Should businesses be anxious about Brexit?

Undeniably, the risk for businesses regarding Brexit has increased in December, as the deadline of March 2019 UK’s departure from the EU is looming. As a response to the recent political developments, the UK pound has weakened, and sentiment has equally suffered, translating into increased business anxiety.

Last week, PM Theresa May postponed the UK parliamentary vote on her Brexit proposal, in fear she would fail to secure a majority, which would directly undermine her leadership mandate. As a response to her Brexit strategy, Conservative MPs plotted a no-confidence vote against her to exert pressure for a change of course on Brexit negotiations. As broadly expected, PM May survived the vote and can’t be re-challenged until December 2019 but committed to resign as Conservative party leader before the 2022 next general elections.

Nevertheless, PM May’s deal is likely to continue to face great opposition from the UK parliament, and the Northern Ireland backstop arrangement to continue to divide MPs. The backstop is a solution of last resort, which guarantees an open border between Northern Ireland and the Republic of Ireland in the event the UK and the EU fail to agree on the future trade deal.

  • On the one hand, Brexiteer MPs are rejecting the backstop because PM May’s deal ties permanently the UK to EU customs rules, unless the EU and the UK conclude negotiations and approve a future deal under alternative terms. Moreover, given that PM May’s deal sets the foundation for the future deal by including an EU customs union, Brexiteer MPs are nervous that the future deal would look much closer to the Norway EEA model, which does not allow for control on migration. Essentially, Brexiteers have long fought for UK’s departure from the EU to ‘take back control’ and certainly did not envision Brexit in this way.
  • On the other hand, Remainer MPs (including PM May’s minority government coalition partner, the Democratic Unionist Party) would not risk a regulatory border between Northern Ireland and England under the current Northern Ireland backstop arrangement, supposing the EU and the UK fail to agree on a future trade deal.

Therefore, PM May will find it burdensome to pass through her current deal without any modification whatsoever. Both Brexiteer and Remainer MPs are set to block her deal unless PM May and the EU make certain concessions on the backstop solution. New general elections or/and a New Brexit Referendum cannot help either because they will result in additional time squandering while the clock is ticking. Preparing and campaigning for a general election or a second Brexit referendum requires time and could jeopardize a No Deal Brexit, having detrimental economic and business effects. EU statements confirm that a second Brexit referendum and/or extension of Article 50 are legally feasible, but PM May acknowledges that she will face great Tory opposition if she decides to advocate for any of those options. Besides the timing aspect, both a second Brexit referendum and the extension of Article 50 would delegitimize the June 2016 public mandate for Brexit, driving more anger among the Eurosceptic wing of the Conservative party.

Political risk will remain high until the parliament succeeds in approving the deal by March 2019, challenging business performance. Thus, FSG advises MNCs to finalize and activate their contingency plans, hedge against potential UK pound depreciation, and manage their inventory and supply chains in expectation of market volatility.

For extended insights on the short-term and long-term FSG Brexit view, as well as scenarios with assigned likelihoods, timelines, tailor-made actions to take for your business, as well as industry outlooks, please reach out to your account manager to request an analyst consultation. You can also review our research on Brexit: Scenarios & Impact on MNCs and How to Build your Brexit plan.

Not a client? Review our Brexit: Scenarios & Impact on MNCs scenario report here, our Brexit playbook here, and don’t miss our Harvard Business Review post, How Multinationals Should Be Planning for Brexit: A six-step process.

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