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June 29, 2016


No way back

We note there is still a lot of hope around for another referendum, or some other way to overturn the Brexit referendum result. It is our view that such a course of action would at the very least lead to the full destruction of mainstream political parties in the UK, and quite possibly violent conflict. Those who supported Leave will regard this as an attack on democracy itself. 

We can only explain that normally reasonable people would make this type of argument through a shock that has affected their ability to think clearly, or a misunderstanding of political processes. Just look at what is happening in the Labour Party right now. Can you imagine what would happen if the party simultaneously got rid of its leftist leader, and overturned the referendum result? No, the Labour Party will not ride to the rescue of Britain's EU membership.

Angela Merkel was a lot clearer yesterday. She said there was no way that this vote would be overturned. She called any notion of a reversal of the vote "wishful thinking“ - in English in the original. Moreover, the EU is now creating facts than are going to be difficult to reverse. First of all, there will be no incentive to delay triggering Article 50. The European Council agrees that there will not be informal talks on Brexit (we presume that people talk on the phone, but that's not the same). On the eventual outcome, Merkel said that there would have to be a noticeable difference between Britain's status as an EU member, and as an ex-member. Our reading of this is that, of course, the EU would have preferred for Britain to have voted Yes. But after the Leave vote, there is now a preference for Britain to leave quickly. If this vote were overturned through some conspiratorial coup, the relationship would turn poisonous.

Facts are now being created on many levels. Britain will not assume the EU presidency as scheduled on July 2017. We are hearing that Jean-Claude Juncker has told Commission officials not to enter into any contacts with British officials. And no matter what option is likely to emerge from this process, one specific aspect is clear, as the FT writes this morning: the clearing business will be gone under any scenario. The ECB will in the end prevail with its wish to relocate all eurozone clearing from London back into the eurozone. The ECJ's non-crimination ruling in favour of Britain will no longer hold after a Brexit. We presume that even the Norway option would not remedy this.

The president of the German bank regulator Bafin said that he would no longer support London as the headquarters of the new Anglo-German stock exchange that will emerge from the merger of Deutsche Börse and the London Stock Exchange. And Deutsche Bank has announce that it will relocate traders of EU government bonds from London to Frankfurter after Brexit. 

In other words: Brexit is already happening.

What is the way forward now? We would like to focus on two articles, which set out slightly differing scenarios. Wolfgang Münchau avours the EEA, the Norway option, at least as an interim step. He doubts that it will be possible to negotiate anything else in a short period of time - given the complex nature of the trade-offs that would have to be agreed. The Norway option has a number of attractions that will become very important for the incoming prime minister.

  1. It respects the referendum result. Britain would leave the EU;
  2. It exists;
  3. It is the option that would have the mildest economic impact;
  4. It reduces the risk of a splits of both the Conservative and Labour Parties in comparison with other routes - like a vote to overturn the Brexit referendum, or clean break;
  5. It would preserve the unity of the UK as neither Scotland nor Northern Ireland would have few incentives to leave.

These advantages are all significant. The problem is, of course, that the Norway option would not honour the central Leave campaign promise of a cap on immigration. Münchau's suggestion is a two-step solution. Implement the EEA as step one. Decide later whether to leave the EEA and adopt a simple free trade agreement. The advantage of that solution is that there would be no time limit. There would be long transition periods in which people and companies would have the opportunity to adjust.

Alex Massie also argues in favour of the EEA. Anything less will cause the breakup of the UK. Even the Scottish Labour Party's commitment to the Union is now waning. And the Scottish newspapers will also shift away from their pro-Union position. 

"The institutions of so-called ‘civic Scotland’, broadly Unionist in 2014 will be much less Unionist next time too."

And he writes that only Boris Johnson, as PM, is able to sell the EEA to his eurosceptic supporters. 

The Economist Intelligence Unit has a route plan with some similarities but also some differences. The EIU also believes that the referendum result will be honoured, and that Article 50 will be triggered before the end of the year. And the new prime minister will want an arrangement to minimise the economic costs. But the EIU does not see the Norway option, as is, but a modified version, which curtails Britain's access to the single market, especially in services, while allowing Britain to place some controls on  immigration, like emergency breaks. It is close to the Norway option, but a touch more removed. 

The EIU notes that such a deal would be politically disruptive in the UK. The Leave supporters will consider any compromise on total control of immigration policy as unacceptable. But that is a risk the new PM will probably take - at the risk of considerable alienation by parts of the electorate. The EIU believes that such a deal would require parliamentary ratification or another referendum, but it would be supported. 

And finally, a couple of thoughts of why Britain voted No. Yesterday we came across this chart, showing that there has been a fall in real disposable income after housing costs for the poorest, and modest to strong gains for the middle classes and the rich. Note that the x-Axis are income percentiles. The poor are on the left, the rich on the right. What we are seeing is an insurrection.


Our other stories

We also have stories on the EU debate that will follow Brexit; on the rather modest market reaction; on the imminent end of the European bank bail-in regime; on the French Senate's adoption of a more liberal version of the labour reform bill; and on the impact of Brexit on the relaxation of capital controls in Greece.

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