Dear [Donald]… Yours sincerely, Theresa…

Well, she finally sent “The Letter”. In the same week that the EU celebrated the 60th anniversary of the Treaty of Rome, Prime Minister May’s formal letter triggering the so-called Article 50 process was delivered by hand to Donald Tusk, President of European Council, last Wednesday. Perhaps not surprisingly, after a lengthy build-up, the earth did not move, and the Pound Sterling only wobbled slightly and then strengthened.

Nevertheless, the act is far more than symbolic, because no-one really knows what the outcome will be, other than that, supposedly, by the end of March 2019, the United Kingdom (assuming it is still “united”) will exit the European Union. This will occur (absent some miraculous volte-face) whether or not it has managed to agree the terms of that exit with the remaining 27 Members (and assuming no-one else decides, or is forced to follow the same route beforehand.)

As we have written before, it is debatable that Her Majesty’s Government has the capacity (in a literal sense) to negotiate in depth all the various issues that should rationally be addressed before the latter-day “break with Rome”. In explicitly rejecting retaining membership of the Single Market, the letter acknowledges that, if no agreement can be reached on, say, trading and economic relationships, the “default” position is that the UK would have to trade on WTO terms, something that would be less than ideal in every sense for an economy that has benefited significantly from the web of treaties and agreements that the EU has in place.

Of course, there are also legitimate concerns that the UK’s status in the world will be diminished, and that its citizens will become relatively and absolutely poorer than would have been the case had Article 50 not been triggered. Yet, consider the fact that the EU’s own economic-and-monetary affairs Commissioner has admitted that Greece’s GDP has fallen 45% (sic) since 2009 and that unemployment is 50%, arguably because the country’s political class willfully allowed it to be hung upon the cross of the Euro. This is believed to be the worst performance ever by a country hitherto classed as Advanced. So much, for not going the “Grexit” route.

The UK’s negotiators will likely face something of an hiatus until this autumn because of the electoral and political situations in France, Germany and Italy, which adds further pressure to a timetable that is, in reality, going to be impossible to meet in terms of delivering a well-crafted and comprehensive “separation agreement”.

And whether it likes it or not, even if, as the phrase goes “Fog in the Channel, Continent cut off”, the UK is part of Europe, by far its largest trading partner; so it will always be affected by decisions made by European institutions in which it will no longer have a voice. Splendid Isolation is a nonsense and a fantasy, while the prospect of creating some sort of preferred trading relationship with an increasingly protectionist US Administration is decidedly uncertain- even if Mrs. May got the handshake that the far more powerful Ms. Merkel did not.

All in all, the negotiation of “Brexit” is going to increase uncertainty; and potentially de-stabilize an arrangement (the EU) which, for all its faults, has done an admirable job of forestalling Europe’s periodic descent into chaos and of raising the living standards of most of its members.

From Awbury’s point of view, the uncertainties are simply another factor to be taken into account in our constant analysis and monitoring of the risks to which our portfolio is exposed; while at the same time, the probability of unexpected outcomes has a habit of generating dislocations which provide new opportunities. So, nothing new there!

The Awbury Team

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