The markets are clearly relaxed about Brexit

Sterling’s recovery shows that the City thinks it will be business as usual even after we have left the EU

There is an old joke about stock markets which has the investor asking his broker which way he thinks the market is heading. “It may go up, it may go down, but not necessarily in that order”, comes the answer, neatly encompassing all possibilities.

What is true of stock markets is equally the case with currencies. Attempting to predict their short-term movements, or even explain them, is a mug’s game; they move up and down for all kinds of reasons, and often for no discernible reason at all. There is, however, one undeniable constant; markets go up when there are more buyers than sellers, and conversely down when sellers outnumber the buyers.

This is perhaps the best way of looking at the remarkable revival in the pound sterling, which over the past year has risen by more than 10 per cent against the US dollar, and is now just a few cents off its immediate pre-referendum rate of exchange. Dollar weakness may be as much the story here as pound strength, but even against the euro, the pound is clawing its way back. Why are the buyers outnumbering the sellers?

The immediate post-referendum sell-off in sterling was a logical enough response, even if it remains incomprehensible to true believers in Brexit; for them, freedom from the EU is an unarguable economic plus, so the pound should have gone up, not down.

Unfortunately, it was never as simple as that. Britain runs a substantial trade deficit with Europe and many other parts of the world. This has to be financed some way or other. If access to the single market is damaged by Brexit, the current account deficit will widen further, at least in the short term, making it tougher to finance. Devaluation makes UK assets relatively cheaper, and therefore more attractive to the inflows of foreign capital that finance the shortfall in trade. The currency therefore falls until the books once again balance.

The fact that sterling is now recovering means that rightly or wrongly, markets have become more relaxed about the potential damage to trade from Brexit. Despite dire predictions to the contrary, the wider economic impact of the Brexit vote so far has been precisely zero. Agreement to a transition period gives further reason to believe not much will change over the next three years.

Markets also bank on growing Brexit fatigue – that everyone has become so fed up with the whole thing that they won’t much notice or care if a form of Brexit that changes very little is eventually pushed through. They may be right. The Government was defeated in the House of Lords this week on whether Britain should remain in the customs union, and may well face a similar vote in the Commons next month. The constraints of minority government have forced Theresa May to abandon just about every other manifesto commitment; the pledge to leave the customs union may be the next to go.

Looked at from the clinical perspective of markets, the once perceived economic dangers around Brexit therefore seem fast to be receding. For the life of me, I struggle to see the point of leaving the EU if at the same time we intend to remain in the customs union. This would make Britain a mere rule taker, the vassal state of Brexiteer nightmare. Sovereignty shared becomes sovereignty transferred. We may buy continued market access by remaining in the customs union, and yes, it would potentially solve the Irish border issue, but it scarcely seems a price worth paying.

As it is, the customs union covers only trade in goods, which accounts for “just” a fifth of the UK economy. Free trade in services, the economic activity Britain excels at, is still little more than an aspiration for the EU. In attempting to maintain market access in goods, Britain risks constraining its trade with the rest of the world in services. These freedoms are especially important in an age of rapid technological change. In such an environment, you really don’t want to have others determining your terms of trade. Britain must be free to make concessions to markets outside Europe on goods so as to win access for services. At the same time, those very same service industries would, once outside the EU, lose their current level of privileged access to European markets. In both respects, this would be an extraordinarily unsatisfactory outcome.

Proponents of remaining in the customs union insist this is not about revisiting the referendum, but only what type of Brexit we should be having. Even I, as a one-time Remainer, can see this for what it is – pure sophistry. Having won the battle on the customs union, they would very quickly move on to arguing that we might as well be completely in the EU as we would be effectively in but with no say, and they would be right.

Either way, markets are becoming progressively more sanguine about the Brexit effect. Not much will change, if anything at all, they calculate. It’s ever harder to disagree.