UPDATE: Brexit hardliners are selling England by the pound

11/10/17 06:25 PM EST

By Brett Arends, MarketWatch

Risks to British economy, stocks are rising

LONDON (MarketWatch) -- Watch out for the British pound.

In an old, Victorian pub in Westminster, not far from the Houses of Parliament, I recently shared a late-night drink with a senior figure within Britain's ruling party, an old friend I have known for many years.

I asked him why Prime Minister Theresa May didn't try to resolve the current Brexit negotiation problems by pushing for a "soft" Brexit (http://www.marketwatch.com/story/soft-brexit-will-propel-uk-stocks-thornburg-fund-manager-says-2017-11-02), and leaving all the other issues to future parliaments to decide. That was, after all, the only requirement of last year's referendum.

My friend's reply? If May tried to do that, he said, her government would fall. She would be brought down (http://www.marketwatch.com/story/is-british-leader-theresa-may-on-her-way-out-why-thats-the-fear-and-why-it-matters-2017-11-09) by the far-right, anti-Europe clique within her own party -- members of parliament such as Bernard Jenkin and Jacob Rees-Mogg. These fanatics are willing to turf out the government, even at enormous political risk to their party and the country, unless they are given a Brexit they believe is "hard" and aggressive enough.

I heard the same message from another powerful figure within the ruling Conservative Party circles -- this time from a Brexit hawk.

Meanwhile sources of mine within Britain's dominant pro-Conservative newspaper, the Daily Mail, tell me that the publication it is preparing to demand the government walk away from the Brexit talks altogether and embrace a complete breach with the European Union unless it is offered extravagantly better terms by Brussels.

In short: The risk of a very hard Brexit (http://www.marketwatch.com/story/brexit-threatens-to-become-a-fiasco-and-investors-are-in-denial-2017-06-19)is rising. This could throw Britain's trade and economic situation (http://www.marketwatch.com/story/weak-british-retail-sales-flash-warning-sign-for-crucial-shopping-season-2017-11-07) into turmoil, leaving the country outside of the EU bloc altogether and dependent on World Trade Organization rules.

Investment bank Rabobank recently warned that a "hard" Brexit without a deal could plunge Britain into a severe two-year recession, with GDP falling more than 2% in 2019 alone. And International Monetary Fund managing director Christina Lagarde warned that Brexit without any deal (https://www.cnbc.com/2017/06/16/imfs-lagarde-warns-the-uk-against-crash-brexit.html) could lead to a "crash situation." The IMF has already cut its U.K. economic forecast (https://www.ft.com/content/499115b6-ad90-11e7-beba-5521c713abf4) as a result of Brexit, and that is without the risks of such a "crash" exit.

Forecasts are always subject to caveats. But logically, Brexit without a deal would be a shock and create extra uncertainty. Investment, accordingly, must suffer. I was talking this week to a friend who is an investment strategist for a bank in London, and he is worried about a severe recession plaguing Britain in 2018-19.

While you'd expect all European assets to suffer if this happens, the pound and British stocks both must surely face more risks than the euro and EU-based stocks. No wonder the rally in the pound earlier this year has gone into reverse

It is extraordinary how the British have gotten to this point.

In essence, last year's Brexit vote is being hijacked by a small clique on the right-wing of Britain's Conservative Party -- and no one apparently is able or willing to stop them.

Prime Minister May's disastrous general election campaign performance from earlier this year, when she blew a strong lead and ended up losing her parliamentary majority, is threatening to have severe consequences.

Yet the 2016 referendum contained no mandate for a hard, violent breach between Great Britain and the EU. On the contrary, pro-Brexit campaigners went out of their way to emphasize how little need change. Britain would merely be restoring sovereignty and "taking back control," they said.

Such reassurances were absolutely essential to getting the referendum through. Even with all those promises, just 37% of eligible British voters supported Brexit -- fewer than the percentage of eligible Catalans (http://www.marketwatch.com/story/why-the-crisis-in-catalonia-is-bullish-for-gold-2017-10-27) who supported independence from Spain last month.

Brexit was sold to many moderates as protection against future incompetence or insanity by the EU. Yet now that the voters have put on their life vests, they are being pushed overboard -- whether they want it or not.

No one seriously doubts that if you put the options to parliament or the British people in open votes, a vast majority would support a very soft Brexit. But instead there is a rising risk of a much more disruptive outcome.

-Brett Arends; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

11-10-17 1825ET

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