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UK businesses and Article 50: What happens now?

By Imogen Stafford March 29th, 2017

UK businesses and Article 50: What happens now?

At 12.20 pm on 29th March Prime Minister Theresa May formally triggered Article 50 of the Lisbon Treaty. Now the clock is ticking.

The UK government and the European Union have until March 2019 to agree the terms of the withdrawal agreement. The current consensus is that a hard Brexit is the most likely outcome of this process.

What are the UK’s trade deal options?

Hard Brexit doesn’t necessarily mean hard Brexit though. While the UK may well be leaving the single market, a new trade arrangement between the UK and the EU may well materialise. The problem is that businesses really need to know for sure. Uncertainty prevents businesses from planning ahead and they may hesitate to invest or find it difficult to find investors until they get clarity.

If the UK government fails to reach a new trade deal with the EU within the two-year timeframe, which experts agree is a very short time for major trade negotiations like this, the UK would be forced to adopt World Trade Organisation rules, either the WTO rules that the EU has already negotiated or the UK’s own if they can be negotiated in time. Trading on WTO terms could price UK businesses, particularly in sectors such as food, out of the continental market altogether. Some 44% of UK exports currently go to the EU.

Businesses have already started to voice their concerns. Ryanair and easyJet pointed out today that WTO rules don’t cover aviation and services could be disrupted, even stopped, if the UK fails to reach an agreement with the UK by March 2019.

Currently the UK is part of the Open Skies deal, an agreement which allows EU and US airlines to fly from and to anywhere within the EU and US. Airlines plan their schedules about a year ahead, so they’d need to know what the deal is by this time next year. easyJet has also announced that it’s considering moving its headquarters to the continent.

When will businesses know what’s really going to happen?

Businesses may not have certainty until the very end of the process, which is March 2019. That deadline could even be extended. While this isn’t a long time to complete trade negotiations, it is a very long time for businesses to live with uncertainty.

In May’s letter to the EU to trigger Article 50, May proposed that the UK and the EU should work together to minimise disruption and give as much certainty as possible to businesses, whilst hinting at plans for a transitional agreement: ‘In order to avoid any cliff-edge as we move from our current relationship to our future partnership, people and businesses in both the UK and the EU would benefit from implementation periods to adjust in a smooth and orderly way to new arrangements. It would help both sides to minimise unnecessary disruption if we agree this principle early in the process.’

Now that the EU has received formal notification of the UK’s intention to leave the UK, the European parliament will draw up guidelines, setting out its red lines in the Brexit negotiations. These will then be presented to the European Commission.

The EU has scheduled a special summit for next month to discuss its approach to Brexit negotiations. The European Commission, which oversees the day-to-day running of the EU, and EU Brexit negotiator Michel Barnier will spearhead the negotiations from the EU side. The EU will have to juggle negotiations with the UK with its other priorities, namely Greece, the Italian banking crisis and Turkey, for example.

On the UK side, the Department for Exiting the European Union and Brexit secretary David Davis will be responsible for the progress of the negotiations. The UK won’t be able to participate in the EU’s discussions on the subject.

It is expected that volatility in the currency markets will remain high throughout the Brexit process. Sterling, even the euro, are likely to react to major updates and the tone of meeting minutes and speeches. Discuss your foreign currency exposure with a risk management specialist at Smart Currency Business to help ensure that your business’s margins are protected.