The Economic Consequences of the Brexit Referendum Result

by George Hatjoullis

Note that this is not about the economic consequences of the UK, or at least England and Wales, leaving the EU. It is about the immediate economic consequences of the result even if the UK never leaves. The problem is that now we have a stalemate and a protracted period of uncertainty. To understand fully consider what must happen next; nothing need happen!

First, nothing legally need happen. The referendum was advisory and parliament could shrug and wait until the next election which is three years away. The election could become a de facto second referendum. Second, nothing will happen before November when the Tories plan to elect a new leader. Third, the new leader must, presumably with the approval of parliament which may not be forthcoming, invoke article 50 of the Treaty of Lisbon. The UK then has exactly two years to negotiate its exit. It then automatically leaves whatever the state of negotiation, unless the EU (minus the UK) votes unanimously to extend the deadline. Don’t bank on it Boris.

Nigel Farage would probably hit the exit button tomorrow but Nigel Farage will not be asked his opinion. Johnson and Gove had both stated that there is no hurry to invoke article 50, thus signalling their intention to begin informal negotiations before bringing article 50 into play. But the EU is under no obligation to negotiate until article 50 is invoked. The EU never intended for anyone to leave so the Treaty naturally makes life very difficult for any state that tries to do so. The indications from the EU is that it will not negotiate until article 50 is invoked. The strong indication is that the two-year limit will also be strictly observed.

Why do Johnson and Gove wish to negotiate before invoking article 50? It may be that they do not really wish to leave. They hope to get some ‘deal’ that they can then sell to the gullible electorate (we have now established that 52% of the UK electorate is gullible) as better than the Cameron deal and that we can now ‘safely’ remain in the EU. It may be that they do wish to leave but realise it will take many years to negotiate a deal and that the UK will be leaving in a bit of a mess if only two years are allowed. Whatever the reason, it is not up to them. It is up to the EU. The consequence of the referendum result is that the initiative is in the hands of EU. The EU has no incentive to do anything.

The EU was designed as an irrevocable union. It cannot allow member states to use referenda as blackmail to get special deals. Where would it end? It cannot allow exit to seem to be a painless and beneficial process as this would simply encourage exit. The same populist virus that has infected the UK is evident throughout the EU. One way of defending against this virus is to make an example of the UK. It can do this by giving it nothing more than it is legally required, which is very little. It may be that the UK is a large economy (already smaller than it was simply as a result of the referendum outcome) but there are bigger issues at stake here. The very survival of the EU (you heard this from Leave campaigners every day). So economics will not play a role in the EU negotiations. The overriding imperative will be to discourage any further defections. This means taking a very firm line with the UK.

The UK will find it very difficult to negotiate any deal with the EU in two years. It will find the EU unwilling to contemplate informal negotiations before article 50 is invoked. What incentive does it have to do so? There are thus two equally likely scenarios. First, the new Tory leadership stall indefinitely creating a protracted period of uncertainty. Second, they hit the exit button quickly and find themselves out of the EU without a fully negotiated arrangement two years later.

My expectation is that it will be the first scenario. Protracted uncertainty is very bad for economic activity. New investment will cease if the future EU status of the UK is relevant to the activity. Plant will be depreciated and run down. The role of the EU in the UK’s prosperity in the last 40 years will become very evident. Ironically, EU migration will slow considerably even before the UK regains control of its borders. The jobs that attract people will cease to be created and many EU citizens will also be put off by the uncertainty. The ageing population will still put pressure on the NHS but the less vibrant economy will make funding the NHS just as difficult as today.

If they opt for the second scenario then conditions will at least be clear quickly. They may not however be better. A poor trade deal from the EU ( driven by the political needs of the EU) will need to be offset by much better trade deals from the rest of the world. Good luck with that!