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So Britons said 'Let's leave'. What happens now?

Published: Monday 27 June 2016

In an historic vote, Britain became the first member of the European Union to say 'we want out'. The votes have been cast, the political debate is still rumbling on and the repercussions will last a long time and be felt across the globe. But what happens now?

Time scales

In order to start the UK's planned departure from the EU, David Cameron has to invoke Article 50 (clause 50) of the Lisbon Treaty. It hasn't been done before, so it isn't certain that everyone knows what part they play but this is the agreed process for departure from the EU. It sets out a two year programme for negotiating the exit but, once again, as it has never been used, it is likely to take a while to blow off the dust and translate the detail. Two years would appear to be an optimistic target and we should not be surprised if things run to three or four years. It should also be noted that the EU will not want to make leaving the EU a breeze; fearful, as they are, of further referenda and further losses. Negotiations are likely to be tough but, as the UK is a net export market for the EU, annoying their customer is not a tactic the EU would want to adopt and, whilst we are unlikely to see Mercedes, BMW, VW and other openly lobbying for fairness; you can bet it will be happening behind the scenes. That kind of thing used to happen in smoke filled rooms but the EU has banned them.

For the UK Government

Prime Minister David Cameron tied himself so firmly to the 'Remain' flag that he has felt it right to fall on his sword. He will stand down by October and a new PM plus associated cabinet members will be names by the same time. Presumably, that new leader will be of the 'Leave' persuasion and the cabinet much the same. Whether George Osborne can survive is an open debate and whether the new leader will have a mop of blond hair or wear a dress is all being debated behind closed doors. David Cameron's decision to delay his departure has undoubtedly steadied the ship to some degree.

For the economy

Having seen the Pound belly flop before bouncing back and seen the UK share markets do likewise, it is reasonably clear that the 'Leave' decision, whilst surprising, is not the disaster than we had been lead to believe it is. The earth is still revolving and the sun came up and, right at this moment, Britain is still part of the EU. The negotiations regarding our divorce settlement with the EU have yet to begin but, for the time being, nothing material has changed.

However, as those negotiations commence, we will start to see the nature of Britain's future relationship with the EU and that may well change perceptions of traders, investors and big business. The UK economy came into this referendum in relatively rude health. Britain boasts better employment levels than many economies, better growth rates than most, low inflation, very low interest rates and an accommodative value for the Pound. None of that has changed since the early hours of 24th June except that the Pound has weakened to some degree.

For Sterling

Newspapers love a Black Friday opportunity and Sterling did dive when the Leave decision became apparent but don't forget that all the late polls had suggested Remain would win and traders had positioned themselves accordingly. So the unwinding of those speculative positions and the abandonment of the Pound in the short term, did cause a sharp drop in the value of the Pound. However, within half a day, the Pound had recovered back to levels seen before the Pound had been bought up ahead of the referendum. Share markets did likewise and the Euro, which had also been hammered in overnight trading, was also back to par; that Par level being around the 4 month average.

Sterling may well face further headwinds as negotiations with Europe develop and we cannot rule out further GBP weakness; always being mindful that, if Britain can reduce levels of regulation and obstacles to doing business in Britain, Sterling could well find a lot of very interested parties across the globe.
All in all, the advent of a momentous change in the EU's funding and membership is going to be a trying time for all concerned but perhaps not as much as the disquiet that other EU nations are likely to experience as their own citizens as for their own say on membership. They must be wondering whether a 'Grexit' or an 'Italexit' or a 'DePartugal' might be good for them. 

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