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Wednesday, 29 June 2016

BREXIT TO Dis-United Kingdom?

So here we are, the bleary-eyed evening after the long night of Referendum results. And pandemonium...in politics, financial markets and potentially about the whole EU project going forward.
The UK electorate has voted 52% to 48% to Leave the UK. What next? 
I knew something was mightily afoot some weeks back when my 9-year old put down his Minecraft to ask about migrants, the then upcoming referendum - excellently presented by the BBC's Newsound for children - and then proceeded to tell me it was worse in Germany.
And some of us had outlined risk assessments on what might happen should Brexit become fact, even though the weight of opinion and expert recommendations were very much in the Remain camp. I thought it apt to review these 12 hours on from the momentous decision that sent genuine political shockwaves across the EU and economic spillovers across the world and various asset markets.
1. Political Risk
As expected PM Cameron has tendered his resignation. It was he who had engineered both the Referendum and the timing of it. Alas, for all his good work he'll go down as the PM that took the UK out of the EU. Ex London Mayor Boris Johnson was assessed to be the likely successor pending the formalities and his lodestar remains bright although other candidates could emerge, likely from the Brexit side of government.
The risk of a fresh election is now a real possibility only a year on from the last.
2. Exit Date from EU...uncertainties
Despite the shockwaves the fact remains that the UK will remain an EU Member State until Article 50 of the Treaty is exercised. This requires the UK government to submit a letter to the European Council  when a 2-year period ensues to sort out the dissolution.
In practice there is a chance that a 2nd referendum may ensue and over 2 million have signed an online petition that parliament will review.
Even without any 2nd referendum, the UK Parliament must ratify the referendum and there is a chance this will not happen, again leaving it to a fresh election to confirm the mandate.
Either way, uncertainty will result. PM Cameron will leave it to his successor to do the jolly work of actioning Article 50, which in reality will not happen until after new PM is anointed by the Conservatives at their conference in October 2016, so unlikely until early 2017 most likely.
1b. Impact on Political parties
There are many factors that led to the outcome of the Brexit win. One  was the Blue-on-Blue attacks within the ruling Conservative party that in effect means two groups with a differing world-view of the UK and Europe/EU and which could yet see some form of split.
Another has been the failure of the Labour leadership to explain to working class voters its position. Its leader, Jeremy Corbyn, also an outlier of a selection last year, will face pressure to resign. At the time of writing most of his shadow Cabinet has resigned.
With the pro-EU Lib-Dems essentially marginal in its impact on the Referendum, the main parties are anything but stable internally whilst essentially without any real representation in Scotland where the SNP has most of the seats.
2. Disintegration of the UK?
As expected the SNP, whose political DNA is to seek full Scottish independence, has set in motion a second referendum. The fact that Scotland overwhelmingly voted for Remain will give the SNP the springboard of legitimacy to seek a second plebiscite so soon after the first one in 2014. The risk of both a 2nd Scottish Referendum and the probability of a successful dissolution from the UK is now significantly higher. 
Not expected was calls from Sinn Fein in Northern Ireland for a poll-cum-referendum on Irish unification. The risk is low but Scottish Independence would accelerate demands and support, particularly if there is a significant economic hit from the loss of EU funds coupled with an economic contraction.
And Wales. The Welsh First Minister, Calwyn Jones has already flagged concerns for the Welsh economy and jobs particularly if EU funding for farming and poorer areas ends. There is a real risk now that there will be demands for greater transfers from London.
Spain has already asked for shared management of Gibraltar which is sited on the Iberian Spain but part of the UK and that unsurprisingly voted almost 96% for Remain. Things could get prickly with Spain that in turn could be a risk to the thousands of Brits living in southern Spain. 
Taken together, this raises the risk of disintegration of the UK and increasing incoherence within what then remains were Scotland to seek independence in order to remain in the EU.
3. Economic Impact
One for another time to review separately but the short term shock was partially predictable in terms of direction if not in magnitude.
Sterling has taken a hit which of itself may not be too detrimental as it improves UK competitiveness but will also mean a rise in imported inflation.
Country risk for the UK will rise and in turn the costs of borrowing and financing national debt. 
The stock market has taken a massive hit although markets in the EU have not been immune.
The UK's imbalances on the Balance of Payments and the fiscal accounts remains a concern and which leaves little fiscal space that will be required for the government to weather the expected acceleration in the economic slowdown already underway prior to the Referendum.
The uncertainty will affect business decisions both in the UK and foreign investors who delay or cancel investment into the UK. The pre-referendum doomsday predictions by the Minister of Finance/Chancellor et al. may not have affected the voting but may actually come to fruition through a marked reduction in household expenditure and housing transactions. 
Fiscal and monetary stances may require softening and UK interest rates may fall, although there is a tail-risk that they could in fact rise also if the pound plummets too far.
There remain a lot of ifs and buts on a range of issues such as the impact on current and future EU migrants in the UK that on balance remain a resource that has had a positive impact on the UK economy and net taxes collected. 
Many of the poorer areas from Cornwall to the former mining communities in Wales and England that voted for Brexit are the ones that have benefited from EU Structural Funds and many of these regions are suddenly waking up to the potential loss of these and asking if the UK government....itself in a fiscal bind...will do so. In the short term there will be no change in flow of EU funds but it raises the spectre of further economic disparities in England and Wales in the medium term.
Of course there will be ripple effects in the EU that could lead to another wave of financial market contagion - particularly in Eurozone countries in southern Europe.
Thanks Mr Cameron.

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