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Brexit – But in which direction?


3rd August 2016

The political scene in the UK over the last two months has been more intense and fast moving than at any time in the post war period and Parliament has just started it’s summer recess – with most members ready for a break.

I am going to attempt to put some sense into what has happened and the likely direction of travel. In doing so I should say that I speak for myself – not the government or my Party, which is itself split on the Brexit issue. Also much of the post Brexit economic data is still to be collected – so some of what I say is anecdotal.

I should say that I campaigned strongly for the UK to remain in the EU, but, with that debate being lost on 23 June, I, like most of my Conservative colleagues, have moved to a position of reluctantly accepting the democratic wish for Brexit and wanting it to happen in as clean a fashion as possible maximising opportunities for the UK to retain its relationship with the EU.

But for the record and as advice for those of you who may face similar referenda in your own countries in the future, I would give the following reasons for the failure of the Remain campaign; which started as the clear favourite to win.

Firstly, the voting pattern varied between blue collar workers and older people voting mainly Out on the one hand and younger and more educated people voting In on the other. However, whilst 75 percent of under 24 year olds were for Remain – only 36 percent of them voted at all, compared to a voting level of some 85 percent for people over 60.

Secondly – the Labour Party leadership gave mixed messages on its wish to stay in the EU. As a result few Labour leaders appeared in the media and on TV, which made the campaign look increasingly like a Conservative leadership campaign as various Conservative politicians attacked each other. This in itself put off many Labour voters.

Thirdly, decades of UK politicians using the EU as a cheap excuse for when things went wrong in the UK often for domestic reasons, made it hard to project a positive message in the referendum campaign. Bizarrely some of the largest votes to leave the EU came from regions that received most support from the EU. As a consequence the Remain campaign had to rely on negative scare tactics which did not always work.

Fourthly, the Out campaigners were able to use discontent within the population not only to discredit the Remain political message but also the message of independent experts. So when the Bank of England, the IMF, the OECD, the Unions, the independent think tanks, in fact almost everyone, warned of the negative economic consequences of Brexit, a leading Leave campaigner Michael Gove was simply able to say – yes but no one believes these experts.
By the way, I think this dismissive attitude is not just a problem for the UK, but is reflective of growing anti-austerity feelings across our continent.

And fifth and finally, the impact of charismatic leadership was undervalued by the Remain campaign who looked technocratic and elitist compared to the populist approach taken by the Leave leadership – one should never underestimate the Boris Johnson effect.

So let me now look at the economy post Brexit. It has to be said that despite a lack of post Brexit policy direction from the government, or from the Remainers or from the Outers, and with a governing party leadership election and with a split opposition, where the majority of Labour MPs are refusing to support their own leader; despite all of this, any forecasts of immediate economic catastrophe have failed to materialise.

Helped by an immediate pledge of economic support from the Bank of England, after a short term fall the FTSE 100 index is now sitting above its pre Brexit level. Of course the companies in this index are companies whose majority earnings are in overseas currencies. The FTSE 250 however, which is more reflective of UK companies performance is around 2.5 percent down but now stable. The pound has also stabilised at around 10 percent down which could be inflationary on top of recent higher petrol prices. Full figures have yet to come out, but the messages are mixed, particularly in the medium term.

Indications are showing that house prices are slowing and commercial property funds have suffered high redemption calls. On the other hand the properties being released for quick sale by the same funds are finding buyers, especially from Asia, who are attracted by the distressed sale prices and cheaper sterling prices. Last week, one of the largest recruitment companies said that demand for new staff had increased by 8 percent over the past three weeks compared with the same period last year. And since the referendum there have been several large takeovers of UK companies by Chinese, South African and US purchasers. Only last Monday a Japanese company announced the £24billion takeover of ARM Holdings who design microchips. They have said that they will keep the company HQ in Cambridge, England and double the 3,000 staff. So deals are happening and much of the activity is coming from Asia.

Elsewhere private equity is looking for cheap acquisitions.

