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Wall Street Journal: Brexitology: Divining Britain’s Plan to Leave the EU

Date: 11 01 2017

Brexitology: Divining Britain’s Plan to Leave the EU

Prime Minister Theresa May’s comments can send analysts scrambling, markets spiraling

LONDON—Britain’s impending departure from the European Union has spawned a cottage industry of Brexitologists.

Investors, securities analysts, political-risk consultants and politicians, intent on divining the British government’s Brexit plans, have been scrutinizing the public utterances of Prime Minister Theresa May and her top aides for clues. Perceived shifts in tone or substance—or the lack of them—from senior officials have sent observers scrambling to recalibrate forecasts as markets gyrate.

“People are grasping at straws,” said John Wraith, a U.K. economist at UBS, charged with predicting the likely course of Brexit negotiations and their potential impact on the British economy. “I can’t think of anything where we’ve been in the dark for as long as we are, and where the consequences are so material.”

Market reactions have been sudden and sharp. On Monday, the British pound fell more than 1% against the dollar as traders reacted to a Sunday television interview with the prime minister they read as a sign she would pursue a clear break with the EU. Mrs. May told Sky News, “Often people talk in terms as if somehow we are leaving the EU, but we still want to kind of keep bits of membership of the EU.” She added: “We are leaving. We are coming out.”

Her words didn’t mark much of a departure from past statements, but investors who see advantages if the U.K. stays within the common market had anticipated a softer stance.

Lawmakers in both major political parties have called on Mrs. May to reveal more detail, and, in a resignation email to colleagues last week, the country’s departing ambassador to the EU said civil servants don’t know the government’s goals.

In the absence of a detailed blueprint, “every single inflection, every single difference from the formula she employed in a previous interview is blown out of all proportion,” said Tim Bale, a politics professor at Queen Mary University in London.

The British leader has said she doesn’t want to compromise Britain’s chances in negotiations by showing all her cards at the onset. But under pressure, she has pledged to offer more details in a speech in coming weeks.

She has said she wants a deal that will address voter concerns about immigration as well as of British businesses that need access to Europe’s trading market. That could be difficult. The EU says such access must be accompanied by free movement of labor. EU leaders, including German Chancellor Angela Merkel, have said they won’t let the U.K. cherry pick what it wants.

After Mrs. May reiterated her stance on Monday, both sides interpreted her comments as a sign of support.

Richard Tice, co-chair of the pro-Brexit group Leave Means Leave, said he took Mrs. May’s words to mean the U.K. is leaving the EU’s common market. “We’re very comfortable with the direction of travel as to where the government is likely to end up,” Mr. Tice said.

Anna Soubry, a Conservative lawmaker who supports staying in the single market, said she was encouraged that Mrs. May wants a new deal with the EU that puts the economy at its heart.

“She has surely noticed the dreadful reaction from the markets each time the government hints that it will aim to leave the single market,” Mrs. Soubry said.

Sterling on Wednesday morning continued its slide against the dollar. In October, sterling dropped against the dollar after Mrs. May said she would begin Brexit talks by the end of March. Later that month, it moved up after a government lawyer said that any final agreement between the EU and Britain would likely need to be ratified by Parliament.

In December, the pound rose after Britain’s Brexit minister David Davis said the U.K. would consider making payments to the EU’s budget to secure the best-possible trade access.

Dominic Bunning, currency strategist at HSBC Holdings PLC said he’s paying more attention to politics than he would normally as an economist, given the lack of clarity.

“There is a lot more noise and a lot less actual signal,” Mr. Bunning said. “Knowing which one to follow is a lot harder.”

The British press, meanwhile, has pounced on any inkling. When a photographer caught an aide to a Conservative lawmaker leaving the country’s Department for Exiting the European Union in November with densely scrawled notes tucked under her arm, it was front-page news. Visible in close-up were the words “What’s the model? Have cake & eat it.”

Foreign Minister Boris Johnson used the phrase when he was campaigning for Brexit to refer to Britain having both control over immigration and free trade with the EU. But the government said the notes didn’t reflect its position, pointing out they didn’t belong to a government official or adviser.

Earlier that month, a memo from Deloitte LLP saying the government didn’t have a coherent plan was published in the Times of London. Deloitte apologized, saying it was for internal use and wasn’t commissioned by the government.

January 11th, 2017: The Wall Street Journal