FUND MANAGER: Delaying triggering Article 50 may 'speed up' company relocations in Europe
Zane E. Brown, partner and fixed income strategist at Lord Abbett a fund manager with $135.9 billion (£106.9 billion) assets under management, said in his "2017 Global Outlook" note that Brexit is likely to have a negative effect on the UK for several reasons.
Here are the key excerpts (emphasis ours):
"Brexit negotiations seem likely to lead to slower growth in the United Kingdom, as well as in the European Union, while U.S. growth appears relatively attractive, especially if Republican pro-growth initiatives are passed. British prime minister Theresa May's intention to begin exit negotiations with the European Union by the end of March 2017 has been compromised by a High Court ruling that requires Parliament's involvement. Parliament could delay the March date, and could include conditions that complicate the negotiating process.
"Such uncertainties may serve to postpone business investment decisions within the United Kingdom or, worse, speed up decisions to relocate some operations outside the United Kingdom. Prime Minister May's hope may be that the U.S. trade uncertainties that accompany a Donald Trump presidency could encourage a more conciliatory approach by EU negotiators."
The loss of passporting rights following Brexit is one of the biggest fears in the City of London. If the passport is taken away, then London could cease to be the most important financial centre in Europe, costing the UK thousands of jobs and billions in revenues. Around 5,500 firms registered in the UK rely on the European Union's passporting rights for the financial services sector, and they turn over about £9 billion in revenue.
So this is why, if there is a "hard Brexit" or a strong indication that one may happen, firms are likely to relocate.
Britain voted for a Brexit by a slim majority on June 23 and, since then, there has been much speculation on when the new prime minister Theresa May will trigger Article 50 and start the official two-year negotiation process for Britain to leave the EU. March 2017 is the current target date.
However, there are two legal challenges that the government faces:
- One over the triggering of Article 50. The case, heard by the Supreme Court last week, is examining whether Parliamentary approval is required to trigger Article 50 and begin the process of leaving the European Union. The government insists no vote is required, but campaigners, led by Gina Miller, argue otherwise.
- And one over Britain's membership of the European Economic Area. The government argues that triggering Article 50 will also begin the process of Britain withdrawing from The EAA. But thinktank British Influence disputes this, arguing that only a vote from Parliament can legally withdraw the UK from the EAA.
Meanwhile, May has continuously said she will not give a "running commentary" on how negotiations are going but she has made it clear in various speeches that her government is prioritising immigration restrictions. This would imply a "hard Brexit" because the EU's official line is that it will not allow the UK to curb immigration and keep membership the Single Market at the same time.
EU parliament Brexit negotiator Guy Verhofstadt said an interview with Business Insider that the deal Britain has discussed so far makes no sense.
And various EU officials, including the prime minister of Malta said that the EU is not "bluffing" when it says it will push Britain into a "hard Brexit" if May insists in opting out of freedom of movement.
Brown at Lord Abbett noted that "Brexit negotiations could be contentious."
"The EU seems intent on making an example of the United Kingdom to avoid an exit contagion among other countries seeking preferential treatment on immigration quotas or economic contributions," he said.
"Trade tariffs between the United Kingdom and the European Union will result in more expensive imports and slower economic growth in both regions. In addition, problems with adequate capital among some German banks and excessive nonperforming loans among many Italian banks seem positioned to further restrict growth in the European Union."