If Brexit happens, what then?

The phony war is over, the real war has begun. On Friday, the first official day of campaigning started with those that favour UK leaving or remaining in the European Union making their opening arguments.

Prime Minister Cameron, coming off a difficult week thanks to the Panama Papers and findings around his father’s money, is arguing for the country to remain “in a reformed, modern EU”. His adversary, Boris Johnson, Mayor of London, and fellow Tory, speaks about “a glorious alternative” where Britain takes back control of its own destiny.

The UK referendum is still 2 months away (June 23rd) and polls show it is on a knife edge ~ the latest one showing a tie or there being one point in it. Considered wisdom seems to be that the most likely result is a small majority to remain in the EU, but this is not guaranteed at all, and even if this happens, things will have to change. A ‘leave’ vote could precipitate a change in Prime Minister, and then 2 years of negotiation of hundreds of trade agreements and arrangements.

What is the EU?

12 years after the end of the second world war, the Treaty of Rome was signed by 6 countries (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany) which led to the creation, on 1 January 1958, of the EEC (the European Economic Community). The UK was not a part of this, and requested to join (along with Norway, Ireland and Denamrk) twice during the 1960s, only to be blocked by then French President de Gaulle (who feared growing US influence through a UK admission). With a new President (Pompidou) in France in 1967, the admissions were agreed, but Norway subsequently voted in a referendum not to join. Years of negotiation then took place, and on 1 January 1973 the UK, Denmark and Ireland joined to become 9 countries in the EEC. In 1975, UK held a referendum on whether to stay in, and by a vote of 2 to 1 voted ‘Yes’ to the EEC (or ‘common market’ as it was referred to in UK).

The 70s

I remember the admission to the EEC and that referendum. The choice (for my 10 year old intellect) seemed to be about ‘joining Europe’ in order to ensure peace and friendship with our European allies, along with wider access to goods and services (before this time we only ever had grapes if we were on holidays “on the continent”). After admission, the range of fruit in supermarkets exploded. Good times. I’d only ever known apples and oranges before this.

The 80s

Greece, Portugal and Spain joined in the 1980s, and by then I was at university studying economics. Pretty much everything I read about the EEC was in favour. The massive benefits of open trade, reduced barriers, free movement of labour, closer monetary integration… in a single market of 350 million made sense to me, and I was all for it. Intellectually it made sense, and we were benefiting from a massive market, with free and open access of labour, goods and services.

The 90s

In 1993, the community became known as the EU (European Union) with more developments around monetary union and a single currency (the Euro) which came into effect (virtually) on 1 January 1999. It had always been a goal of European proponents in the 1960s (and even in the 1920s) to a closer and closer economic integration, with a single European wide interest rate and a single currency. The Deutschmark, the Franc, the Lire… 22 currencies in all disappeared in 2002, all rolled into one.

Meanwhile, the UK had started to lag behind all this ‘integration’. Never signing up for economic integration, and never for the Euro, the British pound remained outside the Eurozone. Various sputtering attempts were made to keep in line with the European Monetary System (EMS), with Black Friday and other events demonstrating the difficulties for the Pound (a petro currency) being forced to move the same way as various others. Meanwhile, the centre right Conservative party contained members of parliament vehemently opposed to the growing powers of the EU (the so-called Eurosceptics) and in the early 2000s, a new party, UKIP, was formed to contest elections on an anti-Europe (and often anti-immigrant) hard right platform. By 2014, it had attracted the largest vote in the European elections in the UK. Oh the irony.

Today

Fast forward to 2016.

There are 28 countries in the EU, enjoying the central 4 Fs (freedoms) – freedom of movement of money, products, services and people. The EU now covers 500m people, and a $18tr economy has been struggling. We’ve had periods where Greece, Portugal, Ireland and others have had to be helped to remain in the EU, post the GFC and the repercussions that ensued.

UK industry and the EU are now inextricably linked. 45% of UK exports are to EU.

In the 2015 Conservative manifesto, there was a promise to  hold an “IN OUT” national referendum on the issue of EU, if the Conservatives won the election outright, which they did. This ploy was designed to pull away UKIP supporters, and to some degree it worked. To the amazement of many, including all the polls, Cameron’s party duly won the election outright.

So on June 23rd there is a referendum on this issue. The polls are close. A leave vote gives the UK government the right to negotiate a leave agreement over 2 years. No one the size of the UK has ever left the EU, so this is a unique situation.

Assume UK leave…

The post leave vote position is very uncertain, and solutions would be found, but it would be very complex.

There are alternative models – such as a European Economic Area, which has Norway in it – and the EEA has bilateral agreements with EU but all EU regulations without seat at the table. This is unlikely to be acceptable to UK, having voted to leave mainly because of the subjugation of powers to Brussels.

The EFTA (Euopean Free Trade Area) model with countries like Switzerland exist, but again this open border model is not going to suitable be for UK.

So it would be a new model for UK if they leave.

It has been argued that 40% financial services business would move to EU; as UK is used as a place to get into Europe due to their being in the EU. The City of London has become a global financial services centre as a result.

Large new tariff barriers would be in place (the EU has massive common external tariffs around its borders), and all these need to be reorganized. There would be hundreds to renegotiate. It could be done, but it would take time.

Among the larger countries, UK has the strongest economy in the EU currently, so as the EU is client to UK (UK imports more from EU than it exports) so there would be a compulsion to put in place trade agreements. France and Germany alone make up over 20% of UK exports and imports. A new agreement with China and US and EU would all need rearranging with UK.

The U.K. has Commonwealth, so will not be alone and might increase trade there. The $10tr economy of Commonwealth (53 countries) is predicted to rise, whereas the $18tr EU economy is stagnating presently and has less upside.

Mood for change?

Older people are more for leaving than younger, but apart from that this the question is splitting people in the UK on every level. Everyone has an opinion. It’s not split on north south or rich poor, it is divisive all round.

Conservatives are for staying except for some high profile ministers. Labour are for staying. SNP for staying. The Telegraph and Mail newspapers are for leaving, Guardian for remaining; The Times is undecided. Big businesses are for remaining, smaller business are for leaving.

Referendums don’t often vote for change; most people in Australia want an Aussie head of state, yet when given the opportunity arose in 1999 they firmly voted against it. Same too with day light saving.

Could it be that when the Brits get in the voting booth, they will stick ‘with the devil they know’? As the Scots did in 2014? Is it that the ‘heart says go, but the head says remain’ and in the end the head will prevail? Maybe.

On the EU side, Europeans feel a mixture of dismay, irritation and growing apprehension around Brexit.  If UK leaves, Spain would probably next. If the UK stays, Holland and others may demand the same exceptions that UK has won.

And for Australia, there will be implications. Australia and UK are major trade partners, and Aussie and British firms have subsidiaries in each others’ countries. People move between them, and Australia is a #1 destination for non European emigration from the UK.

Either way, the EU is not going to be the same, and will evolve in some shape or another in the next few years.