Brexit: What Now?

By Vincent J. Truglia

 

  • Extreme Geographic And Generational Political Divides
  • The UK Determines When Negotiations Begin
  • London’s Advantages As A Financial Center Will Prevail
  • UK Has The Advantage In Any Trade Negotiations
  • Scotland May Pose A Major Problem For Brussels

 

The vote by the British people in the June 23rd referendum on membership in the European Union (EU) is one of the most important political developments since the fall of the USSR. A Remain vote would have just been of passing interest. The Leave vote, however, will have major political and economic consequences, not just across Europe, but also around the globe.

Although the referendum is not legally binding, that doesn’t mean it won’t be respected. Since the UK doesn’t have a written constitution, historical practice, and more importantly, what people expect as correct behavior drives British political processes. This is one of those instances where the British public expects the results of the referendum to be respected.

Let’s explore the actual vote. Overall, the Remain vote represented 48.1percent of the electorate. The Leave side received 51.9 percent, giving the Leave campaign a nearly 4 percent margin of victory. Although I have seen media reports saying that the Leave side won the referendum by a “razor thin” majority, frankly a 4 percent margin is a comfortable margin.

The Geographic Divide in England

UK voting was deeply divided geographically. In England, the Leave side received 53.9 percent of the vote, resulting in a 7.1 percent margin favoring Leave. In the seven major regions in England, six voted to Leave. Only London voted to stay. Even in London, seen as the bastion of the Remain camp, the Leave side still got 40.1 percent of the vote. Wales, too, voted to Leave, but by a narrower margin than in England: 51.7 percent for Leave; 48.3 percent for Remain. This was a surprising result because Wales is a large net recipient of EU aid money. Most commentators thought this would affect the outcome. Although EU aid may have impacted some voters, it obviously wasn’t significant enough to produce a majority for Remain.

Northern Ireland

Northern Ireland voted to remain by a comfortable margin: 44.3 percent for Leave; 55.7 percent for Remain. The Northern Irish vote was obviously impacted by the unique relationship between Northern Ireland and the Irish Republic. Concerns that the free movement of people between the two might be restricted probably made some people vote for Remain. However, it is hard to believe that the free movement of the Irish people across the island would ever be limited, because that free movement between the Irish Republic and Northern Ireland has been in place since the founding of the Irish Republic in the 1920s. A Northern Ireland referendum will not be called, the reason being that a referendum would open old wounds, including a possible return to the “Troubles” (Northern Ireland’s modified version of a civil war).

The Challenge Posed By Scotland

The big constitutional challenge as a result of the Brexit referendum is the fate of Scotland. A Scottish independence referendum took place less than two years ago. Those voting to remain in the UK won by a very small majority. In the Brexit referendum, Scots voted by a very large margin to remain in the EU: 38 percent for Leave; 62 percent for Remain. Since the Scottish government had indicated it would call another referendum if there were major changes in the constitutional structure of the UK and with the UK now on its way out of the EU, and with a large majority of Scots voting to Remain, another referendum on Scottish independence is possible. If there is another referendum, since the last Scottish independence referendum resulted in a tiny majority voting to remain in the UK, it is certainly possible, and even likely, that Scotland would vote to leave the UK. The Scottish issue will center on how receptive the EU would be to Scotland’s accession to the EU. From today’s vantage point, it is far from clear how Brussels will react. Technically EU institutions may only deal with sovereign states. Since Scotland is not yet sovereign, is it possible for the EU Commission to get around that “technicality?” The Commission could certainly find some loophole in order to talk directly with Scotland before Scotland would achieve its own sovereignty. The problem is not Scotland, but the precedent Scotland would represent for other independence minded regions in Europe. The most significant would be Catalonia in Spain. A strong independence movement already exists there. To date the EU has been able to avoid getting embroiled in that hot political issue by noting that it only deals with sovereign states. Negotiating with Scotland, prior to sovereignty, would generate significant concern in Spain, and elsewhere in the EU.

