Is Brexit the next global shock?

Via VOX:

The race to replace outgoing British Prime Minister Theresa May has officially begun.

Ten candidates are now vying to be the next leader of the Conservative Party and the future prime minister of the United Kingdom. Whoever wins the crowded contest will be faced with the daunting task of trying to finalize the UK’s break up with the European Union, which is currently scheduled for October 31.

Brexit is dominating the race — although it certainly won’t be the only issue the next leader will deal with, each candidate is trying to promote their Brexit bona fides and make the case they have the best strategy to steer the UK through its divorce with the EU.

This leadership contest is expected to take weeks, with a new prime minister taking over toward the middle-to-end of July. Here’s what to expect, and who are the candidates competing to be the UK’s next leader.

A brief guide to the Conservative leadership contest

Prime Minister Theresa May formally stepped aside as leader of the Conservative Party on June 7, allowing the contest to replace her to begin Monday. May will remain as prime minister until the next leader is selected, likely sometime in July.

The next prime minister will also come from the Conservatives (or Tories, as they’re called). That’s because the actual makeup of Parliament isn’t changing, and the Conservatives will retain control of government. The next general election isn’t scheduled until 2022, so presumably, whoever takes over for May will stay in power at least until then. (Earlier elections can’t be ruled out, of course, but they’re not an option right now.)

This also means the Conservatives — specifically, Conservative members of Parliament (MPs) and party members — will select the next prime minister.

Right now, there are 10 contenders, each of whom received the support of at least eight MPs on Monday, the baseline qualification needed to advance to the first round of voting, which begins Thursday.

Conservative MPs will vote in secret ballots. In the first round of voting, any candidate who doesn’t get support from more than 16 MPs will be eliminated; in the second round, expected to take place next Tuesday, candidates will have to secure votes from more than 32 MPs. (If all candidates somehow get above that threshold, the person coming in last will be eliminated.)

At that point, MPs will continue to vote in as many rounds as necessary until two finalists are left, with the lowest vote-getters being kicked out after each round. (Experts say it usually moves a bit faster once people start realizing they don’t have a shot and drop out.)

After the two finalists are selected, the Conservative Party’s 160,000 or so official memberswill vote. Whoever wins will become the next Conservative leader and prime minister.

Who are the candidates?

The 10 contenders range from moderate Conservatives to more hard-right Brexit champions, or “Brexiteers.”

Brexit is by far the biggest challenge facing the next prime minister. It’s currently scheduled for October 31, 2019 — just a few short months after the next leader takes over.

Conservatives are also under pressure from the rising Brexit Party, which dominated the European parliamentary elections on the single issue of the UK leaving the EU. The Conservatives have taken the Brexit Party’s success as a warning that if they can’t deliver Brexit under a new leader, it may doom the party altogether.

But the next prime minister, whatever his position, will inherit the same Brexit deadlock that ultimately ended May’s premiership.

May’s Brexit deal failed in Parliament three times. But right now, it’s the only deal on offer, and the EU has insisted it’s not renegotiating the agreementno matter who the next prime minister is.

That hasn’t stopped most candidates from claiming they’d be successful at persuading the EU to come back to the negotiating table, despite the EU saying the opposite.

And a few Brexiteer Tory candidates — most notably the current frontrunner, Boris Johnson— have also said they’d be willing to pull the UK out of the EU without a deal on October 31, if necessary.

Whether any candidate will actually follow through on a no-deal Brexit and risk the potentially catastrophic economic consequences is another question entirely. But here’s a brief look at the 10 candidates fighting to be prime minister, with some details on where they stand on Brexit:

