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Brexit: economic catastrophe and British pound below 4 PLN

10 Dec 2018 16:24|Marcin Lipka

"The agreement negotiated on the conditions of leaving the European Union for months will not be voted on in the British Parliament. Prime Minister May will probably want to renegotiate the terms in Brussels to increase the chances of its adoption by the House of Commons. If this process fails, the risk of a fatal scenario for the pound will increase significantly," writes Marcin Lipka, Conotoxia Senior Analyst.

On Monday afternoon, the pound fell to its lowest levels in one and a half years against the dollar. This is a reaction to reports that the Brexit agreement being prepared by government negotiators is unlikely to be voted on in parliament on Tuesday evening, and the EU does not agree to change it.

The risk of the UK leaving the EU chaotically on 29 March 2019 is increasing. The Bank of England's scenario of a disordered EU exit has serious consequences. It assumes, among other things, a sudden break in relations with the largest trading partner, a considerable increase in customs and non-tariff restrictions for British companies, or a further dramatic fall in the pound's value.

Political catastrophe is approaching

Although support for Brexit among the British people is steadily declining and progressively more often there is talk of another referendum, which may even keep the United Kingdom within the EU, the current political situation on the Isles is generating risks for an entirely different course of events.

In order to preserve power, Prime Minister May will want to renegotiate the current agreement with the Union. The chances of changes that will satisfy the pro-European opposition and the Eurosceptic part of the ruling Tory party are small. This is not only because Brussels does not want to change the main elements of the agreement, but also because technical solutions to maintain boundless traffic on the Irish island, without close relations between Belfast and the Union, can be extremely difficult to implement.

The growing conflict within the governing structures of the Tories and the aversion to early elections or a new referendum may result in the risk of a not so much hard but more of a chaotic and disordered Brexit.

UK at risk of economic collapse

At the end of November, at the request of Parliament, the Bank of England prepared economic scenarios for Brexit. Generally speaking, the closer the UK's relations with the EU, the softer the risks for economic growth should be. With an agreement whose terms and conditions are similar to current ties with the EU, the pound should even appreciate.

The scenario of a chaotic Brexit looks completely different. For the United Kingdom, it would mean an economic tsunami on a larger scale than the 2008/2009 financial crisis.

In the worst-case scenario, GDP would drop by as much as 8% at its culmination moment, inflation would rise to over 6%, real estate prices would fall by 30% and commercial properties would lose almost half their value. The value of the pound would fall by up to 25%, which means that the British currency would become cheaper than the US currency.

Assuming even that chaos in Great Britain would weaken the Polish currency, the pound would probably be worth less than 4 PLN, if trade relations with the European Union collapsed drastically.

Risky game

Although the chances of the worst scenario coming true are not high, even the likelihood of a worst-case scenario could seriously weaken the pound. It is also possible that the ruling Tories will choose a very risky solution to the "political blackmail" of parliamentarians.

Prolonged talks with Brussels and among Conservatives will create increasing economic tensions, and the pound is likely to depreciate in the coming weeks. This will, after all, rest with the House of Commons, which must finally approve the agreement. It may be up against the wall and, as a result, accept the solution proposed by May. Then both the Prime Minister will maintain her position, and the plan will be adopted. Until then, however, the pound may clearly depreciate because of the fear that the political game may actually turn into an economic disaster.

10 Dec 2018 16:24|Marcin Lipka

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