Recently, Scotland’s First Minister, the equivalent of a Prime Minister, has asserted that the Scottish parliament could veto an exit of the UK from the EU. This is a far-fetched idea. The EU referendum was approved by the British parliament. The British parliament has jurisdiction over all UK foreign affairs. Scotland is simply a part of the UK. As such it is hard to imagine that asserting the right to a veto by Scotland’s parliament of a UK-wide result would prevail. I assume the Scottish government is going to try everything, especially since they are probably already hearing that negotiations with the EU are not likely anytime soon.

Generational Divide

Besides the geographical divide, the referendum also showed a sharp difference between the younger generation and the older generation. The numbers are stark. Those between 18-24 years old voted 73 percent to remain. Those between 25-34 voted 62 percent to remain. Those between 35-44 years old were just about evenly split with Remain recording a slight majority at 52 percent. On the whole, those older than 45 years old voted strongly for Leave, tipping the scale towards the Leave outcome.

How can this generational divide be explained? I would suggest that the most likely reason is that younger people have never known the UK outside the EU. They are completely unfamiliar with the idea of national sovereignty. Older people who remember the UK before the EU know how it was like to live in a truly sovereign country. To put it more succinctly, the young seem to have voted following the old adage, “The devil you know is better than the devil you don’t.” Older people know what both “devils” are like, and have voted for the devil of old.

Article 50 of the Lisbon Treaty

Article 50 of the Lisbon Treaty provides a mechanism for a country to exit the EU. The problem facing Brussels is that the UK government must trigger Article 50 in order for it to go into effect. David Cameron, the UK Prime Minister, and a strong supporter of Remain, has announced he will resign his post in October, giving the Conservative Party enough time to choose another leader. Any new leader will need to have been a strong supporter of Leave if the exit process is to work. Many have mentioned Boris Johnson, the former Mayor of London, and the chief spokesperson for the Leave campaign as a possible candidate. However, given the history of in-fighting within the Tory Party, it is anyone’s guess who might be the UK’s next Prime Minister.

Already, most EU politicians are calling for a quick Brexit. They want a new PM named soon. It is doubtful the British will oblige. Merkel has indicated she doesn’t want Brexit negotiations to drag on too long. However, she has also indicated she doesn’t want things done too hastily. Since Germany dominates EU decision-making (one of the reasons the British voted to leave), Merkel’s views will probably prevail, which is good news for the UK.

London Will Remain Europe’s Financial Center

Negotiations regarding the UK’s relationship with the EU will be complex, to say the least. In the end, national self-interests will prevail. Although some in France and Germany want to see Europe’s financial center moved from London to either Frankfurt or Paris, there are many reasons why London will remain Europe’s key financial center. First, UK law is swift and generally predictable. German and French legal systems are slow, cumbersome and sometimes influenced by politics. This is a major point favoring London.

Labor law in the UK is much freer than in either Paris or Frankfurt. Financial markets need a flexible labor force. Another point favoring London.

London is English-speaking. World financial markets function in English. In addition, London has an almost symbiotic relationship with New York, another English speaking center. Also, as a result of its time zone, London has an extra hour of trading time with New York, compared to Paris or Frankfurt. Other ancillary benefits favoring London include its tax code and the quality of public services. The only reason any major financial player would abandon London for Paris or Frankfurt would be for purely nationalistic reasons. However, financial markets are not usually known for a having a strong nationalist streak. Therefore, despite all the uproar in the media, London is “safe.”

Trade Negotiations

Trade negotiations will be complex. However, the UK benefits from the fact that it registers a large trade deficit with the rest of the EU. The latest reliable data indicates that the UK exports about $330 billion to other EU countries, while importing about $415 billion from the rest of the EU. In addition, UK exports to other EU countries as a percentage of total exports have been steadily declining over the last fifteen years. For instance, in 2000, exports to other EU countries equaled 60 percent of total UK exports. By 2010, that percentage dropped to 54 percent. In 2015, it fell further to 44 percent. Over the same time frame, imports from other EU countries totaled a steady 54 percent of UK imports. Simple math indicates that given the UK’s large trade deficit with other EU member states, the EU would lose more than the UK from an unfavorable trade deal. Calmer heads in Brussels will likely prevail.

