We need to talk about Brexit…
Let’s talk about Brexit…no, wait, come back!!! I promise this isn’t an opinion piece…
I’m lucky enough to mix and mingle with many finance and accounting professionals, and, inevitably, the conversation always turns, at some point, to this most thorny of subjects. They say never discuss religion or politics in a business situation, and given some of the strong passions I’ve seen from both sides, I can absolutely understand why that rule applies here.
Still, I’ve never been one to shy away from a debate – balanced, respectful and meaningful discourse is vital to understanding different points of view, and if you can really understand why somebody feels the way they do, you can often find a common ground with them – and focusing on the things that bring us closer together rather than push us apart is the key to social harmony, in my humble opinion.
Despite all that, like I said, this isn’t an opinion piece – this is a piece intended to ask the questions “why did we have a vote?” and “what are the consequences?”
The decision to put the UK’s membership of the EU to a referendum followed a period of negotiation between the UK and its European partners over its membership. At the heart of these negotiations was a desire on the part of the UK to strengthen its sovereignty, particularly regarding jurisdiction of law and immigration control.
UKIP, a relatively new party in the UK political scene, based its entire existence on the premise of leaving the EU, and by banging the drum of “taking back sovereignty” they started to attract a slew of disaffected voters from other parties. Under pressure to stop the hemorrhaging within his own party membership, David Cameron promised a referendum on the subject to Conservative voters if he and his party were put back into power. The tactic – among others, of course – worked, and the Conservatives won a majority that few political commentators thought them capable of.
Cameron prevaricated on launching the Referendum as long as possible, but eventually, the pressure to live up to the campaign promise grew too much, and the question was finally put to the British public.
Right up until the final weeks, the Remain campaign never entertained the idea that they could lose, and with hindsight, that led to an obvious arrogance and complacency that played right into the Leavers hands. A suspicion of politicians in general was brilliantly seized on and manipulated to positon Leave as the campaign of the “people” - having said that, the final result, when it came was, politically speaking, desperately close. Indeed, before the result, Nigel Farage, the millionaire businessman and entrenched Member of the European Parliament who sold himself as an “ordinary man of the people”, openly claimed that “a 52-48 referendum result…would be unfinished business by a long way…”
He changed his mind when the 52 – 48 result went his way, of course.
Following the result, the Brexit process formally commenced on 29 March 2017 when the UK government exercised Article 50 of the Treaty on European Union, the legal mechanism that provides for the exit of a member state from the EU.
Under the terms of Article 50, the exit negotiations must be concluded within two years of the notification to leave the EU, setting a deadline of the end of March 2019. The negotiations are multifaceted and are likely to involve significant concessions and tradeoffs if a comprehensive UK–EU trade deal is to be reached. Under the terms of the exit provisions, any deal must be agreed on by a qualified majority in the Council (representing EU member states) and must obtain the consent of the European Parliament and other national parliaments. The Article 50 provision gives the European Parliament a potentially pivotal role in the process, because it could block any deal otherwise agreed on by the respective member states.
Absent a deal by March 2019, the UK would default to the rules of the World Trade Organization, implying the imposition of certain tariffs in its trade with the rest of the EU—sometimes referred to as a “hard” Brexit.
The backdrop of the referendum informs the negotiating position of the UK government and the possible shape of the future UK–EU relationship. In a white paper published in February 2017, following a speech by the prime minister in January, the UK government set out 12 principles to guide its negotiations. Among them, the government indicated its intention to be an independent nation with full control over its borders and full sovereignty over its laws, thereby repealing the jurisdiction of the European Court of Justice. These aims are incompatible with full access to the EU single market, as acknowledged by the UK government, because they conflict with the “four freedoms” of the EU— namely, the free movement of people, goods, services, and capital. Full access to the single market is conditional upon these freedoms being respected.
Single market access confers the right to “passport” services (including certain financial services) freely throughout the European Economic Area (EEA) based on authorisation in a single member state. Given its stated aims, the UK seemed to have effectively ruled out membership of the EEA after exiting the EU, which would have had important implications for investment firms providing cross-border services. In recent weeks, however, there have been some noises suggesting that a version of the “passport” services could still exist, albeit predicated on the UK paying a fee for such access to the EU, and more than likely some agreement on free movement of people.
The big question is, of course, what will happen when we actually leave? Sadly, nobody really knows for sure. This is the problem with putting a binary question to the people of the UK when the scenario is anything but binary – it’s not, and never has been, as simple as “do we leave or stay”.
There are five main Brexit scenarios, as identified by The Independent.
