The politicking between British Prime Minister Theresa May and the centers of European Union power seated in Brussels is getting nasty. The leaking has begun, with reports out this week in European media that May seemed “tormented,” “anxious” and “discouraged” at her latest meeting with EU Commission President Jean-Claude Juncker. Beyond that, EU chief Brexit negotiator Michel Barnier is now being quoted as saying a deal could take years, beyond May’s March 2019 deadline.
Fingers are being pointed at Juncker’s chief of staff, Martin Selmayr, for the leaks, but of course he denies it. What else can anyone accused of such a leak say? The fact the leaks were almost perfectly timed with Barnier’s pugnacious comments is probably no coincidence. Most likely this is being staged to pivot Brussels into a stronger negotiating position.
We may never know who technically is responsible for the leaks, but what is almost certain is a leak of this type would only get through intentionally. Whoever may be directly responsible for actually leaking, those responsible almost certainly had a go-ahead from someone at the top.
The question is what do leaks and comments like Barnier’s accomplish, and are the chances of a so-called “hard Brexit” without a trade deal now more likely in light of these developments? For possible answers, we can look to previous episodes with Greece and its own Grexit back-and-forth with the same EU officials.
The short answer is this is nothing now. It is just brinkmanship, which we saw quite a bit of with Greece, but all of which turned out to be theatrical. EU officials in Brussels knew from the beginning Greece had no ability to exit the Eurozone and restart its own currency. The results would have been a national catastrophe, with the possibility of immediate hyperinflation palpable in Greece and the equal possibility of the collapse of the eurozone also plausible in a sovereign debt domino effect. Neither side could afford a hard Grexit, so eventually, always at the last possible second, a deal was reached. More than once.
With Brexit, the situation is similar. Neither side really wants a hard Brexit without a trade deal because the results, while possibly not as catastrophic as they would have been for Greece and the Eurozone in the event of a hard Grexit, would be quite terrible for both sides. Any U.K. company that exports to or imports from the EU would be in limbo. Any EU company that trades with the U.K. would be in the same situation.
The U.K. imported over 300 billion pounds ($397.6 billion) from the EU last year and exported 242 billion pounds. A hard Brexit would wreak havoc on that trade. This is something both Brussels and London need to avoid, and neither really has the upper hand. That is what the petty brinkmanship is for.
The EU is extremely fragile now considering the possible secession of Catalonia from Spain and can ill afford an economic shock like a hard Brexit. On the other hand, some may believe the U.K. has the upper hand because its trade deficit with the EU would be erased in the event of a hard Brexit, but this is nonsense. Britain does not have the upper hand either. Contrary to modern economic thought that slips into hackneyed mercantilist tropes that exports must always exceed imports, trade is always a two-way street. An export of goods is at the same time an import of foreign currency, which can only be used to buy back imports from that country in the first place. In other words, all trade eventually balances in the end and national trade deficits are meaningless.
Because neither side has the upper hand here, the brinkmanship will intensify for quite some time. Both sides are trying to look stronger and squeeze a few more pennies out the opponent. It is a war of attrition with artificial deadlines that serve little aside from being targets for the next news cycle. In the end, though, a deal will be struck, just as it was for Greece, because neither side can afford to give up over half a trillion pounds in total trade.
From an investment perspective, companies in the crosshairs – EU companies with heavy exports to the U.K. and vice versa – will probably be safe, if a little rattled by headlines now and then as the brinkmanship wears on.
