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Home / Analytics / Forex analysis & forecasts / Forex Fundamental analysis / London is stalling for time. Fundamental analysis for 27.06.2016
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London is stalling for time. Fundamental analysis for 27.06.2016

A week ago, everyone was wondering if the United Kingdom was going to exit the European Union, and now, after the referendum results were published, uncertainty relating to the Europe’s future is growing like a rolling snowball. Last Friday, the European leaders urgently requested London to start “divorce” procedure, and at some particular moment of time these requests looked like not an appropriate pressure, because the Westminster is “on its direct way” to the strongest political turmoil.

In order to “file for divorce” with the EU, the British Prime Minister has to notify the European Council of the intention to activate the withdrawal clause, Article 50 of the Treaty of Lisbon. Apparently, everyone must be interested in overcoming the current uncertainty as quickly as possible, but in fact, few people in Britain were prepared for such voting results. The sociology is a showcase here – only 19% on the people, who came to polling stations, really believed that the country might really leave the Union.

So, why is it an advantage for London to stall with the application of Article 50? The fact is that after the article is applied, the countdown of two-year period of negotiations with the EU will start. Due to the fact that London hasn’t established any position yet, the passing time will work in the EU’s favor. And it is Brussels, that will have a significant advantage – because is the parties do not arrive at the consensus over two years, the United Kingdom will automatically leave the EU. It will be a disaster for the economy, because the access to the EU’s internal market will be blocked at once.

We should note that the period of negotiations may be extended, but only with consent of all 27 members of the Union. They are highly unlikely to come to do this, unless London agrees to substance concessions relating the migration issue. Moreover, it looks like Paris and Berlin, despite the damage to their own economies, have intentions to offer the United Kingdom the worst of the possible conditions. Why? In order not to let other countries to hold their own referendums.

In fact, one can already see the agitation in the Europe:

- Italy. Even before the British referendum, “Five Star Movement” (It. “Movimento 5 Stelle”), the growing in strength movement, was very active calling to leave the EU and go back to the country’s national currency.

- France. “The National Front” (Fr. Le Front National) headed by Marine Le Pen started calling her fellow citizens for the similar referendum last Friday. Taking into account that the French are very annoyed by the dominance of Germany in the EU, Le Pen might as well speculate on this. There is no even need to invent anything new as the party can be armed with the winning slogan of the British euro skeptics – “Take back control!”

- The Netherlands. The latest surveys and polls are already showing a split within the Dutch society when it comes to the EU membership.

- Sweden. According to surveys and polls, 36% of the population is in favor of exiting the Union whereas in contrast – only 32% are in favor of staying. Wise interaction of populists with undecided Swedes may well lead to the euro skeptics’ victory in the referendum.

- Denmark. It’s also breeding grounds for anti-European forces, because no one was very enthusiastic about accession to the European Union in 1973, and after the debt crisis euro skeptics’ influence is slowly increasing.

Considering all this, Brussels has no other options but to show that exiting the EU won’t do any good. Up before the referendum, the Outers were convincing the Brits that everything would be okay and the EU would be able to block the access to the EU’s internal market. However, right now it’s getting more obvious that the Brits refuse free movement of persons, goods, services and capital, they will not be granted the access to the EU’s market. In this case, the negotiations may turn to the Canadian scenario, but they will take years, and after the two-year period and automatic exit, London will have to trade with the EU countries under the rules of the World Trade Organization, on standard terms.

In fact, all those speeches made by populists prior to the referendum stumbled upon the harsh reality, in which Brussels is ready to agree to a divorce with the United Kingdom, but on the conditions that won’t encourage other countries to follow London’s example. The irony is that the Outers were absolutely sure that they would keep the access to the EU’s internal market, but it wouldn’t be necessary to pay installments. It is worth noting that Norway, not being a member of the EU, pays installments just like the others, solely for the access to the single market.

What might happen later is absolutely unpredictable. The European Union summit, which was planned earlier, will take place on Tuesday, and it will feature David Cameron, the current Prime Minister of the United Kingdom.  However, everyone wants him to tell one thing only – when the name of his successor will be announced, because after the referendum results Cameron’s name is as good as gone. Consequently, this week may also be very volatile for both the Pound and the Euro, and this volatility may continue for quite a long time.
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