Brexit hurts more than muddling through

With the early British elections on December 12, Brexit may be a big step closer. But is that also the most favorable scenario for the economy? And how does the pound react?

British Prime Minister Boris Johnson was able to celebrate his second success earlier this week after a series of painful defeats. He received the green light from parliament to call new elections. He previously managed to get his departure agreement with the EU through the House of Commons. However, a vote is no guarantee for a good outcome.

After all, in 2015 then Prime Minister David Cameron had to leave the field after calling a Brexit referendum turned out to be a serious miscalculation. And Therese May lost her majority in the House of Commons with early elections. She was forced to partner with Northern Ireland's DUP, which has emerged as a major stumbling block during the Brexit negotiations.

Labor in splits
If Johnson manages to lead his Conservative Party to a majority in the December 12 elections, an exit from the EU could be arranged within weeks. In any case, he has little to fear from the largest opposition party, Labour. There is a huge division within Labor over the Brexit strategy.

That's not surprising when you consider that Labor is the largest party in the 10 districts that are the strongest in favor of Brexit, but also in the 10 districts that are most strongly against it. The big danger is that Johnson may lose seats to Nigel Farage's new party.

nice miss
For the time being, the chance that a divided House of Commons will continue to block Brexit after the election is almost as great as the possibility that Johnson will succeed in guiding his country out of the EU. Anyone who thinks that the election uncertainty will lead to unrest around the pound is wrong, however.

It is remarkably quiet on currency markets. The pound has fluctuated in a very narrow range between €1,15 and €1,165 for over two weeks. That will probably only change once the election campaigns pick up steam and more becomes clear about Johnson's chances.

Again not true
So far, Brexit has cost Britain tens of billions. The National Institute of Economic and Social Research (NIESR) has calculated that, as a result of all the uncertainty surrounding Brexit, the economy is 2,5% smaller than if Britain had just stayed with Europe. You would think it would be a good thing if there was a departure as soon as possible.

But that's not true either. According to NIESR, the UK economy will shrink by 10% to 3% in 4 years if the Johnson deal is implemented. If we mud through the next decade in the current way, that damage is only 2%. That is of course a nightmare for Johnson, but if you look at the political mess of recent years, this scenario cannot be ruled out.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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