ACCESS A BROADER MARKET PERSPECTIVE

BREXIT: THE END OF

THE BEGINNING BY PETER MADIGAN LONG DIVISION

The defining moments that led up to the current deadlock over Brexit

JANUARY 1, 1973 The United Kingdom accedes to the European Economic Community, a free trade and customs union

JUNE 5, 1975 In a referendum on continued EEC membership, the UK votes 67.2% in favor of remaining part of the bloc

SEPTEMBER 16, 1992 Black Wednesday—GBP is forced to leave the ERM

NOVEMBER 1, 1993 The EEC becomes the European Union, evolving from an economic union into a political union

JANUARY 1, 1999 Launch of the euro, the EU’s official currency

MAY 1, 2004 Ten new Eastern European and Mediterranean nations accede to EU membership

OCTOBER 4, 2009 New Greek government elected, revealing scale of Greece’s public sector deficit. European sovereign debt crisis begins

JUNE 23, 2016 UK referendum on whether to withdraw from the EU. Nation votes 51.9% in favor of leaving the bloc

OCTOBER 17, 2019 UK Prime Minister Boris Johnson negotiates amended departure agreement with EU leaders

DECEMBER 12, 2019 UK general election. Johnson seeks Conservative majority to push his deal through UK Parliament

JANUARY 31, 2020 Current deadline for the UK to leave the EU

SOURCE: BNY MELLON COVER ILLUSTRATION: ROB DOBI

WHATEVER THE EVENTUAL FATE OF THE UK’S STORIED RELATIONSHIP WITH THE EUROPEAN UNION, THE SEEDS OF THE TORTURED BREXIT SAGA WERE SOWN MORE THAN THREE DECADES AGO. YET, FAR FROM HERALDING A NEW ERA FOR UK-EU RELATIONS, THE REFERENDUM HAS ONLY SERVED TO DEEPEN PREEXISTING DIVISIONS WHILE DESTABILIZING BRITISH POLITICS.

BY PETER MADIGAN

he final departure from into closer union with the European Cameron’s decision to hold a binding 10 Downing Street is the Economic Community (EEC), railing referendum on continued EU member- defining visual that accom- against the notion of a single European ship in June 2016, and his subsequent T panies the end of every currency and the eventual emergence failure to convince the electorate to British premiership. of a “European super-state.” In what back remaining in the union, prema- Whether it’s the last wave in front of would prove to be her last Prime Min- turely terminated a political career that the famous black door, an emotional ister’s Questions in October 1990, she was at its peak. resignation from the podium, or the famously proclaimed “No, No, No” to His successor, Theresa May, fared tear-stained face as the car pulls away ceding further powers to European even worse. Although she was suc- for the final time, it is the image the bodies. Thatcher’s staunch opposi- cessful in negotiating an exit deal with exemplifies the old adage that: “All tion to European integration was a EU leaders, the House of Commons political lives end in failure.” major factor in her downfall as party rejected that agreement three times. The issue that terminated the pre- members would force her from power Appearing to have lost the confidence mierships of all four of the most recent within the month. of a majority of the parliamentary Conservative prime ministers was the Thatcher’s successor, John Major, party, she resigned from office in July same: Europe, or more specifically, the was pro-Europe but in 1993 he found 2019. UK’s relationship with the European himself grappling with eurosceptics At the time of writing, the political Union (EU). within his cabinet undermining efforts fate of current Prime Minister Boris Divisions over European integration to ratify the Maastricht Treaty, which Johnson is balanced on the outcome have vexed UK politics for well over 30 established the EU and laid the foun- of the upcoming general election on years, but they have coursed through dation for the euro. December 12—the UK’s third in just four the veins of the Conservative Party in After Major was ousted in 1997, when years. particularly corrosive fashion. The epi- the Conservatives regained power Justifying his decision to hold the ref- sodic and—on occasion—career-ending under David Cameron in 2010 many of erendum, Cameron said in 2017: “The flare-ups those disputes have ignited the factional divisions over Europe that lack of a referendum was poisoning are the stuff of Westminster legend. had remained largely hidden during 13 British politics, and so I put that right.” Margaret Thatcher spent the 1980s years in the political wilderness came The fate of every Tory premiership in opposing all efforts to draw the UK bursting back to the fore. the past 30 years certainly suggests that UNSTABLE CABLE Economic and political shocks in the past 50 years have yielded periods of volatility in GBP/USD

HEATH WILSON CALLAGHANTHATCHER MAJOR BLAIR BROWN CAMERON MAY JOHNSON JAN 1971 MAR 1974 APR 1976 MAY 1979 NOV 1990 MAY 1997 JUN 2007 JUN 2010 JUN 2016 JUL 2019