Having said that figures show that the number of deals in the UK have halved over the last year and deal makers on recent purchases were reported by the FT to have said that the transactions were negatively affected by Brexit. Furthermore all of these deals would have been started before Brexit. From my own discussions with midmarket London M&A bankers and attorneys, the deal flow has collapsed to post crash levels, with people mainly citing uncertainty as a reason not to invest, despite the cheaper prices. It’s worth pointing out as well that for the UK to really benefit from increased exports due to a weak sterling, UK productivity would have to be significantly improved in a way that has proved unachievable for decades. Furthermore, if cheaper immigrant labour is to be restricted as a result of Brexit, then productivity improvement will become an imperative.

In the meantime, last Thursday, the Monetary Policy Committee of the Bank of England voted to take no action on interest rates. However it looks likely that a forecast of significantly falling growth will lead to interest rate cuts on 4 August. It also looks like action on growth will win over inflation and the new Chancellor has backed this up in his first statements. The Osborne target of deficit reduction to zero by 2020 is likely to be dropped. Indeed, the mood seems to be swinging to fiscal stimulus and rumour has it that large numbers of infrastructure projects are being readied for announcement in the autumn statement.

Whether Asian purchases are cheap asset grabs or, alternatively, long term confidence positions in UK investments is yet to be seen. Likewise is the stock market confidence reflective of confidence in the UK as a place to invest or alternatively anticipating a government retreat from austerity? These things are yet to be understood.

However, until Mrs. May’s becoming Prime Minister, the state of preparedness for Brexit was nil. Indeed, during the Referendum campaign Prime Minister Cameron ordered departments of State not to spend time on Brexit preparations, perhaps thinking he would win. On the other hand the Brexit supporters themselves were also very divided on what they wanted, as they still are: although most of them are now proposing that the UK leave the single market.

The picture is therefore complicated, but in the most general terms one could say that the more favourable the person is towards the EU the more they want to delay triggering the withdrawal provisions contained in Article 50 of the EU Treaty, whilst the most pro Leave supporters wish to trigger sooner. The government’s position is something I shall come on to, but it is worth pointing out that the more pro EU British position is, ironically, at odds with the EU leaders’ position which is that Article 50 should be triggered immediately, so that the EU can move on from Brexit as soon as possible.

The practicalities of Brexit are going to be complex for the UK, with some 7,500 Acts of Parliament containing European law. On 27 June PM Cameron set up a Brexit unit headed by Oliver Letwin to look at this issue. However with our new Prime Minister May, this unit was immediately disbanded and Mr. Letwin asked to leave the Government together with the Chancellor George Osborne and the whole of the Downing Street advisor team, all of whom were generally very pro EU. It is notable that although Mrs May herself was nominally supportive of the Remain campaign, her new Brexit team are all for Leave. That is the new Foreign Secretary Boris Johnson, David Davis head of the new ministry for Exiting the European Union and Liam Fox as head of the new ministry for International Trade. How these three teams are likely to co-ordinate is the subject of much conjecture, given that the three individuals all have different positions on Europe. It’s important to realise that the pro-Brexit MP’s to date have not been a cohesive force – best proved by Michael Gove dramatically ending Boris Johnson’s leadership bid despite them leading the Brexit campaign together.

These new ministries are also going to need trade negotiators as confirmed by Mr. Letwin, who admitted that the British Civil Service had few trade negotiators, compared to the EU which has some 600 or Canada which has 300.
I hear that the hunt for negotiators has started, including discussions with professional service firms. Rumour has it that the Foreign Office has already been warning the new Brexit team not to poach its staff.

Clearly however, the general indication is that the negotiations will, at PM May’s request, be run by new pro Brexit ministers who want a clean break as quickly as possible. The government approach has not yet been set out so I can only give you hints. So in an article of 14 July, that is the week before becoming a minister, David Davis noted that we should be able to end the negotiation phase of trade deals with all of our most favoured non EU trading partners by September 2018, at the latest. This should be done, in his view, before completing the EU negotiations. As for Brexit itself he noted that EU regulation “will stay in place for the moment”.

Although written before he became a minister, this seems to imply that Mr. Davis supports the position which says that we leave the EU as early as possible and that we adopt, at the same time as leaving, the whole EU acquis into UK law and then take however long it takes to restructure or repeal it.

