UK Referendum

UK Referendum: Britain Got Balls!
With all the results of the UK referendum already in, it is clear that the Brexit camp has won a decisive victory wth a 51.89% majority to go alone outside the European Union.

Now begins the painful task of divorce, So, what is in store for Britain, EU and the international community?

Most economists, the UK government, leading international institutions, and major businesses and research houses, believe the economic costs to Britain, if it leaves the EU, will be very heavily negative.

Britain has signed more than 13,000 treaties and international conventions. What will happen to these? Few in the Leave campaign are unaware that immigration is the main reason why UK has one of the most favorable demographic outlook in Europe.

The uncertainty that global markets confront has many dimensions. It is important to note, that the referendum is merely advisory – the UK parliament would have to vote to withdraw from the EU. It is not certain that the House of Commons will agree to start exit negotiations with the EU.

A further political uncertainty involves Scotland. 60% of Scottish voters overwhelmingly voted to stay in the EU. This could prompt the Scots to hold another referendum to split from the UK.

The decision to leave would force PM David Cameron to notify Brussels that Britain wishes to enter discussions and thus begin a two-year negotiation on the terms of the exit. Some have suggested that Britain need not exit but roll iback common EU laws and seek informal talks on new trade agreements instead. The EU would very likely strongly oppose such an approach.

Should Britain vote to leave, it would be excluded from the European Council. But European treaties would continue to apply in the UK, which means common EU laws would still be in effect. The UK’s future trade relations with both the EU and the rest of the world would be thrown into uncertainty, thus affecting global markets.

Negotiations with the EU would very likely be difficult as the EU would not wish to make it an attractive option for other member countries. The EU accounts for 43% of the UK’s exports. Yet the UK could not realistically expect a deal that gives it continued full access to the single market without EU rules.

One possibility would be for the UK to seek a position similar to Norway’s in the European Economic Area. That would keep the UK in the single market, but exports would be subject to costly checks for country of origin. The UK would have to make large payments into the EU budget that could be close to its present contribtuions and would have to continue to accept almost all of the EU’s regulations while having no say.

Alternatively, Britain could seek a bilateral treaty with the EU similar to what Switzerland has. But these do not include most financial services, and EU accounts for 40% of the UK’s financial exports.

Finally, the UK could fall back on its membership in the WTO. That would mean tariffs on UK exports to the EU and no free access for services, which account for 80% of the UK’s GDP and 45% of its global exports. Moreover, the UK then would have to negotiate with each of the 53 countries that have free-trade agreements with the EU.

Along with the uncertainties about the UK’s future trade relations, markets are concerned about implications for investment and the banking sector. Withdrawal from the EU would likely have a negative effect on the attraction of the UK for foreign direct investment, both because of reduced access to EU markets and an increase in uncertainty.

The banking sectors in both the UK and Europe would be hit. Banks would face a prolonged period of regulatory uncertainty. Earnings would suffer from weaker economic growth. Banks in London doing cross-border investments and euro transactions may feel compelled to move to EU financial hubs.

Investors must also be concerned about further risks that relate to the Brexit referendum. Its exit could be the beginning of an unraveling of the EU should other nations decide to withdraw, too. An EU deprived of its second-largest economy will also be weaker economically and less likely to follow liberal, market-friendly policies and would diminish the standing of both Britain and Europe.

Markets do not like uncertainty. A vote to leave would very likely precipitate a recession in the UK, weaker growth in Europe, and years of uncertainty for UK and European markets, with high volatility.