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You are here: Home / British Sterling / Article 50 – What is it and why is it important?

Article 50 – What is it and why is it important?

June 30, 2016 by Rob Lloyd

euro-eurozone-magnetAs it stands, legally, the UK has not entered any withdrawal period from the EU, in essence, the UK remains a member of the EU until Article 50 is triggered. So what is Article 50? And why is it important?

Article 50 is the formal process for an EU member to withdraw from the Bloc, during this period, negotiations are set out in the hopes that a smooth transition is ensured for both the EU and its divorcing member. This transitional period lasts for a period of 2 years, and can be extended if agreements cannot be made or negotiations require further time to implement, with the consensus of the majority of the EU members.

When will triggering of Article 50 occur?

The results of the Referendum are not legally binding and the triggering of Article 50 has been cast aside by David Cameron upon his resignation last Friday. A new conservative leader will be introduced in September although it’s unclear as to whether he or she, will invoke Article 50 immediately.

It looks as though the UK are trying to buy time to have informal discussions with EU officials although it has been made clear that the EU do not want any negotiations until Article 50 is triggered.

What happens during Article 50?

Once the new Prime Minister takes the place of David Cameron, it will be their responsibility along with Parliament to give formal notice to the EU, beginning the countdown of negotiations. During this 2 year “cool off” period, all existing agreements with the EU remain intact, including the rights of expats and free trade.

If agreements cannot be formalised by the end of the 2-year period, this period can be extended with the majority vote of the remaining EU member states, depending on what deal the UK opt for could result in this period being extended well beyond the 2-year timeframe.

What is the likely outcome?

It’s unclear as to what path the UK will take; will they opt to maintain free trade arrangements or will they divorce entirely from all EU policies?

The UK export over 40% of its goods to the EU, by denying the need for free trade could potentially result in tariffs being imposed on these goods, a non-ideal situation for the UK.

If the UK keep to free trade agreements, they will most likely have to accept the free movement of people.
If the UK opt for a Canadian-style deal, which took 7 years to formalise, the UK could be looking at 5-10 years before they completely withdraw from the EU, which would require Article 50 to be extended.

The likely outcome is that the UK will opt for free trade which would result to some degree in free movement of people. This outcome would not be welcomed by the Brexit camp but would be the least economically damaging outcome.

During this period of uncertainty, exchange rates will be vulnerable with the potential for further weakness as new headlines are revealed, current GBPEUR rates are still attractive, those looking to buy Euros could be better off doing so sooner rather than later.

Filed Under: British Sterling

The information on this website is provided for information purposes only. It does not constitute advice to any person on any matter. Every reasonable effort is made to ensure that the information is accurate and complete but we assume no responsibility for and offer no warranty with regard to the same.

About Rob Lloyd

Robert brings with him a wealth of knowledge on what is impacting exchange rates, especially around the subject of the EU Referendum and the implications for Sterling and Euro exchange rates.

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