In today's newsletter we talk about the Big Brexit deal and why Indian stocks are rising on the back of this news.
We have a Deal
Brexit is a story of how Great Britain is trying to part ways with the European Union (a group of 28 countries located primarily in Europe). But more importantly, it’s a story about how hard it is to let go.
But before we get to the meat of this story, a small brief.
For a while now, Britain has been an integral part of the European Union and has, in turn, enjoyed many privileges that come with it. Free trade with other members, free movement of people across borders, some political leverage and a few other nice things. However, times change. And by 2016, people started becoming increasingly sceptical of both the union and these perceived benefits.
The contention was simple — By being a member of the Union, Britain was taking in hundreds and thousands of immigrants, pumping money into EU without getting much in return and ceding control to other member nations at a time when many people thought the country’s national interests were being compromised. One could argue if there was any real merit to these contentions. But it doesn't matter. What matters is that in 2016, when citizens were asked to vote (through a referendum) on whether to stay or leave — 52% decided they wanted to call it quits. And that was that.
At least, that’s what most people believed. In fact, once the referendum was completed, Britain had to figure out how to leave and structure a deal around it. For the most part, the sticky point was Northern Ireland. Despite being part of Great Britain, the folks over at Northern Ireland weren’t keen on splitting with the EU. The reason was pretty straightforward. Northern Ireland shares a border with Ireland (Yes they are two separate jurisdictions and they have different laws.) And Ireland continues to be a part of the EU. So once Britain leaves, Northern Ireland will not be able to trade freely with Ireland and that means tariffs, customs, checkpoints or even hard borders. And that was unacceptable.
The erstwhile Prime Minister, Theresa May tried to reconcile these differences and even managed to crack a deal with the European Union. But then when she got back home, the British Parliament refused to accept the arrangement. And she tried again and they refused again. Third time’s a charm? Apparently not. The parliament refused to budge and she had to resign.
So, many people believed Britain would leave the union without any deal in place. It also meant the country’s future relationship with most of Europe was now at stake and nobody had a clue what to do about it.
And that brings us to Boris Johnson, the current Prime Minister of Britain. Boris had his task cut out. He was made Prime Minister in July 2019 and he had about 3 months to crack a deal with the EU, stop the Northern Ireland Juggernaut and get Parliament to side with him. And lo and behold he’s on track to do just that.
For starters there is now a Brexit Deal.
In the current version of the deal— Britain will leave the European Union but will continue to apply their rules until the end of 2020 in what they are calling a transition period. In the meantime, Britain and the European Union will try and figure out other elements of their future relationship.
To top it all off, Boris has also managed to convince the EU president to make several concessions and allow Northern Ireland to be largely aligned with the European Union, especially in matters of trade. And that means there’s only one thing left — The parliament’s approval.
However, not everybody’s convinced Boris Johnson can get enough MP's to approve the deal. For starters, the Northern Ireland Reps have shunned the arrangement. Other hard-line brexiters — MP’s that want nothing to do with the European Union are still tentative. The opposition has stated that Johnson's deal is far worse than Theresa May’s and we don’t know for sure if the deal will go through.
But nonetheless, investors in India seem to be overjoyed with these developments. Stocks from Indian companies that operate within the UK rallied like crazy. Tata Motors was up ~10% (because they manufacture and sell Land Rovers in Great Britain). So what’s happening?
Well, the popular consensus until recently was that Britain would leave the EU without having a trade deal in place. And this would have left many manufacturers high and dry, especially considering Europe is a big export market. However, with Johnson’s little gambit those expectations have turned. Now people are beginning to think the path is more straightforward-ergo fewer restrictions on trade. It’s almost as if there’s light at the end of the tunnel and everybody’s hoping for the best.
However, if the UK parliament decides to play spoilsport, I am not sure if these stocks will continue to soar. But that is a story for another day. Until then we have a deal.
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Anyway, that’s it from us. We will see you tomorrow.