  • Michael Gove: The current environmental secretary, Gove is said to be a “true believer” in Brexit. He’s said he would try to renegotiate the Brexit deal, and would seek a short extension if necessary to do so. He failed in his bid to become party leader in 2016, and right now, his campaign is bogged down by questions about his past cocaine use.
  • Matt Hancock: The current health secretary, who’s seen as a more moderate, if long-shot, candidate. He’s a former Remainer (meaning he opposed the UK leaving the EU) and has argued that the Conservative Party can renegotiate the Brexit deal and deliver itwithout putting a Brexiteer in charge.
  • Mark Harper: The former chief whip of the party, Harper is another underdog. He’s said he’d ask for another “short, focused” extension of the Brexit deadline and to get the EU to reopen negotiations, though again, that pitch seems unlikely to persuade the EU.
  • Jeremy Hunt: The current foreign minister, who’s seen as one of the top contenders after getting the backing of some prominent Conservative MPs from both the moderate and Brexiteer wings of the party. Hunt is a former Remainer who’s arguing that he can make a better deal with the EU. He said he would also support a no-deal Brexit, but that he would do so with a “heavy heart.”
  • Sajid Javid: The current home secretary, who’s said he will try to get a new Brexit deal and has proposed Britain pay for the costs of new border system between Northern Ireland (which is part of the UK) and the Republic of Ireland (which will remain part of the EU). Javid, who’s the son of Pakistani immigrants, and has argued that Conservatives need to do better outreach to minority voters.
  • Boris Johnson: The former foreign secretary, former mayor of London, and prominent Leave campaigner who’s the current frontrunner in the race. Johnson has said that the Conservative Party must deliver Brexit or face “extinction.” He’s said he would be willing to take the UK out of the EU without a deal on October 31 and argued that such a threat might persuade the EU to renegotiate a better deal. He’s also pretty popular with Conservative voters and has high name recognition. But, he’s a polarizing figure and has a lot of baggage, which could still derail his candidacy.
  • Andrea Leadsom: The former House of Commons leader (basically the liaison from May’s government to Parliament), Leadson has said she’d try to rework parts of the Brexit deal to get the UK out of the EU by the end of October. She was a finalist in 2016 to become Conservative leader, but lost out to May — though she’s facing an even tougher battle this time.
  • Esther McVey: The former work and pensions secretary, she’s a hardline Brexiteer who’s tried to bolster her credentials with working-class voters. She’s doesn’t have much shot of advancing, but she’s said she’d back a no-deal Brexit to take the UK out of the EU in October.
  • Dominic Raab: The former Brexit secretary — in other words, the guy who used to be in charge of negotiating Brexit with the EU — quit over objections to May’s deal. Raab is the most extreme of the Brexiteers — and he’s not particularly well liked among EU leaders. Raab says he’d be a tough negotiator with the EU to get a better deal, but would take the UK out of the bloc by October 31 regardless. He’s also stirred up controversy by suggesting he’d be willing to “prorogue” — basically, suspend — Parliament to get Brexit through over MPs opposition.
  • Rory Stewart: The current international development secretary, Stewart has tried to leverage social media to build support — specifically with (sometimes cringe-worthy) videos. Stewart is the most moderate candidate in the race: He has said he doesn’t want to pursue a no-deal Brexit, and is one of the few to admit that the EU isn’t going to renegotiate the Brexit deal. He’s suggested breaking the Brexit deadlock with a “citizen’s assembly,” where voters would weigh in on various Brexit options to guide Parliament toward a consensus. His moderate stances probably mean he won’t get too far.

Here is the latest poll of pollies wrap:

Candidate Political roles Announced Proposer and
Public support from MPs
(prior to first ballot)
Michael Gove
Michael Gove
MP for Surrey Heath (since 2005)
Environment Secretary (since 2017)
Justice Secretary (2015–2016)
Commons Chief Whip (2014–2015)
Education Secretary (2010–2014)
26 May 2019[94] George Eustice and
Nicky Morgan
35 / 313
Matt Hancock
Matt Hancock
MP for West Suffolk (since 2010)
Health Secretary (since 2018)
Culture Secretary (2018)
25 May 2019[121] Damian Green and
Tracey Crouch
16 / 313
Mark Harper
Mark Harper
MP for Forest of Dean (since 2005)
Commons Chief Whip (2015–2016)
30 May 2019[122] Jackie Doyle-Price and
Steve Double
7 / 313
Jeremy Hunt
Jeremy Hunt
MP for South West Surrey (since 2005)
Foreign Secretary (since 2018)
Health Secretary (2012–2018)
Culture Secretary (2010–2012)
24 May 2019[123] Liam Fox and
Patrick McLoughlin
35 / 313
Sajid Javid
Sajid Javid
MP for Bromsgrove (since 2010)
Home Secretary (since 2018)
Communities Secretary (2016–2018)
Business Secretary (2015–2016)
Culture Secretary (2014–2015)
27 May 2019[124] Robert Halfon and
Victoria Atkins
19 / 313
Boris Johnson
Boris Johnson
MP for Uxbridge and South Ruislip
(since 2015)
Foreign Secretary (2016–2018)
Mayor of London (2008–2016)
MP for Henley (2001–2008)
16 May 2019[125] Liz Truss and
Ben Wallace
74 / 313
Andrea Leadsom
Andrea Leadsom
MP for South Northamptonshire
(since 2010)
Leader of the House of Commons (2017–2019)
Environment Secretary (2016–2017)
25 May 2019[93] Chris Heaton-Harris and
Heather Wheeler
5 / 313
Esther McVey
Esther McVey
MP for Tatton (since 2017)
Work and Pensions Secretary (2018)
MP for Wirral West (2010–2015)
9 May 2019[126] Gary Streeter and
Ben Bradley
6 / 313
Dominic Raab
Dominic Raab
MP for Esher and Walton (since 2010)
Brexit Secretary (2018)
25 May 2019[127] David Davis and
Maria Miller
23 / 313
Rory Stewart
Rory Stewart
MP for Penrith and the Border (since 2010)
International Development Secretary
(since 2019)
2 May 2019[128] David Gauke and
Victoria Prentis
7 / 313