- The UK would leave the EU. We would have no members of the European Parliament, no seat on the European Council of leaders and no substantive role in setting the rules of the single market. Yet we could do all this and still remain in the single market and possibly also the EU customs union. This would mean paying an annual contribution into the EU budget. The UK would also have to accept free movement of people, although it might be able to negotiate some restrictions on flows in times of “serious economic, societal or environmental difficulties” in the manner of Norway and Liechtenstein. Brexit 1 would keep disruption for UK firms trading with Europe to a minimum.
- The UK leaves the EU and remains in the single market and customs union, as in Brexit 1, but only for a temporary period while a new long-term trade agreement is forged with the EU. The UK could also use this period to negotiate new trade deals with the rest of the world. As in Brexit 1, this would also be a course that would minimize disruption for British-based businesses. This would also have the advantage of buying the UK precious time, since many trade experts are doubtful that the two-year deadline for EU exit after Article 50 is triggered is long enough for Britain to negotiate a new deal with the rest of the EU and also the other countries with which the UK currently freely trades as part of the EU.
- Britain leaves the EU and also the single market and the customs union but signs a comprehensive free trade deal with the rest of the European Union. This would be welcomed by goods exporters to Europe. Yet it would also entail costly customs checks. There would additionally have to be a customs border between Northern Ireland and the Republic, with potentially serious political consequences. And if the deal did not cover services (as free trade deals generally do not), our services exporters to Europe – in particular our financial services firms – would be severely disadvantaged. It is possible that a special services deal could be done with the rest of the EU, whereby the UK effectively replicates EU regulation under an “equivalence” regime – although this would obviously mean applying EU rules while having no input into their design.
- Leave the single market and customs union with no free trade deal in place and trade with Europe under World Trade Organisation rules. WTO rules mean that the EU would impose its Common External Tariff on UK exporters. Analysis suggests this would create an initial hit to UK exporters of at least £4.5bn – and in reality the damage would be many times that. The UK could also impose tariffs on goods imports from Europe, provided these were no higher than those charged on other countries’ imports. This would bring in more tax revenue. But tariffs on imports would also push up import prices and domestic inflation. Furthermore, if the UK failed to conclude free trade deals with the 52 other countries with which the UK currently trades freely as an EU member the same would follow: damaging tariffs on UK exports and imports.
- Leave the single market and customs union with no free trade deal – but unilaterally scrap all import tariffs. This would permit a flood of cheap food, cheap goods and cheap commodity imports into the UK. This would also push down prices in the shops. But it would have a catastrophic impact on our farmers and manufacturers and all those who work in those sectors. It would be politically explosive since, by Government choice, the exports of our industries would be subject to tariffs abroad, but imports from foreign competitors would not be. Also, under this Brexit, the UK would not even seek to strike free trade deals, meaning there would be zero help for our services firms, which are the dominant part of our economy, in breaking into foreign markets and bypassing their non-tariff barriers.
There is, of course, a further sixth scenario - we don’t exit at all. The calls for a second referendum seem to be growing ever louder. There is a groundswell of opinion among many Leavers that they were misinformed or outright lied to during the campaign, and as the consequences of their decision grow ever clearer, they would like to reverse their opinion.
It’s no secret in political circles that Jeremy Corbyn was, at heart, a Leaver, caused by decades of personal mistrust of the mechanisms of power in Brussels, albeit distrust caused by being removed from any close relationship. Since his ascension to leader of his party, the closer ties he’s fostered with the other EU leaders as part of his remit have led to a change of heart. Indeed, rumour has it that he has performed a 180 turn on the subject, and now believes Remain is the most sensible option for a healthy UK, and it’s easy to see why. When you look at our size relative to our economic power, it seems a dichotomy, yet being in the EU is what has enabled us to become said powerhouse.
As a result, the Labour party appear to be consciously moving towards the ground previously only occupied by the Lib Dems of “anti-Brexit”, and, indeed, there is some suggestion that should the transition process still be in effect during the next General Election, Labour would be well advised to make reversing the decision a central policy tenet.
All of the above makes one thing, and one thing only, a certainty. Whatever happens next, there won’t be an end to the turbulence of the past two years when March 2019 arrives. We have been in choppy political and financial waters since the vote was first announced, and it shows no signs of abating. Indeed, the reverberation and effects of the decision to Brexit are sure to be felt for many years to come…
Andy works for Wiley and Sons, official publisher of the IMA’s CMA curriculum. If you or somebody you know is looking to take their CMA designation exam, talk to Andy about how Wiley’s test prep Efficient Learning platform can help increase your chance of a successful exam pass.
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