The cooperation among the countries in Europe has been there for more than 50 years. The euro has been the common currency for the members for close to 20 years. This cooperation has helped create a block large enough to compete with the United States and Asian countries. Along the way, the EU has attracted praise and criticism as well. Eurosceptics believe that the dream of a united Europe is not a good thing for the sovereignty of the region. Pro-EU on the other hand believe in the strength of the union.
In June 2016, the United Kingdom, under David Cameron, went to a referendum to decide the future of the relationship between the UK and the EU. Before the vote, many expected that the country to vote for the European Union. This is because voting otherwise would have presented the UK with a difficult choice. For example, many firms that do business with the EU would leave.
After the vote, David Cameron resigned and left the country under Theresa May. After becoming the prime minister, she started negotiating for a deal with the European Union. This deal was unveiled late last year. Her proposal called for a close relationship between the UK and the EU. The EU had a unanimous vote for the deal.
However, the deal was rebuffed in the House of Commons. The members of the opposition Labour party and the government disagreed on the details of the deal. The most contentious issue was about the backstop between Ireland and North Ireland. The worry was that the backstop clause made it impossible for the UK to make trade decisions without the permission of the EU. The chart below shows the performance of the sterling and the FTSE 100 in the past one year.
After failing to get a deal in parliament, Theresa May returned to Brussels this week to ask for another extension. This is after her previous extension failed to deliver results. In her request, she requested for an extension until June 30. However, the European leaders led by Angela Merkel gave her an extension of until October.
This new extension presents more potential risks to the United Kingdom. First, it is difficult to imagine a deal that will pass parliament by October. In the past few weeks, the members have held almost 20 votes, with none of them bringing any results. Therefore, I believe that unless there is another general election or referendum, there may be no way forward before the deadline. Second, and more importantly, the extension may hamper investments in the country. This is because companies may not increase their investments if they don’t have a good understanding about what will happen in October. Already, data has shown that capital investments have reduced in the country. Therefore, in the medium-term, it is difficult to recommend buying UK stocks or the sterling.