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Thursday, 3 March 2016

BREXIT – Article 50 - The long goodbye?

So here we go. Six months of waffle, argument, zillions of articles and oodles of persuasion ahead to the Referendum on June 23rd 2016.
A lot has already been written about the emerging taxonomy of the two sides of the argument. Whilst the elite – most of the ruling Conservatives, the opposition and those who run UK Corp and unions are on the side of the “ins”, this may turn out to be a gross oversimplification of the Island mentality that lurks a scratch below many here in the UK, particularly England.
And insurgency against the elites is very much in fashion - both in Britain with the election of Corbyn as leader of the Labour party, in the US presidential race and across the EU where the middle ground of politics is under vociferous attack from both Left and Right.
Brexit risk has already had an effect on the FX markets through a devaluation of the pound against the dollar and the Euro - which the tradeable sector will gladly take and which in effect further loosens monetary conditions in the UK - and where the likes of UBS are forecasting parity with the Euro in case of Brexit (presumably assuming the Eurozone sticks it out...)
But what if the UK votes to leave? What then?
Leaving aside the possible political, economic and military ramifications for the rest of the EU shorn of the 2nd largest donor to the EU budget and a lodestar for many of the smaller more liberally minded economies in Europe, what would it mean in practice for the UK, hmm leaving on one side the further risk of the break-up of the UK should Scotland and/or Northern Ireland decide to stick with the rump EU27?
Unlike in Greece where the Syriza government had made no plans for issuance of Drachmas had Greece been booted out of the Eurozone in the last – or the one-before-last EU crisis – there is a position paper outlined by the UK Government, at least by its laudable Civil Service.
And it all boils down to Article 50 of the Treaty of the European Union. This lays the framework for an orderly exit of a Member State but one that has not been tested as no country has exited the EU (Greenland’s exit was partial as it remains an overseas Danish territory).
The short answer is that there is a 2-year sunset period but in reality this can mutate up to a decade for trade related agreements or re-agreements. It would also require the full EU institutional structures to be in motion – the European Commission, approval of the European Parliament, of all the remaining EU Member States (particularly for an extension to the 2 years) and of the European Council. Good luck...given the European electoral cycle from 2017.
The implications for a more drawn-out exit phase means that a clinical and immediate divorce sought - and assumed - by many of the Little Englanders will be less likely than envisaged. Likely, though not impossible - anyone schooled in history will recognise that disintegrations can happen very quickly, as those old enough to recall the domino effect of the fall of the Berlin Wall in the fall of Communism in Europe from 1989.
It also lends credence to the Conservatives who have argued that a Brexit vote can be a means to a better negotiated end for the UK - through a better bargain with the EU. This view was echoed initially by the current London Mayor, Boris Johnson, and by Michael Howard - who has argued that the EU has "form" with the Danish and Irish rejections of previous referenda...although these were for boring Treaty changes rather than remaining in the EU.
For more analysis and risk perspective please send an email. 

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