"The British are brave people. They can face anything, except reality."
--George Mikes, author of "How to Be a Brit"
Tuesday's speech by U.K. Prime Minister Theresa May regarding her plan for Brexit sent the pound soaring. The British currency had its best day since 2008 on Tuesday, but are investors right to be relieved? Well, certainty is better than uncertainty, but being able to make investment decisions really depends on what you're certain about.
The speech has been dissected and analyzed to death by everyone in the financial media. However, on such an unprecedented issue, investors would benefit from reading as many points of view as possible. Below are three considerations to take into account:
Presenting Defeat as Victory
For many British media commentators, the speech was bold, daring and clear. "Give Us Fair Deal or You'll Be Crushed" is the headline on the front page of The Times of London's main story about the speech. City AM, a newspaper distributed in London's financial district, writes in big letters on its front page: "It's May Way or the Highway."
However, cross the English Channel and head over to the continent, and the picture is radically different. The French and German media were almost universally skeptical that the speech would do the U.K. any favors in negotiations. Here are two examples:
French newspaper Les Echos: "The Lancaster speech forces the rest of the EU to close ranks. The objective of the Europeans must be to do everything to avoid a situation in which Brexit opens the door for other populist, protectionist, sovereignty-obsessed factions."
Under the headline "Theresa May's Brexit Plan: I Want, I Want, I Want," German paper Der Spiegel writes: "Theresa May wanted to be both nice and tough to her European friends. But above all, her Brexit speech shows the British Prime Minister is blind to reality."
If you think about it, the speech basically acknowledged that the U.K. is leaving the single market, contradicting earlier promises by prominent Brexiteers that this would not happen. Here is what Foreign Secretary Boris Johnson wrote in a column in The Telegraph on June 26, three days after the referendum in which the British voted to leave the European Union:
"British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI -- the BDI -- has very sensibly reminded us, there will continue to be free trade, and access to the single market."
But the BDI is a business lobby organization that does not make policy, so it was in no position to grant the U.K. access to the single market after Brexit. In the end, the EU did not budge on its stance that the four freedoms of movement -- of goods, services, capital and people -- are non-negotiable.
In this light, May's speech can be seen as admitting defeat, because she publicly stepped away from the idea that the U.K. can limit immigration from the EU but still have access to the single market. The fact that it took her so long to realize that the EU will not move on this fundamental issue does not bode well for the negotiations, in which speed will be crucial to avoid a disorderly exit.
Tax Haven and All That Jazz
One strong threat to the EU was the statement that the U.K. could turn into a low-tax safe haven just on the fringe of the EU if its demands for close cooperation are not met.
The idea was floated by Chancellor Philip Hammond before, and it is an apparently simple solution to making up for lost revenue because of trade difficulties -- that is, cut the corporation tax, reduce regulation even more and let multinational corporations flock in, to the detriment of the more bureaucratic, higher-taxed EU.
This approach would alarm neighboring Ireland, which relies on its low-taxation environment to attract giants such as Action Alerts PLUS charity portfolio holdings Apple (AAPL) , Alphabet (GOOGL) or Facebook (FB) , which have their European Union headquarters based there. But, as the recent fracas with the EU over tax breaks given to Apple by Ireland shows, taking such a position is fraught with danger.
And even if the U.K. does offer a lower corporation tax than Ireland's 12.5%, what is to say the EU will be OK granting multinationals based in Britain full access to the single market?
Besides, as U.K. lawmakers themselves complain, London already is a haven for those who seek to hide their wealth (more or less legitimately obtained) by purchasing property in the city. Becoming a tax haven really would set its reputation apart, and not in a good way.
A low tax policy could harm Britain, which has the highest budget deficit in the developed world, somewhere around 5% of gross domestic product, and where public services such as the national health system are chronically underfunded.
To find the money to make up for a potential fall in revenues caused by cutting the corporation tax, the government either would need to raise other taxes or cut welfare spending even more. This is not something the electorate would like, because many voted Brexit partly because they believed EU "migrants" were abusing the country's generous welfare system, making it difficult for the British to get benefits such as state-sponsored housing.
Veiled Security Threat
A very important part of May's speech, which has gone largely unreported, was the veiled threat that if the U.K. does not get what it wants from Brexit, the continent's security will be at risk.
"The third and final reason I believe we can come to the right agreement is that cooperation between Britain and the EU is needed not just when it comes to trade but when it comes to our security, too.
"Britain and France are Europe's only two nuclear powers. We are the only two European countries with permanent seats on the United Nations Security Council. Britain's armed forces are a crucial part of Europe's collective defense," May said.
Or, as Robert Shrimsley put it in an opinion piece in the Financial Times, the British prime minister's negotiation strategy seems to be: "We've got nuclear weapons and you'd really prefer us as a friend." More than anything, this will raise confusion and alarm in Europe and will not serve as an incentive for the Europeans to grant Britain concessions.
The U.K. is a member of the North Atlantic Treaty Organization (NATO) and the vote did not include the option of leaving the security alliance carved by the U.S. and Western powers after World War II and which has served to maintain peace in Europe since the war ended.
With Donald Trump calling NATO "obsolete," alarm bells already were ringing in European capitals about the future for the continent's security. Theresa May's speech has added to that unease, pouring gas on the fire -- an unwise move in these uncertain times, to say the least.