Big bath, with a danger of drowning
LONDON (Reuters) – Britain’s prime minister just took the business leader approach to complex turnarounds.
Smart incoming chief executives sometimes start by taking big accounting provisions against their predecessors’ projects. That creates a clean slate, makes future earnings look better, and lends the new broom an air of decisiveness. Theresa May’s vision of Brexit, sketched out on January 17, could have a similar effect.
One way of negotiating Britain’s relationship with the other 27 states of Europe would have been to start with the status quo and whittle away based on who is prepared to sacrifice what. May has proposed the opposite: cut all ties, then build something anew.
This reflects reality. Britain cannot stay in the EU’s single market and get what it wants – freedom from oversight of the European Court of Justice, room to strike independent trade deals with non-European countries, and the ability to limit EU migration.
May’s stance should help repair her credentials as a firm leader – which were coming into question amid widespread concern that her government didn’t have a plan.
The UK public and EU negotiators know now that the government won’t settle for being “half-in and half-out.” It also sets expectations – having established a worst-case scenario, there is potential for upside if the EU allows the comprehensive free trade deal she seeks.
As with any big bath, there is a danger of drowning. If the remaining states reject any kind of deal, British output could be substantially lowered by 2030 compared to its trend growth – perhaps by up to 7.5%. Car exporters and the UK’s financial sector will be heartened by May’s aspiration to continue with the single market access they currently enjoy. But it is clear – possibly more so now – that this may not materialize.
Right now, investors seem split. The immediate response of sterling was to rise almost 3% against the dollar, but currency options are still showing a preference to sell the pound.
May has at least set out a base case investors can work with. Given the limited control she has over what happens next, that’s the most helpful thing she could have done.