It’s happening, forex chaps! British Prime Minister David Cameron and top EU officials were able to iron out a deal that will give the UK “special status” within the EU. Moreover, Cameron officially announced that the Brexit referendum will be held this coming 23rd of June.
Brexit? What’s that?
If you have no idea what this Brexit hubbub is all about, then you probably missed out on my awesome Primer and Update on The Brexit Saga, so go ahead and click that link to check it out. Don’t worry, I did my best to make it a fun and interesting read. In addition, that write-up also provides the proper context for the deal that Cameron managed to pull off.
What did the UK get out of this deal?
Basically, Cameron duked it out with the other leaders, and managed to hold onto all the initial concessions granted by European Council President Donald Tusk. They were finally able to flesh out and agree on the specifics, however.
Anyhow, below are the major concessions granted to the UK, according to the 37-page bedtime story, uh, I meant “EU document” that you can download and read here (if you really want to):
- The UK can keep using the pound. However, other EU members who have committed to adopting the euro, but haven’t done so yet can’t use this ruling as a precedent to squirm away.
- Discriminating against natural or legal persons (e.g. corporations) from the UK and other non-eurozone Member States (ONEMS) on matters of trade is prohibited.
- The UK and ONEMS won’t be forced to participate in bailout programs, and they will be fully reimbursed if they do so.
- Regulation on financial institutions is largely up to the UK and ONEMS, but this is without prejudice to the future development of a “single rulebook” and the EU can still step in if there are threats to financial stability.
- The EU promised to do its best to cut down tape and reduce fees.
- The EU recognized that the UK “is not committed to further political integration.” The EU policy of encouraging “ever closer union among the people of Europe” (i.e. a European Superstate, Mega Europa, etc.) does not apply to the UK forever and ever.
- The UK and other Member States can challenge and block EU legislation, provided that “more than 55%” of national parliaments object to the legislation.
Social Benefits and Immigration
- The free movement of workers may be restricted on grounds of public policy, public security, public health, or public interest. “Encouraging recruitment, reducing unemployment, protecting vulnerable workers and averting the risk of seriously undermining the sustainability of social security systems” are examples of grounds based on public interest.
- A “safeguard mechanism” will be introduced wherein the UK can ask for authorization to restrict access to in-work benefits to newly-arrived workers for up to four years, but the restriction is graduated from having no benefits at first and then receiving more over time. This authorization has a seven-year time limit. Cameron wanted a complete block and a 13-year limit.
- The UK can refuse social benefits to “economically non active persons” (e.g. students, the long-term sick, slackers, retired persons, etc.) who move to the UK even though they “do not have sufficient resources to claim a right of residence.”
- The UK can restrict the movement of individuals who will likely threaten public policy or security, even if the threat is not imminent and the individuals have no criminal record.
- The UK can deny free movement to individuals from non-EU countries who marry an EU national as a means to bypass immigration laws.
- Migrants can still send money to their children living outside the UK, but the amount that can be sent will be indexed to the standard of living where the child lives. Cameron wanted to completely block sending child benefits abroad.
What are some economic arguments for a Brexit?
The UK’s membership fee amount to around £12 billion a year on average, which is pretty big as membership fees go, and does not include all the waste from red tape that British businesses have to go through. No EU membership means no fees and less waste. Simple as that. The UK would also be free to engage in bilateral trade with whoever it wants to.
The EU follows the principle of “free movement”. If the Uk leaves the EU, then the UK will finally regain control of its borders and can limit access or outright expel unwanted individuals, especially economic migrants who are a drain on the economy. Under current conditions and even under the renegotiated deal, the UK has to jump through a lot of hoops before it can do what it wants to do.
And according to Open Europe, the best case scenario is that “Britain could be better off by 1.6% of GDP in 2030. However, a far more realistic range is between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030.”
Okay, what about arguments against a Brexit?
True, the UK has to pay membership fees, but the UK gets access to the EU market in exchange. And given that around half of UK exports go to EU countries, a Brexit would mean that EU countries would be free to impose tariffs on British goods and services which would hurt the British economy as a whole, at least in the short to medium term.
According to Open Europe (again), the worse case scenario is that “UK GDP could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or reverts into protectionism.” Brussels-based CEEMET paints a grimmer picture, saying that UK GDP growth will get trimmed by 0.5% per year for the next 15 years, but the report from CEEMET only focuses on the industrial sector, so take their report with a grain of salt.
Finally, 3-4 million jobs supposedly depend on continuing membership in the EU. A Brexit would result in the loss of most of these jobs, which will severely weaken the economy. However, some say that these jobs have more to do with EU trade rather than EU membership. Regardless, a Brexit will likely have a negative impact on those jobs.
How will this affect the pound?
Based on Pip Diddy’s most recent Top Forex Market Movers of the Week, pound pairs seem to react negatively to disappointing Brexit-related news. Conversely, pound pairs have a very positive reaction to good Brexit-related news.
Such a reaction is to be expected, I suppose. After all, 55% of British Chambers of Commerce members were in favor of a “reformed Europe,” so businesses are generally against a Brexit, but it remains to be seen if the concessions won by Cameron will cause a shift.
Also, note that the news of a Brexit deal came late into the U.S. session, so Asian and even European forex traders may try to price that in come Monday. Furthermore, no recent polls on the odds of a Brexit after the deal was hammered out have been released so far, so make sure to watch out for those. Lastly, Pip Diddy also noted that the Japanese yen continued to gain strength despite the prevalence of risk appetite last week. He attributed this to uncertainty over how the Brexit deal will go. If that is indeed the case, then we may see some unwinding of the yen in the near term unless we see more negative Brexit news.
In the longer-term, investors will probably become wary of investing in the UK, which may cause demand for the pound to deteriorate until the day of the Brexit referendum or unless polls begin to consistently show that Britons are voting against a Brexit. Also, expect some demand for the safe-haven currencies in the run-up to the referendum.
As for the day itself, nobody knows for sure how the pound will react, especially if a Brexit does occur. The only real precedent we have for the upcoming Brexit referendum is the 1975 British Referendum regarding UK membership in the European Economic Community (EEC), wherein Britons voted overwhelmingly to stay in the EEC. And since the forex market then and now are rather different as only banks, governments, and 1,000 year old immortals like George Soros got to play, with today’s larger number of participants and technically advanced market systems, literally anything can happen. Stay safe Sterling traders!