DEUTSCHE BANK: Britain's looming political crisis could force companies out of the UK

GettyA pro-Remain campaigner.

  • Deutsche Bank: Continuing uncertainty on Brexit and a growing political crisis could lead companies to trigger their worst case Brexit plans.
  • Worst case Brexit plans for major companies are generally believed to involve large-scale movements of staff out of the country.
  • If companies do begin to move, it could hit UK growth.

LONDON – The rising risk of a political crisis in the UK could lead major companies to trigger their worst-case scenario Brexit plans, according to a note from Deutsche Bank.

Writing on Wednesday, DB’s macro strategist Oliver Harvey told clients that “the newsflow in recent days” suggests “rising risks of a political crisis before agreement is reached on transition in March.”

Prime Minister Theresa May is facing increasing pressure from both sides of her party. Pro-Brexit MPs are accusing her of failing to pursue a hard enough Brexit and pro-remain MPs argue the exact opposite.

“Prime Minister May is struggling to shape a political vision without committing to a decision on the future relationship with the EU27,” Harvey writes, and she is unwilling to commit given the pressure from both sides of the party.

The EU’s “uncompromising” stance on the form of any transition deal makes it less likely that an agreement will be reached by the March EU Council Summit, Harvey believes, pushing back the timeline of Brexit and therefore making it more likely that major firms will trigger those contingencies.

Many Brexit contingency plans are believed to involve large-scale movements of staff out of the country.

As if that wasn’t bad enough, Harvey points to discussions of the post-transition relationship between the UK and EU is another potential sticking point.

Here’s Harvey (emphasis ours):

“On the future relationship, the UK’s position continues to remain ambiguous. Prime Minister May has repeated her desire for a bespoke free trade agreement, while the EU has remained consistent that enhanced market access will require the UK to meet Single Market obligations, such as President Macron’s comments that a deal for financial services would require EU budget contributions.

“The EU is due to release draft guidelines on the future relationship at the March 22-23rd EU Council. It is of some concern that the UK has yet to formulate a clear policy at this stage.”

Away from direct Brexit talks, but very much linked to them, Harvey believes that uncertainty over the future of Prime Minister May could have an impact on firms’ Brexit plans.

There are now reports that Graham Brady, the chair of the Conservative Party’s influential 1922 Committee, has received numerous letters from backbenchers calling for May’s resignation.

“On the domestic front, Prime Minister May is under increasing pressure from Conservative MPs over both the lack of clarity on the future relationship and flagging poll ratings,” Harvey writes.

“If [a leadership challenge] occurred before March,” Harvey writes, “it could carry significant negative economic costs, with surveys suggesting firms would trigger contingency plans by then.”

Banks and financial institutions in particular need to make final decisions about moving staff by the end of the first quarter at the latest. Banks need at least a year, if not longer, to set up fully functioning branches and subsidiaries in Europe to maintain uninterrupted EU activities.

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