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.
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.”
40% Of the EU’s financial services exports are from the UK 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.
“We are, therefore, heading towards ‘made-to-measure’ agreements with the EU, possibly supplemented by bilateral agreements. The timescales for negotiating these kinds of agreements are very long – on average, between four and 10 years to complete. At the end of the day, it is likely that the UK will remain part of the EU for more than two years.”
One industry in particular looking for answers in light of the vote for Brexit is financial services, which relies on EU passporting rights.
“The loss of passporting rights means firms will no longer have the right to carry on regulated activities in the EU,” outlines Paul Edmondson, head of financial services at law firm CMS.
“They will have two options: get themselves separately authorised in each EU country where they carry on regulated activities – not an appealing option; or set up a new group company in the EU. Once that new company is authorised by the regulator in the country where it is incorporated, it will have full passporting rights into all 30 remaining EEA states, but not into the UK.
“Large groups may end up with one company for EU business and one company for the UK and the rest of the world. The senior managers of the new company will need to be based in the country in which it is authorised.”
8% Percentage of UK GDP represented by financial services“Negotiations over financial services promise to be long and difficult as they are strategic for both the UK and the EU,” say Mr Ithurbide and Mr Borowski.
“The UK is the EU’s leading financial centre – it accounts for almost 25 per cent of the EU’s financial services and 40 per cent of its financial service exports. Financial services represent 8 per cent of UK GDP. Although no financial market is likely to replace London, the loss of a ‘European passport’ for UK banks is likely to lead to the relocation of certain business segments – to Ireland or certain EU markets.”
The ‘Leave’ vote also calls into question the future of the UK itself as Scotland, which overwhelmingly voted to remain part of the EU, has already begun pushing for a second independence referendum, having narrowly voted to remain part of the UK in 2014.
There is also a risk other European countries will call a vote on their membership of the union, as anti-EU sentiment spreads across France and Italy in particular.
| WHAT NEXT FOR THE EU? |
Ian Stewart, Deloitte’s chief economist in the UK, says: “More extreme political parties, such as the Freedom Party in Austria and the Front National in France, are gaining ground. The immediate concern is the risk of a domino effect as Eurosceptic parties elsewhere demand their own referenda. Recent research conducted by Deloitte and the German employers’ organisation BDI found that 66 per cent of German businesses believe a British exit would lead to further such votes. “A complicating factor for UK negotiations with the EU is a series of national elections: in the Netherlands (March 2017), France (April to May 2017) and Germany (August to October 2017). It is possible that Europe’s de facto leaders, Angela Merkel and François Hollande, will leave office in 2017.” |
This adds another layer of uncertainty for both the EU and UK specifically. “Uncertainty around the future shape of any deal would likely have to run concurrently with the strong possibility of a break-up of the EU and the UK,” point out Jan Straatman, global chief investment officer, and Salman Ahmed, chief investment strategist, at Lombard Odier Investment Managers.
“Contagion to Europe is possible as conjecture increases about the domino effect and as markets question which other countries may also opt to leave the EU.”
In other words, the outcome of the referendum in the UK raises a whole host of new questions.
Larry Hatheway, group chief economist at Gam, observes: “For Europe, Brexit is the single-greatest challenge to European integration of the post-war period. Support for Europe cannot be taken for granted in an environment of rising dissatisfaction with its institutions. The EU must find a compelling message, but will it?”
Ellie Duncan is deputy features editor at Investment Adviser
