I have just read a riveting book that I think is relevant to what is going on with the Brexit negotiations. It is called 'Adults in the Room' by Yanis Varoufakis, the former Greek finance minister who later resigned. I strongly recommend anyone to read it and unlike the title and subject matter suggests it is very well written and in parts reads like a thriller as the events unfold.
The book tells the story of how Varoufakis tried to negotiate a restructuring of Greece's debt which the EU was insisting should be paid off in full by deflating the economy and insisting on punitive measures such as cuts to pensions and sales of precious state assets. When his party was elected in power it was given a mandate to what Varoufakis wanted and the main body of the book is about how the EU used all its weight to prevent it happening. As the book cover says it is a tale of hypocrisy, collusion and betrayal that shows the extraordinary lengths that the EU went to in order to preserve the facade of unity and prevent other peripheral countries, such as Italy and Spain, seeking write-offs of their debt.
The book focuses on the negotiations with the main players in the EU government and many of the same politicians are now involved in talks about Brexit. Given what happened with Greece the progress of the talks does not fill me with much hope about the outcome of the Brexit talks. What is clear from book is that the EU has invested huge political capital in the European Union and the Euro currency and nothing must be allowed to undermine. If Greece had been allowed to restructure its debt (something the IMF supported) then it could have had a domino effect with other weaker Euro currency nations. Brexit was a huge shock to the EU elite as, like Trump's election, it was not considered a realistic outcome. Now it has happened the EU politicians will do what ever is necessary to prevent the UK from getting a reasonable deal as it may encourage other EU nations to leave.
On this basis a 'no deal' outcome is a higher probability than the media supposes. This would favour the EU as it would deter other nations from entertaining thoughts of leaving the Union. However, because…
I have not read the book, and sadly I do not think that I will find time to do so anytime soon. However, I will find time to make a few comments.
Cutting expenditures and liquidating assets in difficult financial situations should not be considered punitive. Unless revenues can be increased significantly, I would expect anyone struggling to pay their bills to do that (whether they were a person, a company or a state).
While the Greek government may have had a mandate to seek certain changes, it is worth bearing in mind that this does not obligate anyone else to agree such changes. Not only were other governments not obligated to agree, they did not have a clear mandate to do so. While of course not binding, the opinion polls at the time were generally not in favour of transferring burden from the Greek to non-Greek economies, and politicians are supposed to represent the wishes of their electors. The UK population opposed the idea sufficiently that several years after it was clear that the UK and other non-eurozone countries would not have to bail out eurozone countries, the risk of it happening was still used as an argument to leave the EU.
Varoufakis disagreed with the channels for negotiation that were set up, and circumvented them by brinkmanship. While it helped in that he managed to get direct talks with leaders, it burnt much of what goodwill remained (and drove up Greek debt further in the meanwhile), leading to greater pain for the Greek economy and voters. While I am sympathetic to the plight of the Greek, I will take Varoufakis interpretation of how he is without blame and it's all down to others not wanting to share their money, with a pinch of salt.
Brexit and Trump were surprises for Farage and Trump (latter admittedly a US rather than an EU elite), and indeed many others. However, the situation following triggering of article 50 has been so clear it has become quite dull. The clock is ticking down until UK leaves EU, with or without any temporary or long-term deals. EU and UK agreed to negotiate matters in a certain order. As soon as both sides agree enough work has been made disentangling UK and EU, talks can progress to discussing future relations.
While I don't want to insult anyones intelligence by stating the obvious, a non-member state (compared to a member state) will either pay more, have less influence, or less access/benefits (or a combination of thereof). I think it would be unwise to assume that EU citizens voters would want to subsidize non-member states, and EU politicians wanting to represent their voters (due to sense of duty or interest in being re-elected) are likely to bear that in mind.
The UK government seems to fear that meeting the EU requests (or even approaching a soft brexit) will either result in a back-bench revolt or a loss at the next general election. Therefore I would not be surprised if we do head towards a so-called hard brexit. However, a deteriorating economy is also a threat to a government seeking re-election, and this may sway May.
If the UK were to leave EU without a deal, I would expect the pound to slump. Imported goods will be more expensive, driving up inflation. Meanwhile exports to the EU will suffer, and from previous experience a weak pound has not significantly helped UK exports to other markets. Other things being equal, one would expect all markets measured in pounds to show an inverse relationship to its trade-weighted effective exchange rate. Unfortunately the gains will largely be offset inflation and/or exchange rates (depending on where one spends realised profits). Companies whose main expenditure is UK wages but overseas income may have an advantage if wage growth is poor.
Until we know what the outcome will be, I will expect markets to attempt to price in the likely outcome (with a bullish tilt, markets are remarkably hard to spook these days). Changes to individual stock prices will be a relatively late event.
While there may be a cause for concern on a personal plane, risks to investments should be limited for those (few) investors with good geographical diversification.
