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Despite Brexit, the status quo remains in Britain

Britain's Prime Minister Theresa May speaks in Parliament as she announces that she has sent the letter to trigger the process of leaving the European Union in London, March 29, 2017.

Parliament TV handout via Reuters

On Thursday, the day after British Prime Minister Theresa May sent her goodbye letter to the European Union, J.K. Rowling used a slapstick tweet to conjure up an image that the anti-Brexiters no doubt adored. "Happy Boxing Brexit Day! The name derives from a ritual dance in which we skip around a burning bus while punching ourselves in the face."

To the anti-Brexiters such as the Harry Potter author, Brexit is a bizarre celebration of destruction and masochism. So far, they are wrong, for Britain's economy has defied the predictions of implosion made by the "Project Fear" mob. The economy is expanding, unemployment, at 4.7 per cent, is the lowest since 2005. But the good times may be about to end and, once they do, Britain may find itself suing for peace. Brexit-lite, anyone? Or a Brexit reversal?

The British economy has not fallen apart because, unlike the euro zone countries, Britain is equipped with its own currency, one that could be – and was – devalued. The sinking pound has worked as an efficient shock absorber, in effect discounting any tariffs Britain might have to pay as a non-EU member. The economy's other shielding force was merely psychological. Before Ms. May actually triggered Article 50, the EU's withdrawal clause, on Wednesday, Brexit had yet to occur. Now, Britain is immersed in it.

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Ms. Rowling's British bus isn't about to go up in flames, but its engine will sputter. While it's likely most businesses – retailing companies, for instance – will stay put as Britain and the EU thrash out divorce terms, some biggies will develop wanderlust. Export-oriented manufacturers, such as auto makers, will be tempted to set up shop in the EU to preserve open access to a market of 27 countries. Thousands of manufacturing jobs could disappear. Now that Opel, General Motors' European division, is owned by France's Peugeot, Opel's British factories appear especially vulnerable.

Banks and other financial-services players are already making plans to move thousands of workers to Frankfurt, Paris, Dublin, Luxembourg and other wannabe EU financial centres, each of them ravenous for post-Brexit plunder. This week, the insurers Lloyd's of London and Royal London revealed they will set up subsidiaries outside Britain. Citigroup and JPMorgan will probably do the same and the European Banking Authority is under strict orders from Brussels to abandon London and paddle across the English Channel.

As some point, in the next year or so, as the exodus trickle turns into a steady stream, low-grade panic will grip Ms. May and her merry band of Brexiters. By then, they will realize that leaving the EU in March, 2019 – the formal separation is to happen two years after the Article 50 letter was dropped in Brussels – without a new trade agreement with the EU will be exceedingly bad news for Corporate U.K. and the employees therein.

There is no way Britain would be able to negotiate a trade agreement before the deadline. On Friday, EU leaders made it abundantly clear that talks on the new trading relationship with the EU won't even start unless Britain makes "sufficient progress" on the divorce terms, including writing a cheque for as much as €60-billion ($85.4-billion), the amount Brussels is claiming from Britain in unpaid budget commitments, pension liabilities and other costs.

Almost by definition, the sheer complexity of disengaging from the EU and re-engaging with a new trade deal will require a post-Brexit transitional deal of indeterminate length, although a thunderous crash out of the EU cannot be ruled out if negotiators on both sides turn hostile.

And any transitional deal will be on the EU's terms, not Britain's. The EU on Friday said the "existing regulatory, budgetary, supervisory and enforcement instruments and structures" must apply between Britain's departure and the start of a new relationship with the EU. In other words, Britain outside the EU might not look any different from Britain inside the EU, at least for some time. One year, three, five? Impossible to say at this stage.

Before and during any transition period, a lot could happen. The Brexit terms will go to a parliamentary vote, which could be lost by Ms. May's government, triggering an election. The election could see Ms. May's government get turfed or forced into a coalition with the anti-Brexit Liberal Democrats. The Lib Dems got crushed in the 2015 election but last year won a crucial by-election and are drawing support from traditional Conservatives who oppose Brexit; there are lots of them.

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In effect, the election could turn into a fresh referendum on Brexit. Voters are allowed to change their minds in democracies and they might turn against Brexit if the Brexit-related job losses mount or a recession hits.

Brexit is over in the sense that Ms. May has hit the Article 50 button. It's not over in the sense that the transition deal – the status quo, more or less – could last for a long time, or an election could disrupt the Brexiters' grand plans. To say that Britain is gone from the European Union is still wildly premature.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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