If you thought THAT was intense, wait til you see what the next two years hold.

By Geoffrey Smith
June 24, 2016

The U.K. has voted to leave the European Union in an unprecedented political revolt against 60 years of European integration, but what does that mean in practical terms for both the U.K. and the bloc’s 27 remaining members, and for the businesses and people caught in the middle? The honest answer—as frankly confessed by Barclays Plc CEO Jos Staley this morning in a memo to staff—is “I don’t know.” Nobody does. This trick hasn’t been tried before. There are some steps that have to be taken, some that beg to be taken, and some that people will try to take. But how many of these happen and in what order, is hugely uncertain.

Q. What happens next in Britain?

A. That question is already being answered. David Cameron has announced he will resign as prime minister to make way within three months for a new leader who can conduct negotiations on the terms of divorce with the rest of the EU. The Governor of the Bank of England (and, after a delay, the European Central Bank) have promised to provide as much liquidity to markets as necessary to stop this from becoming another ‘Lehman moment’. But there has been no sign of actual cash injections by either bank so far. (For more on the immediate impact on financial markets, click here.)

Q. Is the U.K. automatically out of the EU?

A. It’s not so simple. In a statement responding to the vote, Donald Tusk, the head of the EU’s Council, said, “Until the United Kingdom formally leaves the European Union, EU law will continue to apply to and within the U.K. And by this I mean rights and obligations.” He said there will be “no legal vacuum.” So, that means that the continued free movement of EU citizens in and out of the U.K. (and vice versa) and the right to live, work, trade, and invest will be untouched until the ink is dry on a binding new agreement. Businesses that employ Britons in the EU, or EU citizens in the U.K., will not be immediately affected, although they will have to start longer-term planning about where to locate jobs in future.

Q. How long will that take?

The EU’s Treaty—known as Article 50—stipulates that any country that wishes to leave shall first notify it and then conclude talks over the new bilateral relations within two years (albeit that can be extended with some political discretion—and may well need to be—given the depth and complexity of the U.K.’s integration with the rest of Europe). Now, crucially, Cameron’s resignation statement implies that he won’t start the clock ticking down. That gives the two sides time to calm down and think a bit before they get down to the nitty gritty.

Q. What will the final agreement look like?

A. I don’t know. No one does.

Q. Didn’t you already say that?

A. Ok. The Brits will be aiming for a deal that keeps the best possible access to the EU’s Single Market—especially for the City of London and its car and pharma industries—while avoiding as many of its obligations as possible. The trouble is, they already had the best of both worlds, with full access to the Single Market, and free of the burdens of such integrationist projects as the euro or the passport-free Schengen area.

Q. Will the EU give Brits what they want?

A. Put it this way: If you were in a club, why would you offer better conditions to non-members than to members? Or put it this way—if someone had just done their very best to sabotage your life’s work, how would you feel about them immediately asking you for more favors? There is a bloc of opinion in other capitals—notably Paris and Brussels itself—that wants to punish the U.K. to frighten others off pursuing the same course and unravelling the EU entirely. But Tusk and his Commission counterpart Jean-Claude Juncker have a tightrope to walk: the U.K. is a vital market for German carmakers, French farmers and food companies, and a vital pressure valve for the labor markets of the Eurozone that can’t or won’t reform to provide jobs for their youth. The head of the German employers’ federation said earlier this week it would be “foolish” to impose any extra barriers to trade. It’s not like the Eurozone has a surplus of alternative sources of growth. But France holds presidential elections next spring, and Germany holds parliamentary elections in October 2017. The negotiation process will get extremely difficult if the U.K.’s deal becomes a bone of contention in the elections of the EU’s two biggest economies.

Q. What about Scotland, Ireland and Wales?

A. First Minister Nicola Sturgeon has called the result of the vote “democratically unacceptable” for Scotland, given that it voted clearly to remain in the EU. As such, the devolved Scottish government will now prepare the legislation for a second referendum on independence from the U.K. Curiously, this could be a lot easier from a legal point of view today because in contrast to 2014, when it held its last independence vote, Scotland wouldn’t be voting to leave the EU in order to go through the cumbersome process of re-applying. Northern Ireland also favored remaining in the EU and so faces its own soul-searching, especially the Protestant community that has traditionally backed union with Great Britain rather than the rest of Ireland. Wales, by contrast, voted to leave, along with England.

Q. What does this mean for the Eurozone?

A. The proof that European integration is reversible is likely to encourage fresh speculation in financial markets on the Eurozone unwinding. The Eurozone will have to decide on whether to allow that, or whether to complete the institutional arrangements that would create a deeper union, specifically a common Treasury, shared debt obligations, and a common deposit insurance fund for banks. As long as these are ultimately backstopped by governments as weak and highly indebted as Greece’s and Italy’s, the euro remains vulnerable. But Germany has never been prepared to hand over its checkbook to the rest of the bloc, and in terms of domestic politics, appears less likely than ever to do that, given the rise of the far-right Alternative für Deutschland party.

 

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