Well, the markets are currently having their say, but I would strongly advise that we look at them in a week and a half and see if they recover from the initial shock.
Now for Andy’s predictions on what happens from here.
Negotiating our way out
The next step is Article 50 notice to leave the EU, which by the look of it requires an Act of Parliament, which may or may not happen before the summer recess in July.
If it does, then exit from the EU will be in summer 2018, unless an extension is granted by the other 27 countries if negotiations have not been completed. It’s important to note that while Article 50 requires a withdrawal treaty, this does not necessarily require free trade, and the fallback if agreement is not reached is simply the ending of the treaties.
So how will the negotiations play out?
The conventional argument is that the EU will be desperate to keep its largest single export market intact, and will roll over to give us a wonderful deal because of our trade deficit with the EU.
Reality? Look at the economics. To do that, we need to look at the worst case scenario.
What happens if negotiations break down and no trade deal is reached before Article 50 notice expires?
If no trade deal is reached we default to EU “Most favoured nation” trading partner status. What would be the effect if the UK imposed tariffs on EU goods and vice versa?
The answer is that goods that people want and for which they will accept no substitutes will be bought and sold as usual, albeit in slightly lower numbers.
So the owners of BMWs and Mercedes will still pay for their premium German cars, and similarly with their champagne and Cava, continental cheeses, Lego, and, significantly, out of season fruit. At a higher price.
On top of that, distributors of non-EU goods who currently import to the UK via the rest of the EU will have to decide whether it is in their interests to create a second supply chain directly or it is too expensive.
So the UK is going to be desperate to ensure that domestic prices do not rise, because British consumers want to buy EU goods and non-EU substitutes are not necessarily acceptable.
What about the other direction?
The same question applies, and this time it comes with an extremely high risk to our manufacturing industry.
Are our exports worth paying extra for?
Even if they are, the second and absolutely critical question is:
Would manufacturers find it more economically advantageous to move production to the EU and export to the UK?
That is a massive threat. In the event of my hypothetical trade war, the UK will lose in a big way, because we will keep paying for EU quality goods not easily replaced elsewhere in the world.
Exporting beyond the EU is of course essential, and good trade deals will in principle help with that – but any multinational is likely to have a local manufacturing base in most of the world. For example, GM is unlikely to ship cars from Vauxhall in the UK to China when they already have a factory in Shanghai, because it’s simply too expensive.
Another aspect: farmers, particularly dairy. Global milk prices are already in the basement. If no deal is reached, NI milk will not be marketable in the EU because tariffs will make it too expensive. Can we sell it elsewhere in sufficient quantities to save our dairy farmers?
So what next?
I said hypothetical trade war for a reason, because obviously it’s not in the interests of either the United Kingdom or the European Union to have one.
It does however highlight the relative weakness of the United Kingdom’s position in negotiations.
For that reason, I think we will have a trade deal before the initial Article 50 notice expires, but it’s not going to be the advantageous one that many on the Brexit side would have had you believe.
It’s going to be the Norway model, with very little variation because of the extent to which the EU needs us, even though we need free trade with them for the security of the UK economy.
- Free trade with the EU and EFTA
- Compliance with EU laws
- Free movement of EU and EFTA citizens
- Payment into the EU budget on a similar per capita basis to the EFTA members
It has to be said that the second, third and fourth bullet points are the ones which will give some Brexit campaigners a rude awakening. Even if the UK had been in an extremely strong negotiating position, the only one where there was ever room for negotiation was how much we pay into the EU budget.
The net current contribution of the UK to the EU, including payments directly to private firms is in the region of €7 billion. For comparison, Norway paid €290million in 2013, and on a per capita basis that brings us out at about €3.5billion. It could be better, it could be worse, but that gives us back some of the EU funding we would lose without exit.
So, in short, the world won’t fall apart, but give or take some humming and hahing over the next two years, there will be a deal which a lot of Brexiteers will not like, because the dream of abandoning whole swathes of EU law, closing borders to EU citizens, and putting a few pennies into the NHS is gone.
What about the domestic impact?
I agree with those who think that Cameron and Osborne are holed below the water. That is extremely bad news for those of us who are not on the right wing in politics, because their replacements (Johnson, Gove and IDS) are even further to the right. As a Christian, I find that prospect extremely bad, because I perceive a love of money and predict a further squeeze on the poor and middle classes in favour of the rich – reduced public spending, rebalancing of tax burdens from the rich to indirect taxes hitting the poor (and don’t hold your breath for reduced VAT!) which then has serious consequences for potential SMEs because any SME needs money to start. If wages are suppressed because there is little change in immigration (see above) and little incentive for rich employers to pay more, there will be fewer opportunities for entrepreneurs – and those entrepreneurs able to start already face an unequal market, long since the doom for local shops.
The serious impact on Northern Ireland will be the loss of EU funding. Leaving the EU will see at best much reduced access to ERDF and other funding from which Northern Ireland (and Scotland and Wales) currently benefits way out of proportion to England, which has saved what is now the Department for Infrastructure many millions in maintaining and enhancing public transport and roads infrastructure.
It is hard to believe that the Treasury will allow us more than Barnett consequentials of additional spending in England. Remember that there is almost permanent pressure to reduce the amount of money made available to Northern Ireland under the Barnett formula.
What about a border poll?
A quick border poll will not succeed. Sinn Fein are calling for one, and there may be one in Scotland sooner rather than later, but any border poll in Northern Ireland that does not result in a leave vote will settle the question for a generation. Any vote must wait until after the UK actually leaves the EU and we find out what the real impact on our daily lives is rather than what is still a hypothetical question.
Life is going to go on. In two years we will have a free trade deal in place ensuring ongoing free trade with the EU, but the three pillars of reduced EU immigration, repatriating our laws, and not paying into the EU budget will have been destroyed as worthless promises outside the interests of the United Kingdom to achieve.
It remains to be seen what the medium term effect of the vote will be on the markets. This morning is far far too early to tell.