Just one year ago, the idea of the U.K. triggering Article 50 and leaving the EU would have seemed preposterous. But on Wednesday, it happened.
Britain’s ambassador to the EU delivered formal notice of his country’s intention to leave the bloc, officially beginning the so-called Brexit process.
The move is just the beginning of a two-year negotiation process on the terms of the U.K.’s secession. Removing Britain from the various EU treaties is the easy part. The tricky part is replacing those treaties with a mutually acceptable framework for trade, immigration and other forms of U.K.-EU exchange.
This process is sure to be hairy, and it will have market effects extending across Europe and beyond. Below, we’re looking at how the Brexit process will work… and how it could affect your portfolio.
How Article 50 Works
One thing should be made very clear – the actual Brexit did not happen on Wednesday. Not even close. When the U.K. submitted notice of its intent to leave the EU, it was just starting the first step of the process (or the second, if you count the Brexit referendum itself).
The EU itself is a complicated tangle of national governments, supranational bodies and treaties. One of these is the Lisbon Treaty, signed in 2007. This was the first EU document that detailed how member states can legally leave the bloc.
Article 50 of the Lisbon Treaty sets a two-year time limit for withdrawal negotiations. As you can see in the infographic below, that’s a pretty daunting limit. The treaty lays out a complicated and time-consuming withdrawal process, and it doesn’t really offer anything in the way of an “undo” button.
If Britain and the EU fail to reach an agreement within the two-year time limit, then Britain could be forced out of the bloc without any replacement treaties in place. That could have grave economic consequences for the U.K. It would effectively be left alone in the world and would have to build its own trade network and foreign policy from scratch.
This is the “hard Brexit” scenario that global-minded investors have been worrying about for the last year.
[iu-adbox]
The Market Effects of a Hard Brexit
One of the most jarring consequences of a hard Brexit would be Britain’s departure from Europe’s customs union. As of now, Britain is a member, so its exports face no tariffs when being shipped to Europe. These goods are also exempt from various safety inspections and bureaucratic checks that would otherwise delay their import into the EU
But if the U.K. isn’t able to keep its membership in the customs union, it would lose these trade benefits.
That could eventually cause big problems for British manufacturers – and their shareholders. The iShares MSCI United Kingdom ETF (NYSE: EWU) could take a beating if the U.K. gets kicked out of the customs union in a hard Brexit scenario. It crashed by 20% in the week after the initial Brexit referendum, though it hasn’t flinched yet in response to Wednesday’s news.
On top of the trade risks, there are significant political …read more
Source:: Investment You
The post Article 50 and the Market Effects of a Hard Brexit appeared first on Junior Mining Analyst.