July 08, 2016
Party logic requires both Tory candidates to deliver Brexit
There is no sign of Remainer anger ebbing, probably also because the Tory party is heading relentlessly towards a Brexit premiership as the party will unite around their new leader. This will be Theresa May, the home secretary, or Andrea Leadsom, a junior energy minister who has support of the right of the party. For the Brexit discussions, there is really not much to choose in principle between the two candidate. Both will ensure adequate representation of the other side. The main differences are due to tactics. May promised to postpone the Article 50 trigger util next year, while Leadsom wants to trigger earlier. Both have ruled out early elections, which in any case are not that easy to call under the fixed-term parliaments act. The government would have to vote against itself in a confidence motion to trigger a new election - and it is far from clear whether this ruse would stand up legally. Our baseline scenario remains a victory by May, followed by Brexit in 2018 or 2019, and an election in 2020.
The Guardian reports on estimates that commercial property worth £5bn could be put up for sale soon to help property investment trusts meet cash demands from investors. A number of funds have down-valued their portfolios. The biggest cause of uncertainty is the future role of London as the EU's financial centre. While the impact of Brexit is likely to be gradual, the property sector is the first to be hit - as demand for new property is falling.
Christian Odendahl did an interesting analysis of how the British stock market performed by sector, presumably to dispel the view of a relative benign market effect. What we find most interesting is that the bubble sectors of the British economy are affected the most. The worst performers since the Brexit vote were: construction, real estate investment, life insurance, real estate property trusts, retailers, financial services, and tourism. But almost all of this is explained by a combination of exchange-rate depreciation (tourism, retail) and a deflating property bubble. We think that Britain's property sector has blown into a massive bubble, and Brexit had the effect of deflating it. The problem for the UK is not only the absence of a plan B in case of Brexit, but also of an economic plan B not reliant on asset price inflation.
The FT is looking at what the UK should strive for in the upcoming negotiations. One of the options under discussion is EEA-minus - the equivalent of having your cake and eating it.
"Put simply: for each notch of national control secured over free movement, Britain will have to give up a notch of access to the single market."
Martin Wolf notes in his column that only the Remain position was a clear proposition. The Brexit split into three groups: free marketeers, sovereignists, and those who want to stop immigration. It will be impossible to satisfy all of them.
We are not sure that the choice of an EEA-minus deal is going to be available, especially considering the desire by the European Council take a decision with unanimity and also in view of existing treaty laws. Bilateral trade agreements are flexible, of course, but they are not to be confused with the single market. If you are not in the EU or the EEA, you are not in the single market, it is as simple as that. But if you are in the EEA, free movement of labour comes with it. We do not even think the European Council would grant Britain the now withdrawn concessions it made to David Cameron. The purpose of those was to prevent a Brexit vote. We suppose that the British Remain supporters will have another shock when they realise that there are not many choices, and that the only choice available if you want to retain border control is an FTA.