Over the weekend we reported that a key tension had emerged in Europe where on one hand the EU was pressing the UK for a quick and clinical divorce, while Merkel claimed there is no need to rush. It appears that Merkel has, as expectedly, won this modest disagreement with her Brussels subordinates. Moments ago, Merkel spoke, and in continuing her party line said that she understands Britain may need a “certain amount of time” to begin Brexit negotiations. This is what else she said:
- MERKEL: MUST DO EVERYTHING TO STRENGTHEN UNITY IN EUROPE
- GERMANY MERKEL: EXPECT A50 NOTIFICATION ‘AFTER CERTAIN PERIOD’
- MERKEL: MUST NOT HAVE PROLONGED WAITING PERIOD
- MERKEL: BUT HAVE UNDERSTANDING FOR PERIOD OF ANALYSIS
Recall that this is in line with both consensus, which even before the Brexit vote expected Article 50 to be triggered in Q3/Q4 at the earliest as the following Citi chart from June 21 shows…
… and is also in line with George Osborne’s statement earlier today in which he said that he agreed with the decision to delay triggering Article 50 of the EU Treaties.
Ultimately, the decision is in David Cameron’s hands who is expected to continue doing nothing in line with his statement that his successor should invoke the A-50 Trigger, something which however will be impossible until Boris Johnson (most likely) becomes prime minister.
So the structural delay will continue indefinitely.
What are the implications? The unspoken, if implied, message is that both the UK “Remain” camp and the EU are hopeful that as UK financial markets continue to turmoil and cable plunges, that the “Leave” voters will get cold feet and ask for a second referendum demanding they remain. This however may very well not happen as Cameron himself noted:
- 2ND REFERENDUM `NOT REMOTELY ON THE CARDS’: CAMERON SPOKESWOMAN
As such the most likely outcome is a continuation of the confusion, not to mention pain for UK stocks and cable. The risk that both the EU – and the rest of the world are accepting – with this strategy is that the UK chaos will “contagion” to the rest of the world, forcing central banks to act even though they have no desire to do so at this moment as that would obviate a potential second UK referendum.
For the clearest indication of just how much stress there is in the system, and how much contagion has spilled over, keep an eye on European banks which as of this morning are crashing in sympathy with the US. When the pain here becomes unbearable, the ECB have no choice but to act.
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