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> Brexit – Is The Mist Clearing?

However, even the practicalities of how this arrangement would work are far from clear.

"The UK will not automatically revert to full WTO membership on leaving the EU. The UK’s

current membership is linked to its status in the EU and renegotiations with other WTO

member states will need to take place over a number of complex issues," said Oliver Harvey,
Macro Strategist at Deutsche Bank.

The question of what happens in the absence of a Brexit trade deal or a WTO arrangement
needs to be asked.

The two-year negotiating rule was plucked out of thin air. It was not based on previous

experience or even any theoretical assessment of time required. Even if it had been, the
calculation would have been made a very long time ago without any notion of today’s

complex environment. Our thinking is that the most likely outcome is that the two-year

negotiating period will end up being extended for the benefit of all concerned.

Analysts at Bank of America Merrill Lynch Global Research, seem to be working on the

assumption that a transitional deal will be reached and that the period will be extended to

facilitate a soft-landing alternative to the cliff edge. They expect the question of a
transitional arrangement and an extension to the negotiating period to be major factors in

the exchange rate determination, once we get beyond the excitement of article 50 being

triggered.

The Cliff-Edge to WTO

Bank of America’s Foreign Exchange Strategist Athanasios Vamvakidis now expects that the

current strengths shown in UK economic data will be fully tested when Brexit itself comes
along.

It seems that if no agreement or strong transitional arrangement is negotiated in the two-
year period, the UK economy may face the much talked about cliff-edge that is the default

to WTO rules to the detriment of the economy.

The worry is that, in these circumstances, data would also be expected to deteriorate
sharply, and the Pound would lose more ground. This could, in turn, lead to a significant

outflow of capital.

Of course, as we would expect, there are plenty of “experts” who see these forecasts as
unlikely.

Game Theory

The Bank of America, citing “Game Theory” as evidence, suggest there is a high chance that
the UK and EU will manage to reach an interim trade deal and that the Pound will rise in the

medium-term on the news of this happening.

Game theory is “a branch of Economics which deals with how individuals rationalise and

make decisions, and how the decisions of those around them impact on both actors’

outcomes.”

Under the theory, the actors, that is the negotiators, will go for the option which has least