Free Movement of People

The free movement of people will certainly be affected, but probably not as bad as some might imagine. Most UK citizens living in other EU countries are retirees. British residents have been retiring to other parts of Europe well before UK membership in the EU. It is doubtful that EU countries would not welcome British retirees, since they usually represent an economic boon to the recipient countries. UK students wishing to study in other European countries would not be greatly affected because international students are usually welcomed in most countries. UK citizens would find it difficult to find work in other EU countries, unless they possess special skills. Unskilled UK citizens would represent one group, which will be on the losing end of Brexit. As noted above, free movement of people across Ireland will likely be maintained for a whole host of reasons.

It is estimated that over 3 million EU citizens work in the UK. It is doubtful that the UK would ask them to leave. However, going forward, the UK is likely to put restrictions not only on the number, but also the skills level of new migrants from the EU. This group would be the most affected. As such, during negotiations the UK could threaten harsher treatment of EU citizens already living in the UK if the EU doesn’t accommodate reasonable movement of people from the UK to the EU.

Contagion

The biggest international risk posed by Brexit is that it will likely incent other EU members to follow the UK’s lead. The Netherlands, and Denmark are seen as possible candidates for “Nexit” and “Dexit.” The Czech Republic might also try to depart. The phrase invented for that possibility is “Checkout.”

Even in France and Italy, there is no longer strong support for the EU. In a recent poll conducted in a number of EU countries by the Berlin-based Bertelsmann Foundation produced some surprising results. Only 52 percent of the French would vote to remain. In Italy, the result is only slightly better, with 54 percent preferring to remain. Those poll results represent an indictment of the EU’s present structure.

The Far-Right is Winning

The migrant crisis has clearly produced significant tension across the EU. That crisis has led to victories by the far-right across Europe. Hungary and Poland both now have very Eurosceptic governments. The same is true for the Netherlands and Denmark. Left-wing populism is growing rapidly in Southern Europe, especially in Greece and increasingly in Spain, which has faced political gridlock for many months. Austria nearly elected a far-right President. The far-right is likely to be the largest party in the next Austrian national elections. Even in Germany, the meteoric rise of the AfD party appears to imply that the AfD, which already sits in many state parliaments, is likely to win seats in the Bundestag in the next general election. The AfD wants Germany to return to the Deutschmark. Given recent events in Belgium, many argue that the country is no longer governable as a true federal state. I could include even more risks facing the EU over the next several years, but I think you get the picture. The EU is simply dysfunctional.

Brexit a victory for Trump

The US is already calling for UK-EU negotiations to be fair to both sides. Donald Trump is one victor of the Brexit vote. It’s not likely a coincidence that he planned to be in the UK immediately following the Brexit vote. He clearly supported Brexit. In addition, soon after the referendum, he was quoted as saying that the results in the UK vote demonstrated that people want to “take back their government,” a message which he forcefully espouses in his own campaign.

Australia and New Zealand Likely Beneficiaries

Brexit only indirectly affects most other countries around the world. Many are concerned that Brexit might lead to lower growth in the UK and the EU, therefore affecting world trade. It is hard to dimension such risks. Two countries that are likely to benefit are Australia and New Zealand. Both countries historically supplied a number of important agricultural goods to the UK. Once the UK joined the EU, these two countries lost their preferential status. They will likely regain that in the future.

Russia

Russia may gain as a result of the Brexit vote. The UK has been one of the strongest proponents of maintaining sanctions against Russia. With the UK having no voice in the future in the EU, it might mean that those countries, which are not strongly in favor of sanctions, might be persuaded to end the sanctions sooner rather than later. That would be a clear positive for Russia.

Summary

All in all, it is still too early to determine the full effects of Brexit. We will have to wait and see. However, any talk of economic or political Armageddon is grossly exaggerated.

As always, Clear and Candid.