It sure looks like Boris Johnson’s to lose. So what happens if a hard Brexit transpires? Again VOX:

…the UK will cease to be a member of the EU literally overnight. All the trade and regulatory arrangements that the UK once shared as part of the EU will evaporate.

And experts warn that would create chaos that could be catastrophic for the UK economy, leading to potential food and medicine shortages, major travel disruptionsmassive gridlock at ports of entry, and a plunge in the value of the British currency.

This happens because suddenly the UK and the EU may be following different regulatory schemes. For example, goods and people that would normally cross the UK’s border unimpeded may now be subject to customs checks. Delays and backlogs could mean foods rot and medicines expire.

There are also issues with differing regulations. For example, the EU requires a certain size wooden pallet to import and export goods. If you’re an EU member state in the customs union, the EU waives this requirement, which is essentially a non-tariff trade barrier. Now that the UK is out, it has to use this EU-approved pallet.

Other issues potentially abound. The European Health Insurance Card provides coverage to EU citizens traveling outside their home state; that coverage will disappear in a no-deal Brexit. British people traveling to EU countries may suddenly see a spike in cellphone roaming charges.

Just the threat of a no-deal Brexit has taken a toll on the British economy, as the uncertainty has forced companies to stockpile goods and inventory or relocate some operations to EU countries.

 The UK has allocated about 4.2 billion pounds (about $5.3 billion) for Brexit planning, including setting aside 2 billion pounds ($2.6 billion) for no-deal planning. The contingency plans are complicated — and some doubt they will be sufficient to tackle the challenges in case of a no-deal. Approximately 3,500 British troops are currently on standby.

Critics of the no-deal doomsayers or advocates of a no-deal have dismissed the risks, derisively labeling it “Project Fear,” a scare tactic by those who oppose Brexit altogether. And they may have a point: A no-deal might not be as bad as it sounds — or it could be much worse. It’s all unpredictable, because there is no precedent for this.

The UK and the EU have contingency plans, and it’s possible these will mitigate some of the worst outcomes. But the short-term solutions aren’t totally sustainable. For example, the UK will reportedly eliminate some tariffs to lessen the impact on businesses and will waive border checks between Northern Ireland and Ireland in favor of self-reporting. (Now is the time to be a smuggler.)

Either way, there are a lot of apocalyptic-sounding no-deal stories out there. Britain might not be able to get bananasthe UK government bought 5,000 fridges to hold medicines, and the National Health Service is stockpiling body bags.

For all these reasons, this is an outcome that both the UK and the EU want to avoid. (Although the EU is more prepared — and slightly more insulated — from the effects of a no-deal, it’s still going be disruptive for EU countries.)

A no-deal Brexit also breeds a potential political crisis — especially in the UK, where May’s government is already weakened. How will a deeply divided Parliament handle a no-deal?

“Clearly, there will be economic damage done in the short term from a no-deal,” Stephen Booth, the director of policy and research at the think tank Open Europe, told me. “But the bigger concern is actually the lack of political resilience we would have in the very short term.”

That’s why the EU keeps granting May extensions. They want to avoid a no-deal scenario, even as they’re also fed up with the UK’s dithering. But offering more time doesn’t eliminate the possibility of a no-deal Brexit, just postpones it once more.

It does not look all that bad to me. Probably the biggest two impacts would be UK consumption owing to uncertainty and London property which may see big mega-rich outflows. These will offset by a crashing GBP so over time it would actually be of benefit to economic structure as financialisation reverses and tradables rise.

The immediate impact on Europe would be an external demand shock to an already weak economy, likely tipping it into recession. Whether that turned into global contagion will depend upon whether economic weakness then triggers a debt event of some kind. That would lift spreads across global debt markets including, especially, Aussie banks.

The forex implications are also worth mentioning. The EUR will crash right long with GBP so the USD would go through the roof, exacerbating the global shock via a USD tightening in emerging markets and slamming commodities. The AUD would get smashed.

It’s hard to say how bad it would be for the world but it’s probably enough to trigger a global recession given growth is already trending down sharply towards the 2% threshold.

David Llewellyn-Smith
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