Strategic Insight: Brexit

by The Rt Hon Lord Ashdown of Norton-sub-Hamdon

Brexit - The Risks and Opportunities

The UK’s vote to leave the European Union will bring about one of the most dramatic changes in the country’s economics and politics in its history. There are few certainties about the shape and character of a post-Brexit Britain – the nature of its future relations with the EU in trade and foreign policy, as well as with the other global powers, will only begin to emerge over the next two years. Yet despite the prevailing gloom in the City of London and elsewhere, the risks are foreseeable and manageable, and the opportunities are real, if this change is handled sensibly and with good will on all sides.

The Short Term

Politics

By early September the Conservative party will have elected a new leader, who may call for a general election to give them a mandate, possibly in the late autumn, but more likely early in the spring of next year. The election is likely only to be called if the new Prime Minister is certain they would win it, and the referendum aftermath may have turned the tide against the Conservative Government by then, not least because of the impact of market volatility, and many “one nation” pro EU Tories are likely to find the party they vote for an uncomfortable place to be under a Brexit Leader. The Labour Party is also in turmoil, with its senior MPs making a determined attempt to remove a lacklustre Jeremy Corbyn. Labour heartlands voted largely against the party’s official position.

Exiting the EU

With Article 50 of the Lisbon Treaty initiated, at the end of two years from notification, the UK must withdraw from the EU, although the process of decoupling may in fact take much longer because of the way in which EU regulations and standards are entwined into the fabric of British law and practice, and the parliamentary time required to redraft legislation. The point at which such regulations will no longer apply will be the subject of lengthy negotiation and there is an absence of trained trade negotiators. The speed of this may also be determined by parliamentary time restrictions. There will be conflicting pressures too on the remaining EU members – on the one hand, an urge to get rid of the UK fast so that they can get on with rebuilding the union, but on the other hand, a desire not to encourage other possible leavers by making the process too smooth or too speedy. There is no clear idea as to what future status the UK wants, or will be allowed to have, but the Norway option looks the most likely, with a Brexit Government accepting a degree of immigration as the price they have to pay, because they no longer have a seat at the table to challenge such decisions.

The Economy

After the initial flurry of panic, currency and share markets are likely to stabilise and big losses are likely to be made up, unless any of the big banks or manufacturers announce plans to depart the UK. Few will make up their minds on that until the nature of the new UK-EU relationship becomes apparent. Long term investment decisions will remain on hold until there is greater certainty as a result of the political process. Though the short term shock may pass relatively easily, the long term weakening of the British economic base is more worrying, unless Britain is very quickly able considerably to improve its competitiveness and productivity. The fundamentals of the economy remain weak – high public and private debt, weak productivity, low competitiveness and too great a reliance on financial services and the City of London. Many were predicting that, even without Brexit, the third and fourth quarters of this year would be difficult. The Brexit decision will not make this easier. Now that Britain’s credit rating has been downgraded, the increased cost of covering our debt may have a considerable effect on the public finances. A Brexit budget, perhaps even a tough one, looks very possible.

The Long Term

A New Business Environment

The EU is likely to remain the UK’s biggest trade partner both because of geography and because of the strength of relationships built up over more than 40 years of being inside the single market. If negotiations go as many MPs and the business community hope, Britain will still be in that single market. It remains to be seen how far big international deals like the Transatlantic Trade and Investment Partnership (TTIP) with the United States would apply to the UK under these circumstances, and how far the UK would be in a position to make separate deals with other global partners. It is noteworthy that Washington confirmed after the Brexit vote that President Obama’s statement that Britain would be “at the back of the queue” still applies.

The United Kingdom

The Scottish government has already made clear its intention to try to arrange another independence referendum. The current low oil price makes the economic case for separation much weaker than it was in 2014, but resentment about Brexit, despite the strong majority for Remain among Scottish voters, could provide enough momentum for the SNP to win a new independence vote, especially if the EU indicates it would smile on an independent Scotland’s swift accession. It would still be up to the UK parliament to allow such a referendum.

Sinn Fein has called for a referendum on a united Ireland in the wake of Brexit. That seems unlikely in the immediate future, but with a new “hard” border between Northern Ireland and the Republic, the province’s strong vote for Remain, and the possibility of Scotland leaving the UK, the status of Northern Ireland is likely to be debated in a way it hasn’t been since the Good Friday Accord, and could lead to the unravelling of the peace process.

The European Union

The possibility of further exits from the EU has grown as a result of Brexit. Sweden, Denmark, the Netherlands and the Czech Republic have prominent minority parties advocating departure, and they are watching the UK’s exit process carefully. In France, the National Front’s Marine Le Pen is a strong contender for the French presidency in the election of spring 2017 – she has made clear her appetite for taking France out of the EU. The break-up of the EU altogether in the wake of Brexit is highly unlikely, given the longer historical commitment of the key nations, but far from impossible.

Business Risks and Opportunities

The atmosphere of uncertainty in UK economics, politics and trading relations is likely to last at least until 2020, which makes medium term planning challenging, and a careful reading of potential business partners even more crucial. UK-based companies, for example, will need to be wary of deals within the EU that commit them beyond the expiry of the changeover period, when it’s not clear what regulations would apply. Similarly, less scrupulous business partners might take advantage of ambiguity in the changeover process.

In addition, regulated businesses in areas such as finance and energy will be distracted by the urgent need to clarify their future regulatory environment, delaying investment decisions until the position is clearer, which brings its own risks.

The other big risk is political instability. Disruption inside the UK is unlikely even if parts of the union break away, but if exit pressures grow in EU states where the far right has embraced the issue – Greece, for example – there is a real prospect of social upheaval. Scrutiny of political risk is important.

The opportunities are likely to come in the deregulation promised by pro-Brexit politicians, and the push they envisaged to get British business into hitherto neglected external markets unhampered by EU rules. But this can only be achieved if Britain is able to improve substantially and with speed on its position near the bottom of the OECD table of competitiveness. If this is to happen, it will very probably require opening up the economy to full competition and substantial immigration, while strongly reducing the regulatory burdens on business. 

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The Rt Hon Lord Ashdown of Norton-sub-Hamdon
Paddy Ashdown was elected leader of the Liberal Democrats for eleven years

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