Why Brexit Will Be Reversed

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Includes: EWU, EZU
by: Dana Blankenhorn

Summary

The EU rules make it very difficult for the U.K. to leave the EU.

It must endure two years of fruitless negotiation while watching its economy and country collapse.

Bet the decision is reversed.

Those who root for disasters were cheered this week when the United Kingdom voted for Brexit.

But they fail to understand the process, which militates heavily against anything actually happening.

First, as many now know, the referendum only called for the process of exiting the EU to begin. The formal step is for the government to trigger Rule 50, a formal notification of exit, which Prime Minister David Cameron has not done. Despite a campaign promise to do precisely that, he decided to leave power and leave that step to his successor.

In other words, nothing has happened, nor is anything going to happen until September at least, when a new government takes power. That government will have to win a confidence motion in which the many legislators who fought to remain have to vote for a government committed to the exit, or the game ends there.

Now, once Rule 50 is triggered, the UK and EU will have two years to negotiate a status for the UK outside the EU. At any point the UK can decide that it doesn't like the exit deal, and remain under today's conditions. The EU has made it very clear that if the UK wants to retain its trade status, it's going to have to allow free movement of people, which is precisely what voters rejected - immigration was at the heart of the referendum.

So it is impossible for the UK to leave the European Union before September, 2018. Meanwhile the costs to its economy are rising. The pound is sinking, the markets falling, banks and corporations are seriously considering leaving it for the continent. Scotland, which voted to remain, is demanding the right to leave the UK, and Northern Ireland, where people hold both Irish and UK passports under the Good Friday agreement, is thinking about reuniting with Ireland rather than putting up borders again. The only parts of the UK that are likely to exit at all are England and Wales.

The governments of the EU are in no mood to make nice at this point. They saw what happened with Greece. They see a UK which has gotten all sorts of benefits without paying for them, through either economic or political integration, they see the pain Brexit is causing and will cause, and they have no incentive to back down one inch.

All this is going to proceed, and accelerate, while whoever the Conservatives choose as their next Prime Minister tries to negotiate a graceful way out. The EU holds all the cards in that negotiation, because the UK's economy will be falling apart while these negotiations take place. The situation is analogous to that of Greece, which threatened to leave five years ago but wound up staying, despite immense economic damage.

The fallout of the UK's Brexit vote, in other words, is mainly going to be limited to the UK. They're going to be facing the break-up of their country, economic collapse, and a negotiating partner with no incentive to make things easier. That's just what Greece faced. And, after a lot of drama, Greece came back.

If you want a speculation based on what I have written, you can short or sell EWU (NYSEARCA:EWU), the iShares ETF covering the UK, while taking out long options or buying EZU (BATS:EZU), the equivalent ETF covering Europe as a whole. My own money is in a retirement account - I'm close to retirement and not interested in gambling - but if I were 20 years younger, or pressed to go in for a killing, that is precisely what I would do.

Remember, if you think the UK is leaving, you think Boris Johnson will be Prime Minister, that he will either not call a new election or win one against a Labour party newly re-committed to staying in Europe, and that the voters will support that policy for at least 27 months while their economy, and country, collapse around their ears.

Good luck with that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.