43 years of being able to blame “Brussels” for virtually every perceived wrong in UK life is coming to an end. The UK has voted to leave the European Union, the world’s largest and most successful trading bloc, and stand alone. The last time Britain stood alone, it was fighting Nazi Germany which had conquered virtually all of Europe. it was an historic and proud hour. This time, it is rank stupidity.
We are now all in uncharted waters. The formal process of leaving the EU will take up to two years. At the end of that time, the UK will have no voice in Europe. The UK’s commissioners will have to leave office; MEPs will either have to resign or perhaps they can remain until the next European elections are held. British staff working in EU institutions such as the Commission, the joint European Research Centres; The European Patent Office and many more will find themselves out of a job – these positions are only open to EU citizens.
On the markets, stocks will fall, but it will probably be a temporary matter (weeks to months?), but the UK stock markets will be badly hit and the share price of British based firms may well take a bloodbath. What the UK has voted for is a step in the dark and an extended period of uncertainty. As news of the decision spread, the pound tanked from a six month high of $1.4902 and then fell off a cliff, currently trading at $1.36 before European markets react to the news. Yesterday, it looked as if the UK would narrowly vote to remain in the EU and currency speculators bet on the Euro and the Pound – these guys will have taken significant losses.
The Yen is appreciating strongly as a perceived safe haven currency, but if this is sustained it is going to do serious harm to Japanese exports (priced in Yen) which just became much more expensive, damaging the Japanese economy. For Japanese goods priced in local currencies, the margin when profits are repatriated to Japan just took a big hit.
We are in for a period of turmoil as investors digest what this news means and the UK defines its trading position with Europe and the wider world. The campaigners for Brexit have no say in UK government decision making. From an economic standpoint, the next best solution to remaining in the EU would be for Britain to join EFTA, but this would mean continued payments to Brussels and acceptance of the free movement of people which the UK government would be unlikely to sell to the UK electorate. If the UK cannot take this course of action, then the remaining members of the EU cannot offer the UK any more favourable trading arrangement because to do so would invite similar schisms in other EU states which would ultimately lead to the destruction of the EU which would have catastrophic effects in Europe and globally – the Euro would become virtually worthless plunging Germany, France, Ireland, Italy Spain et al into an economic crisis which would make the sovereign debt crisis seem like a lover’s spat. Unfortunately, the EU’s survival may now depend on giving the UK a really rough time and its members will not quail from doing so. In tandem with this, the EU must reform to be more relevant to EU citizens, more democratic and transparent and strive to reduce bureaucracy which is an impediment to trade.
David Cameron’s position must surely be untenable. He pledged a referendum and argued strongly that the UK must remain in the EU. The people chose to ignore that advice and his personal credibility was challenged by Leave campaigners during the referendum. However, to be in a situation where the ruling party needs to find a new leader now or to call a snap general election would only make a very bad situation worse.
There have already been calls for the Bank of England (which in fairness did warn this would happen!) to intervene to prop up the value of Sterling, but it is highly unlikely that any intervention would be successful. The room for the Bank of England to make further monetary easing decisions is also extremely limited. I suspect people will just sit on their hands for a while and see where Sterling and the markets land.
The EU, for its part, has to make it clear that it is business as usual but that it notes what happened in the UK and the wider sentiment on the continent. As they say, watch this space…