A ‘black swan’ refers to an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict1.
Brexit arguably is a 'black swan' that, paradoxically, has taken years to unfold. Despite this, we still do not know what the effects of Brexit will be.
We know the basic facts: on 23 June 2016, the UK held a referendum on leaving the EU, in which a majority of British voters voted yes2. On 29 March 2017, the UK government invoked Article 50 of the Treaty on European Union, commencing the legal and political process whereby a member state of the EU ceases to be a member3. On 20 June 2018, the UK Parliament passed The European Union (Withdrawal) Act 2018, which became law by Royal Assent on 26 June 2018. This Act declares “exit day” to be 29 March 2019, at 11pm Greenwich Mean Time, or midnight, Central European Time4.
There is a great deal that we do not know
Negotiations between Britain and the EU are ongoing, and there is still uncertainty as to the 'deal' they will strike. The next formal European Council summit, due to be held on 18 October 2018, had previously been viewed as the deadline for striking a deal, but talks may continue beyond this date.
Commentators have suggested that the outcome of these negotiations may fall into one of the following broad categories:
1. Hard Brexit5: the UK leaves the EU in every sense, giving up full access to the single market and customs union, as well as all EU rules and regulations, financial commitments to the EU and the jurisdiction of the European Court of Justice (ECJ). Hard Brexit would see Britain gain full control over its borders, the laws that apply within its territory, and the responsibility for making its own trade deals with other countries – and with the EU – under the World Trade Organisation (WTO) rules for trade.
2. Soft Brexit6: This approach would try to leave the UK’s relationship with the EU as close as possible to the existing arrangement, particularly so as to retain unfettered access to the European single market and customs union. But since the UK would not be a member of the EU, it would not have a seat on the European Council, nor would it be represented in the European Commission.
3. No deal7: a hard Brexit without the arrangements being pre-agreed between the UK and the EU.
In the light of the above, anything seems possible, even a fresh referendum or a snap general election, which could change everything.
The politics of Brexit remains fraught
After the government issued a statement in July, which included a number of concessions aimed at reviving negotiations with the EU, politics remains fraught within the Conservative Party among those who are in favour of a Soft Brexit and those who are not8.
Examples of a Soft Brexit include Norway, Iceland and Liechtenstein, which are not members of the EU but are part of the European Economic Area (EEA). In return, they must make payments into EU budgets (which sets out the EU's long-term spending priorities and limits)9, accept the EU’s “four freedoms” of movement of goods, services, capital and people, and be subject to EU law through the European Free Trade Association (EFTA) Court10.
A Soft Brexit could be applied in the same way to the UK, but the UK government is likely to insist on tighter controls for immigration into the UK11.
Brexit is debated not only among political parties, but also among other organisations. These include, on the one hand, Leave Means Leave, the Bruges Group, and the European Research Group, and the Open Britain group, Best for Britain, Britain for Europe, InFacts, and the People’s Vote campaign, on the other.
The initial effect of the Brexit vote, which caused panic on the stock markets, is now in the past. The British pound was impacted by the Brexit vote, falling by 13.3% on the day the result came out, from US$1.50 to a 31-year low of US$1.3012. The pound fell as low as US$1.15 in October 2016, which the Financial Times called a 168-year-low in terms of a trade-weighted index measuring sterling against a basket of its trading peers and is now trading at US$1.2813.
However, just as no-one can predict the final outcome of the Brexit negotiations, no-one could possibly state categorically that all potential final deals and arrangements are factored into stock market prices. Brexit is very much a black swan still.
Information current as at 3 July 2018. This article has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141, AFSL & Australian credit licence 233714 (Westpac).
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