Whither Goes Britain?

It would seem that they’ve gone and done it. Over the objections of Scotland, Northern Ireland, their EU partners, and nearly every economic expert on the planet, the voters of England and Wales have elected to lead the United Kingdom out of the EU. People have understandably been upset by this. In the short term, this reaction is being triggered by market instability, with stocks and the pound collapsing overnight as traders reeled at the prospect of a Brexit. Consequently, most people with funds tied to the stock market or sterling woke up on June 24th to discover themselves significantly less prosperous than when they had been when they fell asleep. Pension funds, especially, are a source of worry for many looking forward retirement.

While stocks (if not sterling) will likely rebound in the coming weeks and months as investors regain some semblance of decorum, the medium and long-term economic threats created by the Brexit pose no less danger for their recovery. Particularly, the lack of a coherent proposal for the future put forward by the Leave camp—combined with consensus that much of its campaign rhetoric was misleading or outright false—has left many worried that London has no plan for how to proceed. This leaves open a myriad of progressively more destabilising possibilities which will likely chill investment in the UK and Europe at large until an exit plan is firmly in place.

First among the options for the future (and least disruptive) would be the accession of the UK into the European Free Trade Association (EFTA) and its continued member the European Economic Area (EEA) (the so-called Norwegian option). Under this model, London’s financial sector would retain its passporting rights and continue its operations largely as before, while UK companies would be able to go about their business in Europe largely unaffected. Its fisheries would be the only economic sector to face significant change, with the UK gaining more control over who is permitted in its waters. Such an agreement would also betray the aims of the Leave campaign, however. The UK would still have to accept the free movement of people and pay into the EU budget, but now without having any say in how the EU is actually governed. As such, the UK government triggering Article 50 with the aim of pursuing this path seems unlikely.

The UK could also, as the Swiss have, join the EFTA while leaving the EEA for good, purusing access to EU markets through bilateral agreements. This would remove barriers to trade in most goods (with the notable exclusion of agricultural products), but would necessitate bilateral agreements for the City of London to continue operating in its current capacity. This path, like the EEA, would likely require London to accept the free movement of people. One of the more likely options available, EFTA membership paired with bilateral agreements could reduce the amount of pain inflicted on the UK/EU economy while still honouring the (admittedly close-run) referendum.

The UK could also enter into a customs union with the EU, reducing barriers to trade and minimizing its obligations to the EU outside of keeping regulations in-step with those of Brussels. However, the likelihood of achieving this without accepting the free movement of people is, as in the case of the other possibilities, low. This is especially true if the UK wishes to obtain passporting rights for its financial sector, as Eastern European governments will likely veto any agreement that lacks protections for their migrant citizens.

Finally, the UK could simply pursue some type of bilateral trade deal akin to Canada’s, reaching a free trade agreement with the EU within the framework of the World Trade Organisation. In such a case, no constants could be assumed, as the scope of such an agreement would have few confines, and no guarantees of broad-reaching protections for current businesses/workers. As in other cases, the EU will likely demand free movement of people in exchange for any serious market access.

None of these options are particularly appealing for businesses. In most cases, contracts between UK and EU firms will have to be renegotiated, and none of the plans look likely to satisfy both Leave voters and the demands of EU negotiators. Ultimately, though, they are the only options available for the continuance of UK-EU trade if David Cameron’s successor honors the referendum and triggers Article 50 this autumn. Of course, the power to do this does rest with parliament, and there is a non-zero chance that Brexit will be rejected by MPs, the vast majority of whom favoured the Stay campaign. Leadership elections in the Conservative party could very well be fought over the issue, with pro-Stay members pointing to buyer’s remorse on the part of many Leave voters as a sign that the referendum narrow result does not provide a strong democratic mandate. Any possible general election, too, would likely be treated as a second referendum. Such an outcome would be—to say the least—politically destabilising, but it is seen by many as the last hope for a European UK.

In any case, it will most likely be months before we have any firm ideas of where Brexit might take the UK, and economic uncertainty is likely to dampen European markets for the foreseeable future. Stay tuned.

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Ryan O’Regan
International Trade Associate