What does the election result mean for Brexit?
The Conservative majority means the UK is almost guaranteed to leave the EU by the end of next month. We explain what will happen next in the Brexit saga.
Conservatives win election to ‘get Brexit done’
The Conservatives have comfortably won the election with a large majority that gives Prime Minister Boris Johnson a powerful new mandate to deliver Brexit. The pledge to ‘get Brexit done’ seems to have resonated with voters and the result shows how Brexit was the main issue for most of the public, which didn’t agree with Labour’s policy of sitting on the fence and reopening the debate with a second referendum.
Final results are still being tallied but the Conservatives will boast a majority of at least 76 seats – which means it is almost guaranteed that the UK will leave the EU before the end of January 2020. Johnson made it clear that all Conservative candidates had signed-up to his plans for Brexit and the size of the majority means he is less reliant on the Eurosceptic wing of the party and no longer needs to win the support of the Democratic Unionist Party (DUP), which was punished in the Northern Irish polls.
Conservatives plan to ‘get Brexit done’ by the end of January 2020
The Conservatives plan to get the Brexit ball moving quickly. The government intends to put the withdrawal agreement that was struck in October to the House of Commons before Christmas. That is the same deal that was voted down on numerous occasions by the House before the election, but that deadlock has evaporated and the deal should now be able to comfortably pass parliament.
This ‘oven ready’ withdrawal agreement will, upon passing the House, pave the way for the UK to leave the EU before the end of January 2020, which is when the current deadline is due to expire.
What happens when the UK leaves the EU?
It will be a landmark moment when the UK formally leaves the EU – but make no mistake, Brexit is far from over. It is important to remember that the divorce from the EU is only phase one. If the UK leaves the EU as the Conservatives plan, then the next, arguably more complex, stage of negotiations begin about the future trade relationship between the two.
The Conservatives intend to overhaul the immigration system to ‘an Australian-style points-based system’ once the UK has left. It has said ‘there will be fewer lower-skilled migrants and overall numbers will come down’ and said applicants will need to be able to speak English, already have a job offer, demonstrate they don’t have a criminal record, and hold good qualifications. It says applicants from inside and outside the EU will be treated equally.
UK aims to agree new trade deal with EU before end of 2020
Trade will continue as normal under a transition period that would last until the end of 2020. Importantly, the Conservatives have said they will not, under any circumstances, ask for that transition period to be extended – but now, emboldened by the large majority, that policy may change if no trade deal is on the table in the latter half of 2020.
If the Conservatives are to stick to its pledge not to ask for another extension, then this means a new trade deal would have to be struck in less than a year. No country has managed to strike a trade deal with the EU in such a short amount of time.
The Conservatives have said a new free trade agreement with the EU ‘will be a new relationship based on free trade and friendly cooperation, not on the EU’s treaties or EU law’, adding there ‘will be no political alignment with the EU’ and committing to ‘keep the UK out of the single market, out of any form of customs union, and end the role of the European Court of Justice’.
The party aims to simultaneously start negotiating free trade deals with countries outside of the EU during the transition period with a view of implementing them once it ends. ‘We aim to have 80% of UK trade covered by free trade agreements within the next three years, starting with the US, Australia, New Zealand and Japan’, it ambitiously said in its manifesto. It has clearly said that the ‘NHS will not be on the table’ and that neither the service it provides or the price it pays for drugs will be up for discussion.
What happens if there is a new trade deal in place by the end of 2020?
If the UK and EU manage to rapidly agree a new deal in time, then this will come into force when the transition period expires at the end of 2020. While businesses will want the government to act fast in order to provide them with some clarity and certainty, they won’t have ample time to prepare for the new trade arrangements even if the deal is agreed quickly.
The size of the Conservative majority should strengthen its hand in negotiations with the EU, which can no longer rely on the deadlock in parliament and the indecisiveness of UK politics. If the Conservatives draw red lines then it will be able to stick to them far easier than before the election, but whether this changes the EU’s approach is not yet known.
What happens if there is not a trade deal in place by the end of 2020?
Although the UK and EU have both said they are proactively hoping to strike a new trade deal, we know that this is far from certain. The pair could struggle to agree terms or could simply run out of time to hash out a proper deal.
This is significant because it could lead to more volatility for the pound and UK equities if there isn’t a new trade deal on the table by the end of 2020. This is because, without a deal, the transition period could come to an end and the UK could end up leaving under a ‘no deal’ scenario, whereby the economy is significantly disrupted overnight and trade has to fall back onto World Trade Organisation (WTO) rules.
In this scenario, the Conservatives could push ahead without a deal and deliver the no-deal Brexit that the party has always argued must remain on the table during negotiations. Otherwise, the party will have to abandon its pledge not to ask for an extension to the transition period and request more time to strike a trade deal with the EU.
Brexit: is it done and dusted?
It is almost certain that the UK will leave the EU now that the Conservatives have won the election with such a large majority, but the outlook beyond that remains uncertain. The UK’s intention to strike a new trade deal with the EU in less than a year is highly ambitious and has never been done before, but the election result will fill the Conservatives with confidence and gives the party the mandate it needs to negotiate effectively.
The biggest threat now boils down to timing and what happens at the end of 2020. Will the Conservatives stand steadfast and allow a no-deal to occur if a deal isn’t agreed? Or will it abandon its pledge and ask for an extension to the transition period, which can technically be postponed by up to two years (to the end of 2022)?
What does this mean for markets and the pound?
Whatever the government chooses, it will have profound effects for financial markets. The one thing we have learnt over the last few years is that markets want certainty more than anything. The Conservative win has provided that over the short term, hence why the pound and most UK equities have rallied today, but prepare for volatility and uncertainty to return next year as focus moves from withdrawing from the EU to what future trade with the bloc will look like.
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