Brexit shock a force for EU structural reform

brexit

There is a big world outside Europe that the UK can freely interact with.

By Steve Blizard   9 July 2016

In a historic “Brexit” vote which has ended months of speculation, the UK electorate has voted to leave the European Union (EU).  While the speculation may have ended, the uncertainty has not.

Immediately following the referendum, it’s as if a reset button has been pressed on UK politics, with Nigel Farage resigning as the leader of UKIP and leadership of the Tories and Labor are now up for grabs.

The actions that the UK now takes may end up becoming a template for others in the EU to follow.

Leaving the EU is going to be difficult for the UK to unravel because there is no precedent to follow and there are significant constitutional and legal hurdles to overcome.

The UK joined what was then known as the European Economic Community in January 1972 when Prime Minister Edward Heath signed the Treaty of Accession in Brussels.

Membership of the Common Market took effect in 1973.

The EEC morphed into the EU following the Maastricht Treaty in 1993.

So there is over 40 years of ‘unpicking’ required.

The UK is now required to invoke Article 50 of the Lisbon Treaty, although the precise timing of this step is entirely in the hands of the British government.

Once invoked there is approximately a two-year period allowed to organize the ‘exit’.

Market Reaction

The markets reacted violently because the majority of the ‘bets’ were on the “remain” side.

Interestingly, the UK stock market experienced one of the mildest falls on the Friday – down a little under 4 percent.

At the time of writing it is little different from its 2016 start position.

The weaker Eurozone countries suffered the most – Greece, Italy and Spain all experienced market declines of more than 10 percent.

France’s market was down by 8 percent, Germany 7 percent, Portugal’s 7 percent, Ireland 8 percent and Holland’s 6 percent.

In Japan, the Nikkei 225 index slumped by 8 percent.

In North America the reaction was relatively muted, with a fall of 3.6 percent by the S&P 500.

Currency Crash

Since the June 23 vote, investors have been dumping the pound – which has slumped 15 percent, to $1.28, its lowest level in more than three decades.

After appearing to stabilize, the pound resumed its decline after three big asset management firms halted withdrawals from real estate investment funds.

Up to £13 billion of UK property investments have since been locked in, as investors scrambled to withdraw cash in the wake of the Brexit vote.

Continental politics

Perhaps the most serious repercussions are in Europe itself.

“Euro-scepticism” is becoming more deeply entrenched in Europe.

Around one third of European parliamentary members represent Euro-sceptic parties and the Brexit vote may have set off a chain reaction which could ultimately lead to the unravelling of a united Europe.

At least five other countries are at risk of leaving the union including Italy, the Netherlands and Austria.

Politics in Italy is again in turmoil with the Five Star Movement’s rise emblematic of the disconnect between people and politics that appears pervasive in the developed world.

In addition, there are now serious fears in Brussels, that the Italian government will not be able to fund a rescue package for its banking sector.

The UK will power on

Without doubt there are complex issues to unwind but none of it is insurmountable.

However, the UK will be fine, as trade and immigration will continue.

The UK needs Europe and Europe needs the UK.

Nigel Farage, now a retired Ukip leader, urged the next Tory leader, who will be elected by September 9, to remember that the “customer is king and we are the customer” when it comes to negotiating a new trade relationship with Europe.

There is also a big world outside Europe that the UK can freely interact with.

Frustrated by EU trade negotiations, Chinese officials are open to launching trade talks with Britain in the aftermath of the Brexit vote, raising hopes that the UK’s economy can receive a boost after it leaves the EU.

The indications from China are that deals are possible.

Regrettably Britain has not negotiated a trade deal for decades as EU membership meant Brussels was responsible for international treaties.

As a result the British government is not yet in a position to begin substantive negotiations on leaving the European Union and it would therefore be unwise to start the process ticking by triggering Article 50, Foreign Secretary Philip Hammond has said.

Hammond also said the government would need to build up its trade negotiating resources and would look to friendly governments to help it do so.

The UK has few trade specialists within its civil service, at a time when the country needs to negotiate a new arrangement with Brussels as well as the 50 countries with which the EU deals, on top of extra treaties the UK will wish to draw up with the rest of the world.

To help fill the gap, New Zealand has already offered to loan staff to Britain’s civil service.

Europe, excluding the UK has been bogged down with anaemic growth and high unemployment for years.

If Brexit is the catalyst that leads to break-up of the Eurozone and structural reform of the EU it would therefore be a good thing.

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