 deadline to exit the European Union (EU). In the first scenario - Brexit Deal - the EU divorce will materialize after Prime Minister Theresa May’s deal. That's the markets' base case.

In the second scenario - Brexit Deferral - the goal would be to shun a no-deal. This is an option that markets consider unlikely.

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Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute ...

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