MAY 1972 EUROPEAN CURRENCY SNAKE 3

1976 STERLING CRISIS & IMF BAILOUT OF UK 2.5 SEPTEMBER 1992 BLACK WEDNESDAY: GBP EXITS ERM JUNE 2016 EU REFERENDUM 2

1.5 GBP/USD JANUARY 1973 1 UK JOINS EEC SEPTEMBER 2008 GREAT RECESSION EARLY 1980S RECESSION 0.5

0

1/4/1971 1/4/1973 1/4/1975 1/4/1977 1/4/1979 1/4/1981 1/4/1983 1/4/1985 1/4/1987 1/4/1989 1/4/1991 1/4/1993 1/4/1995 1/4/1997 1/4/1999 1/4/2001 1/4/2003 1/4/2005 1/4/2007 1/4/2009 1/4/2011 1/4/2013 1/4/2015 1/4/2017 1/4/2019

SOURCE: BNY MELLON

the question of the UK’s role within the from Europe—from rebates on its the conclusion of the first part of the EU is indeed toxic—for Conservative contributions to the EU budget, to its overall departure process. prime ministers, at least. ability to maintain a UK border while From here, the UK will enter a tran- Less charitably, it can be argued that being a member of the border-free EU, sition period, during which time a the decision to hold a referendum took to its opt out from joining the euro. similarly labored negotiation on the a poison—which had been largely con- These exemptions reiterated time and future relationship between Britain and fined to the Conservative Party—and again that while the UK was an EU the EU will begin. transfused it into the mainstream of member, the nation clearly held sub- To borrow a phrase from another UK politics. stantial reservations about becoming Conservative former prime minister, At three and a half years removed further intertwined with the Continent. Winston Churchill: “This is not the from that vote, a compelling narrative The clues were there for all to end. It is not even the beginning of the can be made that the signs of an even- see. While FX markets have become end. But it is, perhaps, the end of the tual breach emerging between the UK increasingly granular in their daily beginning.” and EU were there almost from the analysis, investors who had pulled the very beginning of their association. lens back and heeded those signs could AN INAUSPICIOUS START The UK was forced to leave both of have positioned themselves to benefit The UK’s relationship with Europe the major European monetary har- from the events that have roiled GBP through the 1960s and 1970s was a monization initiatives in which it and UK fixed income and equity mar- fraught one. Britain had joined the participated in the 1970s and the 1990s, kets since mid-2016. EEC—the precursor to today’s EU—in on both occasions due to sterling’s Yet, as we approach the December January 1973 under the Conservative inability to remain within the currency 12 election, an essential fact seems to Edward Heath, but only after two pre- bands set by the mechanism. have gotten lost in the discussion: the vious attempts at entry in 1961 and 1967 Then there was the litany of special passage of legislation setting out how had failed. accommodations that Britain secured the UK withdraws from the EU is only Even after its admission, the “The lack of a referendum was poisoning British politics, and so I put that right.”

