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July 01, 2016


Brexit will happen

We are following the Brexit details in detail because it is highly relevant for the future of the EU as well as the eurozone. But we are not bringing you blow-by-blow accounts of what is happening inside the Conservative Party, an organisation we consider as mercifully outside our reservation. We note, however, that yesterday's political events have virtually eliminated the last strands of hope - or fear - that the next prime minister might fudge his or her way out of Brexit with either a second referendum or a technical device to overturn the referendum result. We note that some Labour commentators like David Aaronovitch in the Times, economic commentators like Martin Wolf, and loads of newspapers on the continent, have been getting rather excited by the possibility that this referendum result might just fail to become reality. We disagree.

One view was that Boris Johnson, if he had become prime minister, would have switched position. We don't know that this is true, but in any case it is now irrelevant speculation since he decided not to run. The two most probable candidates to emerge from the first round of the leadership contest are Theresa May, the interior minister and a reluctant supporter of Remain; and Michael Gove, the justice minister and one of the leaders of the Leave campaign. May is the front-runner, but she made it clear yesterday that "Brexit means Brexit". She is also taking a tough line on immigration controls. While she left it open what she had in mind specifically, that position would appear to rule out the option of the UK joining the European Economic Area. That would grant Britain full access to the single market, but require continued openness to the free flow of labour. Gove does not even care about single-market access. So this is a choice between a middle-of-the-road version of Brexit and a hard Brexit.

As a Remain supporter May is aware of the need to reunite her party - which is absolutely necessary if she has any chance of winning the 2020 general election. It is our view that, if elected, she is likely to succeed as the Tory Party's survival instinct will ultimately keep it together. A failure to implement the Brexit vote would destroy the party, and either lead to a surge for UKIP, or to the establishment of a new anti-EU party - an English National Party on similar to the SNP in Scotland, but on the right. A further complicating factor is the turmoil in the Labour Party, which may not be resolved any time soon. Labour might split, which might trigger a realignment of the political system. But it is far from clear that a strong pro-European party might emerge in time that could somehow revert Brexit. Most informed commentators see that as a post-Brexit scenario.

May said that she does not want to trigger the Article 50 procedure before the end of this year, but we have no indication that this is a delaying tactic. She said she wants to create a ministry for Brexit to prepare Britain's negotiating position in some detail. We assume that the timetable is for Art 50 to be triggered in the first half of 2017. Exit would formally conclude in 2019, about one year before the next parliamentary elections. 

One of the many complications that the new government will need to sort out is how to deal with Scotland and Ireland. We noted a comment by the constitutional expert Jo Murkens, who rightly warns that Scotland and Northern Ireland have a veto, and who wrongly concludes that the primary goal of this entire process will be to preserve the unity of the country, rather to execute Brexit. May would destroy her premiership if she, as a Remain supporter, risked a politically devastating row with the Tory eurosceptics. That said, there are formidable obstacles that need to be addressed. If Scotland concludes that it would accept nothing less than the EEA, and if May concludes that she cannot deliver that, she will have to concede an independence referendum. It is possible that Britain might then negotiate two deals - one for the UK or what's left of it, and a separate hypothetical EEA deal for Scotland. If Scotland voted to become independent, the EEA would then become a platform for an independent Scotland to apply for EU membership under Art 49. These obstacles are formidable. We do not think that the House of Commons would withhold support for an Article 50 process. But, since such a decision would trigger immediate elections, it would risk the total annihilation of both the Conservative and Labour Parties. We do not think that the Tories in particular would take such a risk. And we would assume that the majority of pro-Remain Labour MPs would abstain in such a vote. It is easy for commentators to demand that a referendum be ignored. Politicians find this harder.

In the meantime, more Brexit facts on the ground are being created. We noted a story that the number of EU citizens in the UK who are applying for a British passports is rising dramatically. People are entitled to do so after five years of residency. The more passports are granted, the easier it will be for the new government to take a hard line on the question of free movement of labour, since fewer people would then need to leave the UK.

For some light entertainment, note this cartoon in Le Soir. No more free coffee for Cameron at the Council.

Our other stories

We also have stories on a possible rerun of the second round of the presidential elections in Austria; on the Five Star movement overtaking the PD in the polls; on why a new Italian bank debt guarantee won’t solve the problem; on systemic risks of German banks and insurers; on the Greek government backtracking over Piraeus; and on why Brexit will dominate the French presidential elections.

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