As pound slumps to lowest levels against U.S. dollar in 31 years, a look at what could lie ahead.
Britain faces the prospect of a “hard” Brexit that threatens to further roil markets after a plunge in the pound to multi-year low points this week.
What is a hard Brexit?
Following Britain’s shock referendum vote on June 23 in favor of exiting the European Union, it was not immediately clear what form the separation would take. But Prime Minister Theresa May has hinted this week at a hard Brexit that would see Britain’s departure from the single market, or tariff-free zone, while also ending the free movement of people.
May on Wednesday said she wanted a Brexit deal that offered “maximum freedom” to operate in Europe’s single market from the outside as well as emphasizing the need for control over immigration into Britain.
But European leaders have made it clear that any attempts to limit the influx of E.U. workers into Britain would mean ejection from the single market. “I want to give British companies the maximum freedom to trade with and operate within the single market and let European businesses do the same thing here,” she said in an address to her Conservative party’s annual conference. “We are not leaving the European Union only to give up control of immigration all over again and we’re not leaving only to return to the jurisdiction of the European Court of Justice,” she said.
After May on Sunday set an end-March deadline for the country to start negotiations to leave the European Union, the pound has slumped to 31-year-lows against the dollar and three-year troughs versus the euro.
A study on Wednesday showed the cost of a hard Brexit for revenues in Britain’s financial services sector could total as much as £38 billion, risking the loss of up to 75,000 jobs.
A halt to British companies being able to sell services freely across the European single market would result also in a heavy loss of tax revenues, according to the study commissioned by lobbyists TheCityUK. According to Britain’s financial watchdog meanwhile, ‘passport’ rights allowing 5,500 British-based financial firms to operate freely across the European single market are at stake.
Some 8,000 financial firms based elsewhere in the European Union also do business in Britain via passporting, and their rights are likewise threatened, the Financial Conduct Authority revealed last month.
“If Britain wants a hard Brexit, that can be announced now, without negotiation… but it would be dangerous not only for business in the U.K. but also across Europe,” said Mark Boleat, chairman of City of London Corporation’s policy committee. “There would be the introduction of custom and other trade barriers and problems of movement of workers in and out the U.K. There is little enthusiasm in business for a hard Brexit,” he told AFP.
Why support a hard Brexit?
The International Monetary Fund on Tuesday cut its 2017 growth forecast for Britain, blaming Brexit, and warned that the damage could be greater if rocky negotiations lead to trade barriers.
“Those supporting a ‘hard Brexit’ will argue that any soft Brexit does not go far enough to honor the electorate’s vote to leave, while those who support British membership of the E.U. will be dissatisfied with the fact that the U.K. will leave the E.U. and likely the single market,” BMI Research said in a research note. “A hard Brexit would undoubtedly cause significant concern in the short-to-medium term, and would risk a recession in the U.K. economy, but would leave the country in a more advantageous position in the long term to try and facilitate trade with expanding emerging markets elsewhere around the globe.”