DAVID CAMERON, FORMER UK PRIME MINISTER

nation’s relationship with the EEC— having sterling shadow the German the UK’s continued membership of the then mainly a free trade and customs deutschmark. system. union—remained contentious. Heath’s Although an inflationary spiral Despite a robust defense of sterling successor, the Labour Party’s Harold brought that policy to a close in March by the Bank of England (which led to a Wilson, put the question of continued 1988, the issue of potential UK entry significant drain on the UK’s currency membership to the people in a 1975 ref- into the European Exchange Rate reserves) there was little that could ulti- erendum, with the British public voting Mechanism (ERM)—the monetary con- mately be done to keep the UK in the 67% in favor of remaining. vergence system on which a single ERM in the face of the market forces While that vote would essentially European currency would be built—was that had emerged. September 16, 1992— settle the matter electorally for the sowing discord within Thatcher’s Con- Black Wednesday—saw the UK forced to next 41 years, sterling’s relationship servative Party. withdraw sterling from the ERM, mor- with other European currencies proved The debate over whether or not to tally wounding the premiership of John more volatile. join the ERM provoked a particularly Major. Although his administration The first attempt at monetary coop- acrimonious split among the Tories, would limp on for another four years, eration among the European nations with Lawson (in favor of member- Europe had claimed a second prime was the European Currency Snake, ship) resigning over the issue in 1989. minister. established in 1972 as an attempt to The battle was ultimately won by the narrow the fluctuation of exchange pro-European camp, with the UK DEEPENING DIVISIONS rates between currencies. Even though joining the ERM in October 1990, just The political fallout for the Conser- it would not be admitted to the EEC weeks before Thatcher was forced from vatives proved toxic and long lasting. until the following year, the UK still office. With the party’s reputation for prudent elected to place sterling into the mech- The timing of the ERM entry could economic management tarnished, it anism. The Snake proved a failure, not have proved worse. The UK lost the 1997 election and spent much however, with the pound forced out housing boom of the late 1980s was of the next 13 years fruitlessly seeking within weeks of joining, after being beginning to collapse while in Europe, new policies to sway voters away from unable to adhere to the rates set by the post-reunification Germany was suf- the governing Labour Party. currency band. fering from inflationary pressures. By During this period the already fes- Despite that early lesson in the the summer of 1992, the widespread tering split between Tory europhiles pitfalls of European monetary coordi- belief had taken hold that sterling had and eurosceptics was further riven by nation, by early 1987 the UK Chancellor entered the ERM at far too high a rate. a trio of new forces. of the Exchequer Nigel Lawson With no way for the UK to cut interest The first was the enlargement of was pursuing an informal policy of rates, the stage was set for a battle over the EU in 2004, bringing 10 eastern European nations into the bloc and the existing UK-EU relationship that it hopes to win an outright Conservative raising concerns in that significant could seriously harm the UK economy. majority that will enable him to pass numbers of economic migrants from Pro-leave MPs were similarly enraged— his deal. these states would seek to relocate to but due to their belief that the deal left Opinion polls are delivering an the economies in the north and west of Britain too intertwined with the EU and uncertain picture of whether the Tories the continent. did not represent a clean enough break. will indeed achieve that majority. A The second was the eruption of the The compromise deal that Theresa YouGov poll undertaken on November eurozone debt crisis in 2009, which May was able to agree with EU leaders 12 concluded that the Conservatives tabloids depicted as a bailout of profli- ultimately placated neither the euro- can expect to receive 42% of the nation- gate Mediterranean EU nations by their sceptic nor the pro-Europe factions, wide vote, a result that would hand the frugal northern neighbors. leaving both sides further entrenched party a working majority. Across northern Europe, populist in their positions. A Survation poll on November 8, parties sought to capitalize on the The withdrawal agreement was however, gave the Tories just 35% of debt crisis and the issue of internal ultimately rejected by the House of the vote, an outcome that would imply European migration. Britain was no Commons in the largest legislative a hung parliament and the need for exception, with the UK Independence defeat in British parliamentary history. Johnson to once again seek out a coa- Party advocating for the wholesale May put the bill before the House twice lition partner to attain a workable withdrawal of the nation from the EU, more, only to see it again defeated on majority. and peeling off voters from the right both occasions. Shortly thereafter, she Given his current coalition ally, wing of the Conservative Party. stepped down, bringing the EU’s prime Northern Ireland’s Democratic Unionist With these broiling forces at work as ministerial toll to four. Party, has refused to support the the Tories returned to power in 2010, The amended deal secured in Johnson withdrawal agreement, serious they proved hugely influential in pro- October by her successor Boris Johnson questions remain as to whether there pelling David Cameron’s decision to is in substance the same agreement are any other potential partners the promise the electorate a binding refer- May obtained. Tories could form a government with. endum on the UK’s membership of the Like May’s deal, Johnson’s with- The November 11 announcement by EU if the Conservatives won the 2015 drawal agreement would see the UK the Brexit Party that it will not stand general election. consent to honor all of its outstanding candidates in the 317 seats won by the When the Tories enjoyed an unex- financial obligations to the EU (there is Conservatives in 2017 (to minimize the pectedly decisive victory in that year’s no official figure, but it is estimated in possibility of a second referendum) will poll, Cameron found himself bound to the region of GBP38 billion) while the likely alter the political calculus, pro- give the people the referendum he had residency rights of EU citizens in the viding a boost to the Tories in those promised. It was a pledge that would UK, and vice versa, would be preserved constituencies. ultimately lead to his resignation, yet post-Brexit. Nonetheless, since the Brexit Party another casualty of the Conservative The major difference between the still intends to put candidates forward Party’s split personality over Europe. May and Johnson agreements is in the in swing seats, this strategy may still removal of a controversial “backstop” scupper the Conservatives’ attempts BREAKING THE IMPASSE mechanism, which would have kept to move marginal constituencies into If, to use Cameron’s words, the lack the UK in the EU customs union should their column. of a referendum had indeed been poi- future negotiations fail to prevent a hard A failure by the Conservatives to win soning British politics, the June 23, 2016 border being erected between Northern a working majority will lay the ground- ballot did not serve up an antidote. In Ireland and the Republic of Ireland. work for three possible alternative fact, it had quite the opposite effect. Johnson’s deal replaces that pro- outcomes. As an immediate outcome, the ref- vision with a proposal to conduct The first: Johnson could agree to erendum placed some members of customs checks at Northern Irish make sweeping alterations to his with- parliament in the unenviable position ports instead of at a hard border, with drawal agreement in order to coax of having to respect the decision of the taxes paid on any goods destined for another party into coalition with his voters in their constituency even if that the Republic of Ireland. All the while, Tories. This could be a moonshot given outcome did not accord with their own Northern Ireland would remain in the that most of the smaller political par- opinions. UK customs union. ties lean in favor of remaining in the As withdrawal negotiations with This was the EU withdrawal agree- EU, and it ignores the likely challenges the EU progressed in 2018, pro-re- ment before Parliament when it was involved in getting EU leaders to accept main Members of Parliament bitterly dissolved on November 6 to begin the a withdrawal deal that is only revised to complained that the emerging deal general election campaign ahead of the win coalition approval. represented such a departure from vote on December 12, at which Johnson A second, equally outlandish DIMINISHING IMPACT

