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A long and winding road

This article is part of
What next for the UK? - July 2016

A long and winding road

Britain’s historic decision to leave the EU has left many wondering what happens next. This question was asked of the ‘Leave’ campaign in the run-up to the referendum in the event they won a majority but, in the aftermath of the vote, the order of events appears just as uncertain.

This is in part because there is no precedent – no member state has ever left the EU.

The only certainties are that the UK does remain a member of the EU for now and will do for two years after Article 50 is triggered. Prime minister David Cameron also confirmed the day after the referendum he will stand down and will not start the Article 50 process – the task will be left to his successor.

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In its post-referendum investment update, Rathbones says the vote to leave the EU should now trigger a formal exit process, but admits that, given the constitutional challenges and relatively close result, “this will not be straightforward”.

“The government [has chosen] to delay formal notification until the Conservative Party leadership situation is resolved and until its policy ducks are in a row. There is even a chance that the UK could remain in the EU – the referendum is not legally binding and parliament must vote to repeal the 1972 European Communities Act. Also, despite their rhetoric in the run-up to the vote, European leaders may well explore new ways to keep the UK in the EU,” the wealth manager suggests.

EXIT MODELS

Trinity, an independent specialist hedge fund company, sets out the three principle exit models:

The EEA model

Remaining as an EEA country, rules such as the AIFMD and Mifid II would continue to apply but UK policymakers would have less say in their formulation.

The Swiss model

This means joining the European Free Trade Association and negotiating access to the single market.

The World Trade model

A complete withdrawal would designate the UK as a third country. This would have a more noticeable impact as Britain may have to rely on its World Trade Organisation membership to negotiate trade deals.

Chris Urwin, head of global research at Aviva Investors, explains: “Negotiations for exit do not start immediately. For that to happen, the UK needs to inform the European Council of its intention to invoke Article 50.

“However, the government may choose to start negotiations before triggering Article 50: once invoked, negotiations are limited to two years unless there is unanimous agreement of the European Council to extend them.

“So there is going to be a prolonged period of time during which the terms of our withdrawal from the bloc are unknown. It could take even longer for clarity on the UK’s terms of trade with partners around the world.”

One of the questions frequently asked during the run-up to the referendum was whether there are any models the UK could follow outside the EU.

As Amundi’s Philippe Ithurbide, global head of research, strategy and analysis, and Didier Borowski, head of macroeconomics, note: “The UK has several options: join the European Economic Area [EEA]; draw on the existing model for certain countries [Switzerland, Norway or Turkey]; or conform to the rules of the World Trade Organisation – the most costly solution for the UK as it is the furthest from the current situation. None of these solutions will please both parties at this stage.