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What could a vote to leave look like?

This article is part of
EU Referendum – May 2016

What could a vote to leave look like?

When the EU referendum takes place on June 23 this year, many believe the outcome will end the uncertainty that has dogged the UK since David Cameron called on the British public to make a decision about the country’s EU membership.

A vote ‘out’ of the EU is likely to raise more questions than it answers, though. So what are the next steps in the event the UK votes to leave the EU?

The Wealth Management Association’s deputy chief executive John Barrass says wealth managers and other financial services firms with retail clients should provide reassurance: “The first thing you’ve got to do is reassure them because they’re the ones who are most affected by uncertainty. [Reassure them] that nothing will change in the short term.”

As Goldman Sachs points out in a recent paper ‘Brexit: The uncertainty shock of leaving the EU’: “The negotiation of a UK withdrawal from the EU would be conducted under Article 50 of the Lisbon Treaty. From the date on which the UK prime minister informs the EU Council of the UK’s decision, Article 50 contains a two-year time limit for departure. During this transition period, existing EU legislation would apply to the UK.

“During the transition, the UK government would have to construct a new trading, regulatory and legal architecture.”

But David Page, chief economist at Axa Investment Managers, says: “For most of those two years, it will be uncertain exactly what the UK is able to establish in terms of a trade relationship with the EU.”

So what are the existing models the UK could replicate and what level of EU market access do they offer?

Norway, a member of the European Economic Area (EEA), has been cited as a potential model. It has free movement of goods, capital, services and people in the EU, but as the Organisation for Economic Co-operation and Development (OECD) points out in its report, ‘The economic consequences of Brexit’, the UK would have “only limited influence on regulation” under this model. At the opposite end of the spectrum is the World Trade Organisation model, or ‘most favoured nation’ status.

The OECD states this means trade with the EU is subject to the EU’s common external tariff. Switzerland’s arrangement under the European Free Trade Association means it is still required to make contributions to the EU budget and, under this type of agreement, there would be no passporting rights for banks.

Mr Page predicts: “My own suspicion is we would get something close to what we currently enjoy in terms of goods, because the EU has been quite good at promoting competition and a single market in goods. Also, the EU runs quite a large surplus exporting goods to the UK. But it’s going to be more difficult to get a reciprocal arrangement and something that’s as close to, or as beneficial for, services exports because the EU hasn’t been good at implementing a single market in services but also because the EU runs a large deficit importing services from the UK.”