The UK Prime Minister David Cameron decided to resign after the referendum. The new Prime Minister Theresa May starts on July 13, and it is then her duty to start to work with the resignation and EU relationship negotiation process. The referendum decision is not binding, although it is politically difficult for the Members of Parliament to ignore it. There is a lot of speculation whether Brexit really will happen. It is not an easy step to leave the single European market. Theresa May has said she is going to respect the will of the voters, but there is a lot of uncertainty on how the breakup will actually be implemented and on what the UK’s relationship with the EU will be going forward.
Politically, the situation is even more complex. Scotland has had its own independency plans for a while now, and has said it would leave the UK if the UK leaves the EU. And there is also a threat that Brexit could shake the relatively new peace in Northern Ireland. People in Northern Ireland also have talked about an exploring an option to join Ireland. In Northern Ireland and Scotland, the majority of voters wanted to stay in the EU.
At this point it is impossible to give a detailed analysis when we have no information on what the EU - UK relationship will be in the future. We don’t even know the negotiation targets of the UK or the EU. In principle, we can say it can be anything from the models Norway and Switzerland have with the EU to the global WTO model. For example, Norway is a part of the single market, but it has to follow all EU rules, including free movement of people that is a big issue in the UK. Switzerland is not directly a part of the single market, but it has agreements to cover free trade and also free movement within certain limits, but its banks cannot operate in the EU single market (that’s why many Swiss banks have had EU business HQs in London).
Finance services are very important to the UK and especially for London. UK based finance services that have been a part of EU’s internal market, including the passport model to be able to offer services in each EU country are unlikely to continue as is. This arrangement is simply unlikely if the UK is not a part of the EU. The free movement inside the EU has also been important for the UK finance sector, which has sourced talented people around Europe. London has also become a capital of fintech, with many European entrepreneurs moving to London to set up their finance technology companies.
Capital Markets Union has been the EU’s new initiative to build a more common capital market inside the EU, helping offer finance services and also helping European organizations to raise capital. It has been important also for SMEs that they could raise more capital to compete globally. London City has been a strong supporter of this project and it has been led by British EU Commissioner Lord Hill. He has now decided to resign and when the UK is not part of the EU, most probably it will not be a part of this Capital Markets Union.
The UK has also quite large manufacturing and agricultural industries that sell products especially in the EU single market. For example, German and Japanese automobile companies have had manufacturing in the UK. Often these firms have also received EU subsidies. If the UK leaves the EU, it has an impact on these industries too.
The UK will need to negotiate trade agreements not only with the EU, but with many other countries in the world, because up till now, it has been able to trade based on EU’s deals with those countries. It takes a lot of time and resources to negotiate these agreements and already there have been comments that the UK does not have enough competence to handle this given that for 40 years they haven’t had a need to. So, they probably need to hire competent negotiators from other countries, including the US.
According to the EU rules, the resignation process takes two years. Officially the UK hasn’t yet triggered the resignation, and it is still unclear when they are going to do it. And it is also possible that it takes more than two years to agree to all terms and conditions of the resignation and agree on a new arrangement. For example, the EU is now finishing a trade agreement with Canada that has taken 7 years. The TTIP and TTP negotiations have also taken years.
The EU and US are now finishing the TTIP agreement. It is still hard to say, when it will be finalized. At the moment trade from the US to the UK continues as before based on the EU agreements, and it is hard to evaluate what happens after the resignation. If the UK has the Norway model or ‘modified’ Norway model, it could be applied for trade with the US. But if it is a much looser arrangement, then most likely the US and UK will need a mutual trade agreement as well.
The referendum had an immediate impact on the UK economy. The British Pound has dropped significantly against the dollar and euro. The Bank of England has started actions to stabilize the situation, e.g. by easing lending. The government also announced that it canceled its plan to cut the budget deficit by 2020. Many analysts see that real estate market that has been hot especially in London is one significant risk. If growth decreases, fewer people move to the UK and foreign investors are less interested in London properties. Already now, five property funds have suspended redemptions by their investors due to liquidity issues.
It has been said that Brexit is the most complex and expensive divorce in the world. It will take years, and it is still unclear if it really changes things, or if is it will be more like an “almost a member” arrangement with a new name. But it has already created a lot of uncertainty for the UK economy and its trading partners, forcing many companies to consider what to do with their UK based operations. It would be important for companies and the economy to find a new arrangement or at least targets for the new arrangement as soon as possible.