Throughout our EU referendum campaign, we have been urging you to use your vote. On June 23rd the UK public did just this, voting to leave the European Union by 51.9% to 48.1% with an astounding 72% turnout. For perspective: over 17.4 million people voted to leave the EU; the Conservatives won a majority in the last general election with 11.3 million, and the last general election to beat a 72% turnout was in 1992 when John Major won the single largest mandate (by number of voters) in UK history. Despite all the often bitter and unhelpful campaigning, the referendum will go down as one of the most engaging (perhaps frustrating) and important democratic events in Britain’s history.
As expected, there has been some economic fallout. The pound fell to its lowest value since 1985 on the morning of the 24th before showing some mercy throughout the rest of the day. The same happened with the FTSE 100, suffering its biggest one-day fall before rising back to finish higher than the previous Friday. Within this, some sectors were pounded in the markets: banks and housing stocks fell sharply and are some way off recovering.
Whilst the dramatic one-day shifts in currency and markets appeared to be mostly due to speculation, rapid repricing and unwinding of positions, the markets rapidly internalised the unexpected result, with some fast money being made by the less risk-averse. In the longer term however, the exit process will fundamentally change the composition of the economy, with currency and market readjustments bound to continue through a period of heightened uncertainty.
So, what next? Now we know the result, it is paramount that divisions are left behind and both sides work together to secure the best future for the UK as possible. The close result was anything but a landslide, and the 48% that voted remain must be represented during the exit process. Across the recent British Chambers of Commerce opinion polls the remain-leave split of our membership has hovered around the two-thirds/one-third mark, so for most of our members the result will come as a disappointment. The result of the vote did not reflect this split across the people of Greater Manchester however, with 7 of the 10 GM boroughs voting to leave the Union. The public has voted, and the government must now set about the processes to leave the EU, negotiating our exit terms, and we must look to the future. Article 50 of the Lisbon Treaty sets out the formal process for leaving the Union, and once triggered starts an initial negotiation period between Britain and the other 27 member nations of two years. There has been much talk about when exactly the government should invoke Article 50, but as this decision is completely at the discretion of the UK government we should take the Prime Minister’s word that this will be left to his successor. The EU has pushed hard for this notice to be served as soon as possible, but it is for the departing member state to notify the EU of its intentions, and so, for now, we’re in a stalemate position. The EU is not duty-bound to enter into negotiations with the UK until we have served the Article 50 notice (which has to be served by the normal democratic processes of a member state: for the UK, this is for parliament to decide, as referenda are not legally binding in the UK), and the UK is not duty-bound to serve notice at any time apart from its choosing.
David Cameron’s resignation as Prime Minister has triggered a leadership contest in the conservative party, which has speeded up its selection process in order to put a new leader in place for the 9th September. This means that Article 50 will not be triggered until at least then, possibly not until after the Conservative Party Conference in October, and maybe later still, meaning that the UK will not be leaving the EU for over two years. This is welcome news; it urges calm and will give those who will be around the negotiating table and the electorate the chance to come to terms with the situation, and figure out exactly how Britain should move forward.
Britain’s future relationship with the EU and the rest of the world will take shape over the next few years and will continue to evolve much past 2020. It is the short term though, that is understandably the largest concern for business people. For the business community, the government must do its utmost to ensure stability, and must provide clear messages as to the path forward. This will most likely involve something akin to Norway’s position as a transitional arrangement. This would require Britain to maintain its membership of the European Economic Area (EEA), though from outside the EU, and to re-join Norway, Iceland, Lichtenstein and Switzerland within the European Free Trade Association (EFTA). This would enable Britain to leave the EU whilst maintaining full tariff-free participation in the single market, ensuring continued free movement of goods, services, people and capital. Britain would still need to pay for this privilege, as well as for continued access to EU funding streams, and may not save a great deal of money in doing so. There would be benefits though: Britain could begin seeking trade deals on its own terms, would gain control over VAT, would be exempt from the Common Agricultural and Fisheries Policies, and would gain its own seat on many global regulatory and trade bodies like the World Trade Organisation and the International Labour Organisation. This option feels like EU-light, and would not fully address the issues of immigration and sovereignty (although EEA members can use a more substantial “emergency brake” on migration than Cameron negotiated), but it is the least-risky and least economically disruptive option initially available, and would provide a sound transitionary platform for further de-coupling from the Union.
Something like the Swiss option may be a longer-term objective. Switzerland is not a member of the EU or the EEA, but maintains selective tariff-free access to the single market through a series of more than 120 bilateral agreements. Switzerland has greater sovereignty than Norway, accepting fewer unwanted EU laws and even negotiating restrictions to free movement of people. It does have to bargain with the EU to achieve this however, giving up certain privileges for others, and many of the bilateral agreements took more than five years to negotiate, hence why the Swiss option would be best explored after securing something similar to Norway first, rather than straight away. Further disintegration from the Union is possible, and may become increasingly so if the population wishes to see further moves towards global free trade.
The WTO option would see us set completely adrift from the EU and the single market, with trade happening according to unilateral global rules, with bilateral trade deals emerging with other countries over time (Australia, New Zealand, Mexico and Iceland, who take over the running of EFTA from 2017 have already indicated interest in swift deals with the UK, Iceland on behalf of EFTA overall). The potential economic gains from truly liberalised and global free trade could be enormous, but come with huge uncertainty over the transitional period, and would be better served when that future exists rather than in 2016. If we are giving these options time frames, the WTO option should come after Norway and Switzerland’s position, allowing the UK to negotiate other trade deals whilst maintaining access to the single market.
The initial signs from Europe are varied. Some, perhaps not unreasonably, feel that the UK has damaged the European project by walking away and want to see a deal that is harsh enough to discourage other member states from attempting a similar process. The challenge for the EU is that punishing the UK unduly harshly may spur anti-EU sentiment, with political parties in other member states calling for membership referenda on the basis that the EU is acting in an undemocratic and malicious way. On the other hand, a very good deal for the UK would show that life outside the EU has few downsides, and could entice other member states to leave.
Other voices within the EU have been more promising: the head of the German BDI (equivalent to our Confederation of British Industry) said that imposing trade barriers between the EU and the Britain would be “…very, very foolish”, whilst Angela Merkel said she is seeking an “objective, good” climate in negotiations, and that the EU has “… no need to be particularly nasty in any way”.
Getting a deal agreed in the two-year period however, is not necessarily easy. The deal must be agreed by the 28 heads of member states and then ratified by the EU parliament, both with simple majorities. If this deal is agreed in less than the two-year window allowed by Article 50, then the UK ceases to be a member of the EU on the acceptance of that deal. However, if the deal involves matters which are not only EU competence, but that of member states themselves (which is possible, if not likely), then that deal would need to be ratified not only as above, but by each of the member states’ parliaments or, for some states, by referenda. This could mean that concluding the process in the two-year window becomes difficult, if not impossible. The two-year period can be extended indefinitely, but only by unanimous decision of the heads of members states, and It is unlikely that the EU would want to drag this discussion out that long. If a deal cannot be reached within the two-year window, and the period is not extended, then the UK would automatically exit the EU, all treaties would immediately cease to apply and we would fall back on WTO rules and tariffs for all trade outside the UK. By the time Article 50 is invoked, perhaps towards the end of the year, we will have to work with government to ensure that it is ready to enter the negotiations with a proposal that is mutually beneficial. Until then, very little to do with our relationship with the EU is set to change. British politics may be about to get very interesting, but for everybody else, for now, it is business as usual.