The Harsh Reality of Brexit Sets In

The morning after Britons voted to leave the E.U., there was considerable apprehension across the U.K. Even some who had voted for Brexit did so with confidence that choosing Leave was merely a protest vote and that Remain would carry the day. Obviously they were wrong, but there was considerable relief when the immediate economic fallout from the vote appeared less damaging than feared. International markets came to understand that negotiations over the terms of exit and Britain’s future relations with the E.U. would take at least two years, and probably longer. Many hoped that their fears about Brexit had been exaggerated.

In the weeks following the vote, speculation centered on how Britain might cut a deal that would preserve its access to the European single market. Yet newly minted Prime Minister Theresa May understands what the optimists refuse to see–that no Conservative Party leader can survive by publicly considering a deal that leaves British borders open to the free movement of E.U. citizens or Britain subject to E.U. laws. At a party conference this month in Birmingham, May made clear that she understands what her constituents expect: to reclaim control of borders and laws. All else is secondary. Brexit means Brexit.

Perhaps the lack of an immediate crisis has created a complacent sense that the loss of E.U. market access won’t badly damage Britain’s economy. Or perhaps May’s government can still strike the sort of trade deal that the E.U. has negotiated over many years with Canada. Yet Canada’s agreement only partly covers services, which account for more than 75% of the U.K.’s economy, and a similar deal for the U.K. would not allow British financial-services firms the E.U. market access they’ve enjoyed in the past. It would also make it much more difficult for U.K.-based banks to get so-called passporting rights within the E.U. These are losses that would have serious long-term impacts on Britain’s future.

Markets look set to punish the U.K. Investors don’t like bad news, and they hate uncertainty. May says Britain will formally begin exit negotiations in March 2017. But substantive talks are unlikely to take place until after next fall, when Germany holds national elections. European leaders will make the negotiations as lengthy and painful as possible to discourage any notion among voters in other E.U. member countries that exit is easy. May, who has no mandate from the broader British public, will have to keep things quiet on her side, because rumors of key concessions will undermine her strength at home and the flexibility of her bargaining position.

In the meantime, Britain and all who invest in its future can expect a very rocky ride.