One civil servant has estimated that this could involve 25 Bills every year for the next decade. It does seem somewhat ironic that a vote to leave the EU could result in Parliament being dominated by EU business for the next 10 years. What remains unclear is the order in which things will be done.

The mechanical Treaty process of Brexit, namely triggering Article 50, is itself turning into a major talking point. Firstly, whilst the government is maintaining that the Prime Minister has the executive powers to trigger Article 50, there is a growing body of legal opinion that considers that she will need a prior vote in Parliament if not a full Act of Parliament. If this is the case and given that MPs supported staying in the EU by a margin of 3:1, it could well be the situation that MPs demand that the government has a plan for future trading arrangements with the EU, even an outline one, before they agree to vote on a Bill to leave the EU. Which could make the Bill difficult to get through Parliament.

This Act, which would provide for the UK’s exit, could then be kept ready, but not brought into force until the maximum two year Article 50 withdrawal process is finished one way or another.

Last week a high level Court case was started by pro Remainers, aimed at forcing the government not to trigger Article 50 before there is an Act of Parliament. The judge has said that this case will be determined by the end of the year and the government’s lawyer announced to the Court that Article 50 will accordingly not be triggered this year. So we know that there will be no immediate start to the two year EU leaving timetable. Of course, at some point there will need to be an Act of Parliament to leave in any event. So I speculate that what we may see is the government bringing forward a Bill in September. This would keep momentum for Brexit, stop the Court case and also show other EU countries that we are moving as quickly as possible to start the Article 50 process.

Some of the In campaigners are unlikely to give in too easily. Of course almost half (48 percent) of the UK population also voted to Remain and 4 million people have signed a petition since the Referendum asking for a second referendum. Young people especially have been demonstrating to stay in the EU. Most MP’s voted to Remain and many will be planning ways to force the government to stay in the single market after Brexit.

In the unelected House of Lords, an ex head of the Civil Service and others have called for the Referendum to be taken as advisory only. Personally I don’t think that any of these challenges to the initial referendum are likely to succeed, not least because they could lead to significant civil unrest. However, some Remain supporters think that the longer time there is before Article 50 is triggered the less heat there will be in the debate and the more people will see the error of their ways. Some Parliamentarians and legal experts are even maintaining that Article 50 is revocable after being triggered. This means that if either negotiations fail with the EU or alternatively the EU offers a good deal to the UK, the Article 50 notice could be revoked such that we remain in the EU.

However, given where we are, given the need to retain business confidence and looking at the politics of the new ministerial team, I find these Remain possibilities unlikely. The UK is on course to leave the EU and the debate realistically will focus on how much if any of the single market will be open to the UK. I do not however discount the possibility that the terms of the UK’s new relationship with the EU post Brexit may be put to a new referendum or feature in a General Election campaign. But this should not be confused with rerunning the Referendum on our leaving.

Surprisingly, there have not been many calls for an immediate General Election even though Mrs May became Prime Minister without the vote of Conservative Party members, let alone the country. I think this is because most MP’s, journalists and the British people are thankful for the stability that she is offering coming out of a very turbulent time.

Finally, it is not adequate just to look at the UK domestic situation, and I think that there are many outside influences here that could impact on the EU’s attitude to Brexit. Firstly trade. A few EU countries, Germany in particular, have very significant trading relationships and interests with the UK. This will encourage a deal to be made sooner rather than later. Secondly, pressures for change are building up in many other EU countries, for instance on freedom of movement. Ever closer Union is a concept rejected by 73 percent of voters in Holland, 85 percent in Sweden, 65 percent in Germany, 68 percent in Italy and 60 percent in France. And in some EU countries there are likely majorities to leave the EU. So it is possible that Brexit will force the pace of general EU reform, or at least encourage quicker negotiations with the UK. This would also be helpful to other non EU countries, such as Switzerland who have their own freedom of movement issues with the EU. And finally there are large international challenges, including financial stability, dealing with asylum seekers and facing an aggressive resurgent Russia that will probably help the EU decide to work as closely with the UK as possible.

So to conclude, I would suggest that given the referendum result and the constitution of the new government, Brexit is almost inevitable – although the form it may take is still very much open for discussion.

Jonathan Djanogly MP
22.07.16



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