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A hard and uncertain road lies ahead for exiting Britain

At the very least, Britain faces a prolonged period of uncertainty, during which both domestic business investment and inward investment will suffer.

Published: 26th June 2016 08:06 AM  |   Last Updated: 26th June 2016 08:14 AM   |  A+A-

AFP-David-Cameroon-Brexit

Britain's Prime Minister David Cameron delivers a speech at a Britain Stronger In Europe event campaigning for people to vote to remain in the EU in Birmingham, central England. | AFP

So how does this play out? The honest answer to this question is that I haven't a clue, and nor has anyone else. I don't care what the victorious Brexiteers tell you. They don't know either. The game was simply to win the vote. Now they must decide what to do with it. It is impossible to predict what direction this journey will take. But what I can do is set out some of the possibilities.

Start of a decade of uncertainty or a brave new beginning? 

Start with the economics. These do not immediately look nearly as bad as the Remain camp has been suggesting over the past two months. Certainly the financial markets fallout thus far has been nowhere near as disastrous as the likes of George Soros had been predicting, though it is fair to say that it is as yet early days.

All the same, it is hard to impossible to see any economic upside from what has just occurred, certainly in the short to medium term. There will be no instant Brexit dividend, and there will be no more money for the NHS and other promises rashly made in the heat of battle. To the contrary, the sharp devaluation in the pound has for the time being left all UK citizens significantly poorer.

At the very least, Britain faces a prolonged period of uncertainty, during which both domestic business investment and inward investment will suffer. Households, too, might increase their precautionary saving, hitting domestic demand at a time when it was probably weakening anyway. Markets are already discounting a 25 basis point cut in bank rate by November, taking it to zero. The risks of recession at some stage in the next year have risen significantly.

To mitigate this downturn, it is essential that the new Government provides early clarity on precisely what it is trying to do. This does not mean immediately triggering Article 50, which as Boris Johnson, Britain's presumptive Prime Minister, has already acknowledged, would be to jump the gun and give the EU the whip hand in determining the terms of exit. There is in any case no point in jeopardising all our trading arrangements with the EU before providing at least a wish list of what might replace them. The new Prime Minister must quickly define his purpose - is it the Norwegian, the Canadian, or the World Trade Organisation option? - and be sure that whatever is chosen can command a majority in Parliament.

In itself, this will be a far from easy task, but it be as nothing compared with the challenge that awaits in trying to win an accommodative arrangement from our EU partners. This brings us onto the politics of Brexit. Senior European bankers I spoke to on Friday are split down the middle on what to expect. Germany would be keen to secure a "velvet divorce" which protects its substantial trade surplus with the UK from the imposition of tariffs.

As a quid pro quo, Britain could seek continued access to the single market on existing terms for its financial services industry, which accounts for around 8pc of UK GDP. UK services as a whole enjoy a trade surplus of 5pc of GDP, a large part of it with the EU. Much of this is finance and related business services.

If these exports were damaged, it would make Britain's already humungus overall current account deficit much worse, piling further pressure on the pound. Xavier Rolet, chief executive of the London Stock Exchange, is on record as saying Brexit will over time cost 100,000 City jobs. If anywhere near the truth, it would punch a giant hole in Britain's already stretched public finances.

For all concerned, the velvet divorce would therefore be by far the best way forward. Yet rational behaviour is rarely the defining characteristic of a marital bustup. The French government is in no mood for compromises, and, "pour encourager les autres", seems perfectly prepared to hang Britain out to dry. It also sees an opportunity to shift German opinion behind its long-cherished goal of a centralised budget for the eurozone, which it views as the only way of buttressing the single currency against renewed crisis.

So will Brexit lead to a more federal Europe, or a less federal, even disintegrating, Europe? Britain's vote to leave the EU might be taken as a sign that further global integration is over. Yet it might equally lead to a circling of the wagons and a more protectionist Europe. Or it might spark a series of copycat popular insurgencies across the Continent. If Italy, or more explosive still, France blows up next year, it will make the fall-out from Brexit seem like a mere gust of wind. The single currency has rendered Europe a highly integrated and interconnected place financially. The omelette has been mixed, as it were, and it cannot be unscrambled now without dire consequences.

Back home, the years ahead are going to require nerves of steel. Brexit means different things to different people. To those who voted in their hundreds of thousands in England's North East to cut loose from the EU, it was as much a protest vote against the Government and immigration as anything else. To John Mann, the Labour MP who broke ranks to back Brexit, Thursday's vote was "a mandate against privatisation, for workers' rights and for higher wages". On the face of it, these priorities are almost wholly irreconcilable with the liberal economics of Boris Johnson and Michael Gove. They want Britain to be a truly global player, but they have aligned themselves with those who want a closed shop.

It's a tough road that Britain has chosen. To survive and prosper alone outside the EU, the UK will be forced to become a far more competitive economy, which is obviously a laudable purpose. But in so doing, regulation will have to be slashed, wages constrained, and to attract enterprise, taxes and some forms of government spending will need to be cut sharply. This may be just the sort of shock therapy the UK economy needs after decades of complacency. But is it what those who voted in their droves for Brexit had in mind? I doubt it. Now we are free to negotiate our own free-trade agreements, are people prepared for the huge increase in work visas that will be demanded by India and others as part of the price for opening up their markets? Again, I doubt it.

As I say, the honest answer to "how will this play out" is that I have no idea, and nor has anyone else. What happens to Scotland, and to Northern Ireland? If they vote for separation, is Britain's independent nuclear deterrent, or even its standing army, remotely sustainable any more?

A glorious victory may have been won, but the hard work, and the cruel business of dashing expectations and hopes, has only just begun.

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