June 28, 2016
We watched the real Brexit on TV last night: England's ignominious loss to Iceland, a fitting symbol of the big story that has been occupying us and everybody else for the last few days. Amid all the chaos, a few coherent strands are emerging. Speaking in the House of Commons, David Cameron yesterday reiterated that the vote will be respected - an outcome some commentators are still questioning. It also emerged that the Norway option - membership of the European Economic Area - is now likely to be seriously considered. This is also our own baseline scenario.
The Conservatives have brought forward their leadership election to early September, under a schedule that will benefit the chances of Boris Johnson becoming Cameron's successor. If he gets on the short list, we would expect him to become the next leader. The other likely candidate is Theresa May, the home secretary. Johnson, too, favours an agreement on the lines of the Norway option, with access to the single market and free movement of labour. He wrote this in a newspaper commentary, which to us reads like the opening move for an EEA-type negotiation. It is our view that this is the only option around which Johnson or May can unify the party. Some of the Remainers would accept it.
There was more predicted turmoil on financial markets, accelerated further by credit downgrades. But, as on Friday, watch out for the collateral effects. Among the biggest victims of Brexit so far are eurozone banks, whose share price has collapsed over the last two trading days. The pound fell further during the day but then recovered overnight. The movements are big, but hardly extreme.
The Norway option has drawbacks, notably of course the lack of influence on future decisions. However, the option is consistent with the referendum result. The Leave campaign made no specific commitments about the future relationship. That option would, however, require that the next government - perhaps after an election - trigger the Art 50 procedure. Angela Merkel said Britain should get more time, but not much, and that there should be no informal negotiations until Art 50 is launched. It is possible, of course, that the next government does not launch the Art 50 process. But we are not sure this is a wise course of action. The longer the delay lasts, the greater the economic impact. Investment decisions by many companies are currently on hold. A new prime minister would have no incentive to prolong the uncertainty. And while it is true that the EU has no legal means to force an Art 50 procedure, it is also true that Britain now requires some goodwill from the other member states. We are certain that Johnson understands the need for deal-making. The financial fallout from Brexit is so far not as extreme as it could have been. The economic fallout will depend on the length of the political uncertainty. But this is clearly not a Lehman-type event.
What we note is that commentators are still all over the place. There is still a lot of anger out there. Many are angry because they did not see it coming. We think it is generally a very bad idea, and poor style, to criticise a democratic vote. We note that especially economic commentators tend to this - presumably in anger that no-one is listening to them any more. For all his faults, Cameron showed us what dignified post-Brexit composure looks like.
Some commentators are still clinging to the hope that the referendum might be repeated, or that the British establishment might find ways to ignore the vote by other means. Gideon Rachman argues that Brexit will not happen because this is the EU after all. Remember Denmark's Maastricht vote? The various Irish U-turns? Yes, there are differences, but why should the establishment not push the extremists aside? Rachman is right in one sense: the EU has so far been able to defy any binary choices that went against it. This one, however, is of a different category. This was not about a treaty. This was a vote on a fundamental question. We agree with Janan Ganesh, who says that the Leavers not only won the referendum campaign but also an election. They will need to govern now. He is sceptical, but not dismissive, about their capacity to do so. He compares them to people who overbid at an auction and discover, to their horror, that they won. The best strategy for the Remain campaign is to influence the debate from inside the government.
One strand of commentary concerns the possible realignment of British politics. Big issues bring about new parties. But ask yourself: what do the 48% who voted Remain have in common beyond the referendum ? Do they really want to re-enter the EU, which will then only be possible under Art 49? This means no opt out from the euro, Schengen, or justice and home affairs! We doubt that very much. Also consider that the British first-past-the-post electoral system does not encourage the creation of new parties. It is possible, but we are not holding our breath.
It's all Brexit today. We also have stories on how the financial shock from Brexit threatens Italy and the banking union; on how the Eurozone will be affected; on the impact on Greece; on Sarkozy's idea to hold a pro-EU referendum in France; and on how Ireland braces for its biggest diplomatic challenge since WWII.