What Now? Brexit Win Sets Stage for Two Years of Bitter Talks

In World Economy News 27/06/2016

British voters have opted to walk out on the European Union, setting up at least two years of bitter talks. Here’s a road map of what’s to come.

How Long Will David Cameron Stay?

The prime minister said Friday morning he’ll stay in office for at least three months to “steady the ship.” He said Britain should have a new leader by the time his party meets for its annual conference in October and it should be the next prime minister who starts the formal negotiations with the EU.

What Happens Next?

Cameron will travel to Brussels next week to brief EU leaders on the U.K. situation. The other national leaders will want to know what sort of relationship the U.K. wants to have with the EU. Before then, the six founding members of the bloc will meet in Berlin on Saturday. There may also be an emergency meeting of finance ministers over the weekend. Cameron said Friday he won’t trigger the start of the secession process underArticle 50 of the EU treaty. That will be up to the country’s next prime minister.

Once Article 50 is set in motion, the U.K. formally has two years to negotiate its way out of the bloc. Analysts say it’s unlikely that this will be long enough to work out the more complex trading accords and talks are likely to continue long after the U.K. officially leaves.

Who Will Lead the Negotiations?

Cameron’s successor is most likely to be one of the leaders of the Brexit campaign, such as former London mayor Boris Johnson or Justice Secretary Michael Gove. Their presence may harden the stance of other EU governments. The Leave vote may also prompt calls for a general election to clear the decks and elect a government specifically charged to negotiate with the rest of the EU.

What Sort of Deal Does Britain Want?

That’s still to be decided, and something that the Leave camp couldn’t answer definitively during its winning campaign. Three issues in particular will be in focus for investors and executives: What new agreement will regulate the $575 billion of annual trade between Britain and the rest of the EU? On what terms will U.K. companies be able to access the EU’s $13.6 trillion single market? And will banks domiciled in the U.K. continue to be able to do business in the rest of the EU?

There are three broad options:

• The Norwegian Model
  By staying in the looser European Economic Area, the U.K. would still have access to the EU’s single market and participate in free movement of workers — but without any say in how they evolve — and it would still contribute to the EU budget. Banks prefer this model because it would preserve their access to EU customers.
• New Deal
  Negotiating its own free-trade agreement would limit most trade tariffs between the U.K. and the 27-nation bloc but it would take years to work out the extent of Britain’s market access. The EU’s trade agreement with Canada took seven years to negotiate and still isn’t ratified.
• WTO Rules
  Trading with the EU under World Trade Organization rules would avoid the hassle of setting up a complex new agreement and the U.K. could set its own trade tariffs just like Russia and Brazil do. But it would have no favorable relationship with the EU or any other country.

What Will the EU Offer?

Domestic politics will play its part and leaders from Helsinki to Athens may not want to give a favorable deal with extensive market access for Britain because that would risk encouraging similar anti-EU movements in their own countries.

The response will largely fall into two camps: the pragmatic German approach will probably acknowledge that the U.K. needs to remain a major trading partner; the French will be leading another group who believe exit shouldn’t be easy and that countries on the outside don’t merit the same favorable conditions as EU members.

Add to the mix the rise of anti-EU sentiment in eastern Europe, a drive for deeper integration in the euro area and some sympathy for Britain’s decision among Nordic governments, and it’s clear the next few years won’t be straightforward.

What Do Banks Want?

Financial-services firms have a long list of concerns but the most important is “passporting.” That’s the legal regime that allows a bank domiciled in one EU country to do business in any other. Without it, international lenders will probably have to movesubstantial operations out of the U.K. in favor of Frankfurt, Dublin, Paris or other hubs.

Another issue is euro-denominated trading and settlement — the EU is wary of allowing those transactions to continue unrestricted out of reach of its regulators. Asset managers’ ability to sell mutual funds across the continent is another privilege that may be up for review. Those rules will be a major focus for the U.K., since finance is so important to its economy.

What Do Employers Want?

Chain operators like Whitbread Plc, lodging groups like InterContinental Hotels Group Plc and retailers like J Sainsbury Plc are all heavily dependent on European workers: almost three-quarters of workers in the hospitality sector in London are foreign-born.

With the Leave campaign promising to end the free movement of European citizens “by the next election,” the hospitality and retail sectors will have to find ways to attract British staff, perhaps by paying higher wages. How fast that has to occur will depend on what happens to EU citizens already resident in Britain.

While U.K. Independence Party leader Nigel Farage has said those living in the country now should be allowed to stay, no one yet knows what the criteria will be and implementation of the new rules will depend entirely on future legislation.

What Do Manufacturers Want?

Market access is the biggest question hanging over British manufacturers. Before the referendum, companies from Diageo Plc to Rolls-Royce Plc warned of the consequences of being shut out of the EU, the destination for about 44 percent, or about 223 billion pounds, of U.K. exports. Just 16 billion pounds worth of exports goes to China.

Securing a comprehensive free-trade deal that keeps that flow moving in both directions without tariffs will be manufacturers’ top priority. That’s especially true for companies with integrated supply chains like GKN Plc, which sources parts in Spain and Italy, assembles them into drivetrains in the U.K., and then sells them on to European carmakers.

What Do Farmers Want?

Farmers did better out of the EU than almost anyone. Roughly 40 percent of the bloc’s budget goes to the complex subsidies of the Common Agricultural Policy. British farmers received 3.1 billion euros ($3.5 billion) in direct payments last year. Another 5.2 billion euros is allocated to the U.K. for rural development projects through 2020.

The Leave campaign said that “subsidies will continue” after Brexit, because the U.K. will be able to redirect payments that it currently makes to the EU budget. But like every other aspect of Britain’s post-EU business landscape, this is a matter of future legislation, and the U.K. government will face many other demands on its budget.

Source: Bloomberg