Pound Dives, Bitcoin Up in a Countdown to Brexit

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Boris Johnson

The British pound has begun to look like it’s in freefall, down 10% since May from about €1.2 to now close to falling below €1.1.

That means for every 1,000 pounds Brits have lost 100 euros, making exports from the continent a lot more expensive with vacations this year costing quite a bit more than last summer.

GBP/EUR, July 2019
GBP/EUR, July 2019

This freefall is probably due to prospects of a no-deal exit now looking more realistic, with the market probably trying to price in a smaller economy, thus less demand for the pound.

Plenty of smart Brits are also probably trying to hedge, ditching the pound for maybe dollars, more probably rising euros, and of course bitcoin which looks like the above chart, but in reverse.

Rising bitcoin, July 2019
Rising bitcoin, July 2019

As what happens in Britain can move markets, including cryptos, all are probably watching very closely to figure out just what might happen and therefore what should they do with their money.

The Countdown to Brexit Begin Has

Conservative leadership ballot papers have gone out this Friday with all expecting the grandpas and ma’s that make up the membership to do their duty and return the ballots preferably immediately.

No one expects any surprise from grandmas unless they want to decimate the conservative party, so they’ll probably return with Boris perhaps by Monday.

Once a majority is reached then Jeremy Hunt would probably step down, but whether he does or not is irrelevant for Boris Johnson would be the defacto Prime Minister.

We, the country, and the world, expect him to go straight from the Queen to Heathrow (or Kings Cross) and off to Brussels to meet his old friends.

That begins three months of some of the toughest negotiations this country has ever faced with much at stake, including war and peace itself.

The Plan

We don’t know, they obviously won’t tell, but it probably begins at first with bringing money at the table as a bargaining chip.

About £40 billion “is a great solvent and a great lubricant,” Boris said. It’s not clear whether he’ll renegotiate the sum itself, but he’ll use it as the cost to pay for a deal or as the funds to soften no deal.

He’ll then ask them to agree to Article 24 of the General Agreement on Tariffs and Trade (Gatt). This is a World Trade Organization (WTO) provision that allows two countries to continue to trade on zero tariffs while they negotiate a free trade agreement.

This provision is generally for ten years, with little reason for Europe to not agree as it would benefit both sides.

If they do agree, it would sort out the issue of Northern Ireland because that’s only relevant to tariffs. If there are no tariffs, then you don’t need customs checks, and thus you don’t need a border.

Europe’s position so far has been the request for a backstop in case they can’t agree to no tariffs after the implementation period and the expiry of any free trade transitionary provision.

UK can not agree to any internal border and neither side wants an actual border, with both having the capability of provoking troubles.

Here thus is where negotiation skills come in. Both sides generally agree on free trade because there’s massive trade between the two, both in buying and selling with Europe selling quite a bit more to UK than the other way around.

Beyond economics it is also politically extremely important for Britain and Europe to remain very close, and thus very integrated economically.

So realistically we should expect Europe to agree to this article 24 and leave any potential failure to long term reach a free trade agreement to when its time to cross that bridge.

This is all just about goods, however, you know tomatoes and olives. They’re important, but it’s arguably the easiest part because realistically if anyone “should” implement tariffs is UK.

Presumably that’s why Europe might be worried about a potential failure to reach a long term free trade agreement, but realistically there is no chance Britain would implement tariffs on Europe, meaning Ireland and all the rest.

UK has a long standing pre-EU free movement agreement with Ireland. It is thus difficult to conceive of a world where UK would implement tariffs. Just as it is difficult to see why Europe would want to.

That’s why some conservatives suspect there was some sort of remainer May stitch up, with it to be seen now whether Boris can do any better.

The Real Plan?

Assuming they get this article 24, UK can leave in a somewhat orderly fashion, but as stated this is just about tomatoes, which is important but no one really cares about tomatoes.

What is far more important as far as this space is concerned is passporting where an FCA British license is valid in all of Europe and vice versa.

It’s not clear why Europe would want to double businesses’ paperwork, so they may well give it.

Then things like Erasmus are not political. Britain is a very… well Britain is European so it should continue to be part of scientific or academic aspects as well as intelligence and all the rest, including close cooperation with the French army and perhaps a European army if there is one.

The real plan logically must be for UK to continue working very closely with Europe, but just not have any say in its internal matters and vice versa.

That’s because UK was forced to keep the pound by markets, so it can’t really be part of a United Europe. Leaving the EU, therefore, may well be to the benefit of both.

Cause For Optimism?

Depending on what Boris comes back with, there may be much cause for optimism if it amounts to a very close relationship with Europe.

The latter needs to effectively merge because that’s the only way they can stop fighting each other and that’s the only way they can stand up for their interests in the world stage.

Britain, as an island, can be like pretty much all islands, a bit more outside, leaving EU to move full speed ahead towards closing that Balkans gap while integrating further to perhaps even continent wide European parties.

UK has chosen to not be part of that, perhaps unwisely but in many ways it wasn’t their choice. Markets forced them to keep the pound.

So they’re leaving and considering the shameful behavior at Parliament of banker Farage, perhaps Europe is glad to see them out.

UK’s role would then be to act as some sort of bridge between Europe and America, as the glue that keeps them very close together due to shared principles, values and history with much of America being European.

With Boris at the helm, he would probably win a general election. He calls himself a liberal conservative, so we’d expect FCA and the British civil service more widely to get back to cheerleading this space. The Royal Mint might even revive their plans to tokenize gold.

Tax cuts are on the card. Removing the poorest from national insurance taxes is very wise. Lifting the threshold for those earning more than £40,000 might be smart if the tax bracket then doesn’t stop at £80,000, but continues to increase with maybe higher taxes for those earning more than £200,000, one million and so on.

More wiser than lifting the tax bracket, or in addition, might be scrapping VAT all together. It’s a regressive and barbaric tax on bread. USA doesn’t have sales taxes and look how they’re doing.

In short, in our view there is much cause for optimism depending on how things go in the next three months, optimism both in Britain and in a more United Europe.

The latter will have to carefully consider Boris’ proposal because while Parliament has not changed, it certainly will in a general election which presumably would be forced this autumn if they can’t get an agreement.

EU would have to consider what would happen if Boris wins this election after coming back with no deal.

It would be a close call in that situation with a four horse race, but realistically no one would vote for Farage over Boris and on the other side Libdems would probably gain considerably with Labour becoming a wasted vote.

In a race between Boris and Libdems, the latter could certainly win as this would be a sort of second referendum with people likely voting primarily on the question of Europe.

Realistically however it is probably more likely Boris would win as independents would probably abstain as the question is a bit too difficult.

At that point then Europe would presumably come back with a deal because what’s the point of having the “just in case” backstop when in a no deal situation it would be a certainty.

Meaning what will happen in three months might depend on just how much Europe wants a last attempt to see if Brits have changed their mind and want to stay.

The results of the European Parliamentary elections, however, show UK is very divided and slightly to the exit side.

Perhaps for the better. It can work out in the end and very well to the great benefit of both sides, but how exactly it will work out remains to be seen once Boris gets back from Brussel.

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