A decline in cable’s implied volatility with each Brexit setback suggests markets are becoming inured

JUNE 2016 JANUARY 2019 UK VOTES TO LEAVE EU PARLIAMENT REJECTS MAY WITHDRAWAL AGREEMENT 16 AUGUST 2019 OCTOBER 2016 JOHNSON MAY ANNOUNCES PLAN TO TRIGGER PROROGUES 14 ARTICLE 50 IN MARCH 2017 PARLIAMENT NOVEMBER 2017 MARCH 2017 EU ACCEPTS MAY 12 ARTICLE 50 WITHDRAWAL AGREEMENT TRIGGERED 10

8

6 JUNE 2017 UK ELECTION RESULTS IN APRIL 2019 4 HUNG PARLIAMENT BREXIT DEADLINE EXTENDED TO OCTOBER 31 3-Month Implied Vol in GBP/USD 2

1/1/2016 3/1/2016 5/1/2016 7/1/2016 9/1/2016 11/1/2016 1/1/2017 3/1/2017 5/1/2017 7/1/2017 9/1/2017 11/1/2017 1/1/2018 3/1/2018 5/1/2018 7/1/2018 9/1/2018 11/1/2018 1/1/2019 3/1/2019 5/1/2019 7/1/2019 9/1/2019 11/1/2019

outcome, would be the creation of a Then, when Johnson prorogued Par- general elections in the UK—perhaps grand coalition of several opposition liament in August—a decision widely beginning with the current one—may parties in order to cobble together the interpreted as a move that increased the no longer provide clearly defined necessary 320 seat majority to form a chances of a disorderly no-deal depar- winners and losers, but that future government. ture on October 31—vol jumped once governments will emerge as coalitions. Thirdly, if no party can find a way to again, but less severely than before. This not only suggests the possibility reach that threshold, Johnson would As the legislative wrangling grinds of greater instability within Parliament have little choice other than to once to a halt and the UK awaits an election but also that it will be harder to make again seek a Brexit extension from the that may break—or merely prolong— assumptions about the direction of EU authorities and hold another gen- the Brexit impasse, the pause provides the UK and GBP in the aftermath of an eral election in the hopes of a more time to reflect on the fact that the election. decisive outcome from the British deep fissures between europhiles and The passage of a withdrawal deal electorate. eurosceptics, especially within the Con- from the EU through the UK Parliament What can be said with a higher servative Party, could be more than a should prove a positive for sterling, degree of certainty is that FX markets short-term phenomenon. but it is unlikely that this will prove the seem to be growing increasingly non- Today, it becomes increasingly hard end of the current volatility for the cur- chalant about the possibility that Brexit to argue with Cameron’s oft-stated rency. Instead, the next year could see will indeed happen at some stage. The view that a vote on whether to remain the pound continue to endure a bumpy chart above clearly demonstrates how in or leave the EU was “inevitable” at ride as long-term political patterns con- implied volatility in cable reacted to some stage. tinue to play themselves out. each successive Brexit shock in a more As a result, it’s unlikely that even muted fashion than the previous one. after the signing of a withdrawal While GBP/USD implied vol rock- agreement these divisions will disap- Peter Madigan is Editor-at-Large eted after the shock result of the 2016 pear—particularly given that the fraught for BNY Mellon Markets. referendum, the reaction when May’s business of negotiating a new trading Questions or Comments? deal was rejected by an unprecedented relationship between the UK and EU Contact [email protected] margin in January 2019—a curveball has yet to commence. in BNY Mellon Markets Strategy & that threw the entire Brexit process Financial markets will also have Insights, or reach out to your usual into chaos—was markedly less violent. to contend with the possibility that relationship manager. BNYMELLON.COM

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