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What Now For Brexit?

Aug 25, 2016 | Market & The Economy | 0 comments

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What a shock! The majority of Britons voted in favour of the United Kingdom leaving the European Union, and no one in the financial world saw it coming. People don’t vote against hardship!….right?

What we all ignored in the run up to the referendum is that people outside of London have become poorer and disillusioned with Westminster, while the politicians have kowtowed to big business and the financial sector in particular. The British people have simply had enough. They wanted to show their frustration about the slow economy, and their tipping point was the high level of immigration and increased likelihood of terror attacks.

The political fallout has been simply astonishing for both the victorious Leave and the vanquished Remain camps. The outcome for the governing Conservative Party may be the best. Since the days of Margaret Thatcher, the argument over continued membership of the EU has rumbled on in the party, but it is now over, and Boris Johnson, the main Leave protagonist, has been moved aside. The cuts may heal with Theresa May now at the helm of the party.

Europe and the bureaucrats have also been stung, and Angela Merkel is moving in to calm things down. Lessons are being learned in the UK and Brussels, and things need to change on both sides.

Clearly the new Prime Minister will push out as far as possible the day of Britain’s exit from the EU, and wait and see what changes now occur in Europe. Meanwhile, negotiations between the UK and EU will proceed and probably lead to a watered down Brexit. The deal that is struck will form the basis of the next (possibly early) UK general election. As always in politics, the outcome will be decided by “events” that take place in the run up to an election or referendum. David Cameron would never have called the EU referendum if the refugee crisis had been on the radar at the time, so future events will be key.

How Europe deals with Brexit is another key factor. Political union has now been kicked to touch as national politicians have woken to the fact that “Turkeys don’t vote for Christmas” and they will resist giving more power to Brussels.

The medium-term problem is the Euro. It is a flawed concept, but it works for Germany, as a net producer and exporter of goods, to deal in the weaker Euro currency rather than in a very strong Deutsche Mark. The Euro currency is impossible to implement without the political cohesion and will power to make it work.

Brexit negotiations will be complicated as the UK is the second biggest exporter of tourists to Europe, second only to the Germans. 1,2m British citizens live and own properties in Spain alone. Critically, Britain is a net importer of goods from Europe. Imagine what BMW and Mercedes are saying to Angela Merkel as she steers a settlement. They will not want Brussels to be too harsh on the UK as this will affect their business. Apparently, tariffs globally have fallen to such an extent that US goods sold in Europe only carry a 2% tariff.

At this stage the final outcome and consequences of Brexit are unknown. In our opinion, it isn’t in any one’s interest to be at loggerheads, now is the time for discussion and negotiation. It has already caused some serious introspection in the UK and Europe, and it will mean that new paths will be found. From our observations following the announcement, it is questionable whether the UK public would have voted for Brexit today. Ultimately, it was the unexpected size of individual protest votes that produced a result most people did not anticipate.



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