The UK’s Long Goodbye?
Three possible scenarios for the Brexit endgame.
July 7, 2016
Ten days after the British referendum on membership in the EU, we are now in a waiting game.
Prime Minister David Cameron’s political career has imploded and nothing much will happen until his successor is in place in September.
In the meantime, British politicians and opinion leaders are discussing when to trigger the EU escape clause, Article 50, or even whether a second referendum is possible and what other options might exist — other than a simple “Leave.”
In short, the referendum campaign continues, albeit in a slightly different form. Among the public, there is no panicky buyers’ remorse on the Leave side. Undoubtedly, some have regrets, but most are calmly waiting to see what happens.
On the Remain side, some are still in shock. But many of them probably voted simply to avoid the unknown and are now content to let politics take its course.
With a British sense of fair play, they now argue that the people have spoken and the government should get on with the process of leaving the EU.
Adding to the sense of uncertainty, the Labour party is in the midst of one of its periodic self-immolations – making it irrelevant to the Brexit debate right now.
While uncertainty and political disunity reign in Britain, in Brussels the first meeting of the EU-27 (i.e., the EU heads of state without the British) showed a remarkable sense of unity and concord.
Even though technically an “informal” European Council after David Cameron left, it was clear European leaders wanted to send a message of tolerance and firmness. Mission accomplished.
The EU 27’s common position
Differing statements before the summit — be tough on the British vs try to make a deal — were replaced with a common view. Any access to the Single Market must include observation of the “four freedoms” – freedom of movement for goods, services, capital and people.
Of most immediate importance, there will be no negotiations before the British trigger Article 50.
Until the British explicitly declare their intention to leave, and presumably indicate what they want out of the negotiations, the EU-27 will just wait.
In the meantime, European leaders will use the impending Brexit to solidify their own political positions. Some, like French President François Hollande and Dutch Prime Minister Mark Rutte will lambast opponents who also call for EU exits, using the British chaos as an example.
Others, like the Poles – who saw Britain as a key ally in the EU – will need to find new political friends. When the new British government does invoke Article 50, it will face European colleagues who have worked for a unified position and have domestic reasons for being firm.
As any U.S. negotiator can tell our British friends, moving the EU once it has a consensus can be extremely difficult.
Political and economic developments
So what happens now? First, the Conservative party leadership contest must be resolved. Home Secretary Theresa May leads the pack in the first phase – voting by the parliamentary party — despite having campaigned for Remain.
Justice Secretary Michael Gove’s decision to go for the leadership led to Brexit star Boris Johnson’s withdrawal from the race before it had officially begun. However, Gove is even trailing Andrea Leadsom among voting by MPs.
The top two contenders then face the final hurdle — a poll of the whole party membership. Faced with the choice of a reluctant Remain campaigner (May) or a dedicated proponent of Leave (Leadsom or Gove) the membership may overturn the Parliamentary result, as it did in 2001. Or a strong showing for May could be seen as a rethinking of the referendum results.
And while Britain’s politicians are on the campaign trail, the UK economy could begin a long, slow slide toward recession.
Companies that had avoided investment decisions because of the referendum will continue to delay. Alternatively, they may begin making plans to invest elsewhere in the EU.
Already, property funds, including Standard Life Investment, Aviva, and others, have suspended investment in the UK commercial property market.
Both Morgan Stanley and JP Morgan indicated before the vote that they might move jobs out of the UK if the Leave campaign won.
Questions have also been raised about U.S. banks continuing to use their London offices to secure the “passports” that allow them to do business across the EU.
And French leaders have made clear they will reopen the fight to take away the City’s ability to clear Euro trades, threatening London’s pre-eminent spot on the Euro exchange market.
These economic developments will not go unnoticed by the team of British civil servants preparing the new government’s negotiating position.
Responsible for identifying exactly what needs to be done to secure the best EU exit for the UK, they will be acutely aware of the multitude of ways the UK and EU are linked together.
These officials will also be very aware that once Article 50 is triggered, the EU-27 hold most – if not all – the negotiating leverage. Their report to the new government could be a game-changer.
Three possible scenarios for the Brexit endgame
Only after that new government is in place in September – and possibly much later — will Britain begin to move toward one of three possible scenarios for the Brexit endgame.
1. No Article 50
The new British government could be alarmed enough by the details of Brexit and the looming disadvantages that it would refuse to invoke Article 50, and instead look for some way to walk back the referendum.
This will be politically difficult, but not impossible. The determining factor may be that membership – a seat at the table – is the only way to preserve the position of the City in terms of euro transactions.
However, such a delay strategy cannot go on forever. By early 2017, the EU-27 would demand some sign that Britain is re-committing itself as a member, either a second referendum or a general election with EU membership at its core.
2. The Norwegian/Swiss Example
At first glance, this would seem to leave Britain in a worse situation than being a member. Norway accepts all the rules of the Single Market and free movement of people, but has no seat at the table. It also pays into the EU budget.
Switzerland has a similar arrangement. Its relationship with the EU is based on a multitude of specific treaties, rather than a comprehensive arrangement.
A new British government may try to negotiate access to the Single Market without accepting intra-EU immigration. This will be vetoed by the Central Europeans as well as other members who will see it as “cherry-picking.”
In the end, Britain may accept immigration to stay in the Single Market, but claim victory as long as they escape formal EU membership and oversight of the European Court of Justice and primacy of EU law.
Norwegian leaders have made clear that not having a seat at the EU table is a real disadvantage, but this is the choice the fiercely independent Norwegian — and Swiss — people have made.
The British people are also very protective of their sovereignty, as the Leave campaign amply demonstrated.
3. On Their Own
In the end, the new British government may decide that the only option that genuinely responds to public opinion is to leave the EU, including the Single Market.
Britain could, like Switzerland, negotiate multiple treaties with the EU governing specific issues, from transport to residency, to trade and judicial cooperation.
It would be a patchwork that would undoubtedly leave the UK diminished but sovereign. The UK would still be a major economy and a force on the global stage – but less so.
On June 23rd, the British people voted to leave the European Union. This will not be a quick process. Even starting negotiations will take months, perhaps even into 2017.
In the meantime, there will be ample opportunities for reflection – and perhaps for reconsideration.