PM May marches ahead on Brexit despite economic warning signs

On refusing to make a policy reversal, Margaret Thatcher, the United Kingdom’s first female prime minister, famously said, “This lady is not for turning”.

Judging by her consistently tough stance on Brexit, one has to wonder whether Theresa May, the U.K.’s second female prime minister, might not say the same of herself.

Despite a swooning of the pound in the foreign exchange market and warnings from German Chancellor Angela Merkel of the adverse consequences for the U.K. of a hardline Brexit negotiating stance, May is sticking steadfastly to the red lines she has drawn for herself in the forthcoming Brexit negotiations. 

In the immediate aftermath of last June’s Brexit referendum, May kept repeating the refrain that “Brexit means Brexit”. By this she has meant that the British electorate’s choice to vote in favor of the U.K. leaving the European Union had to be respected.

To that end, May set for herself a March 31 deadline for the U.K. to trigger Article 50 of the Lisbon Treaty. That triggering would start the two-year period during which exit negotiations with the U.K.’s 27 EU partners would need to be concluded.

Last weekend, May repeated her commitment, which she had originally made at the Conservative Party’s annual conference last October, to two red lines for the U.K. in its Brexit negotiations.

The first was that the U.K. must retain complete control over its borders, including its control over immigration to the U.K. from the EU. The second was that the U.K. should no longer be subject to the jurisdiction of the European Court of Justice.

While May’s hardline Brexit stance might be playing well with the Eurosceptic members of her party, it is certainly not going down well with the U.K.’s 27 EU partners.

As the U.K.’s ambassador to Brussels kept warning her before his very recent, abrupt resignation, drawing red lines would leave the U.K.’s partners little alternative but to exclude the U.K. from the benefits of the Single Market.

After all, if the U.K. was allowed to cherry-pick what it liked and did not like in the EU, why should other countries not be allowed to do the same?

A glaring weakness of May’s rigid negotiating stance is that it could force U.K.-based companies, particularly those in the financial sector, to relocate at least part of their operations to mainland Europe.

They would likely start doing so well before the negotiations are concluded in order to ensure that they retain access to the Single Market in the event that the U.K. loses its access at the end of the negotiation period. 

If May had the slightest doubt about the riskiness of her Brexit strategy, all she would need do is to take a look at the foreign exchange market for the pound. Since the U.K. voted for Brexit last June, the pound has lost 20 percent of its value against the dollar, taking it to its lowest level in over 30 years.

More telling, each time May has indicated in her statements the U.K. could be heading for a hard Brexit, the pound has sold off sharply.

In the period ahead, May would be well advised to remember that the U.K.’s current account deficit makes it uncomfortably dependent on foreigners for its funding. That makes the pound particularly vulnerable to foreigners’ perception of the U.K.’s attractiveness as an investment destination.

Should doubts about the U.K.’s Brexit future make foreign investors less well disposed towards the U.K., we could see a further period of considerable pound weakness. That could raise the specter of stagflation in the U.K.

May might also be well advised to recall that Thatcher’s intransigence on the poll tax issue proved to be her political undoing. She might want to consider the distinct possibility that an unduly tough line on Brexit could precipitate a sterling crisis that could cause her to share the same ignominious end to her premiership as Thatcher.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

The views expressed by contributors are their own and not the views of The Hill.