What will Brexit entail?

Republished from 06/05/16, six weeks before the fateful EU referendum on Brexit 

On 24 June the UK could well wake up to having voted to leave the EU. What will this entail? These are my views:

There will be an immediate dislocation of financial markets. Sterling will fall, stocks will plummet and the Bank of England will step in with a massive injection of liquidity, as financial stocks in particular are hammered.

The next issue to dominate headlines would be the crisis within the Conservative Party. The prime minister, David Cameron and chancellor, George Osborne, will almost surely come under pressure to resign. This will trigger a fractious existential leadership contest at a time when the country needs a steady hand.

The Scottish National Party will prepare an announcement for a second referendum for Scottish independence. They would in all likelihood win this one, triggering the unravelling of the United Kingdom. Wales will not be happy and problems are likely to brew once again in Northern Ireland as the legal basis for the settlement is shaken. Great Britain will cease to exist, replaced instead by an insular “Little England”.

Other EU states will react with shock and disappointment, but would offer scant comfort, as it will be rightly seen as a self-inflicted disaster. To ensure a Brexit does not catalyse the dissolution of the rest of the EU, other member states will seek to make an example of the UK and will be uncompromising in their post-Brexit negotiations.

The terms of relationship with the EU, including access to the single market the UK needs, would be worse than those enjoyed by nations such as Switzerland and Norway. The UK will lose on three things so precious to those in the out camp: sovereignty, immigration and net payments to the EU. In order to retain access to the single market, it will end up like Norway or worse.

The UK will be obliged to adopt EU laws without having any say in the drafting of these, thus eroding the UK’s sovereignty. Like Norway, it will be forced to make payments to the EU, but without benefitting from the vast majority of the EU’s transfers to member states. It is also highly unlikely, as the case of Switzerland shows, that the EU will give the UK access to the single market without requiring free movement of EU citizens.

So many laws will have to be rewritten that the legislative calendar will be clogged for years with little time for discussion or drafting of new laws. The uncertainty around the final shape of laws that will apply will cast a shadow over business, trade and commerce, which prize predictability and a stable legal framework. The effect on financial services, including the audit and accountancy profession, is likely to be particularly pernicious if the UK loses access to the single market.

It is because of this uncertainty and the possible loss of access to the single market that the overwhelming majority of prominent economics experts surveyed, and economic policy institutions such as the IMF, the OECD and the Bank of England, all project a negative short-term impact on the UK’s economy. Most agree that the effect will persist in the long term. The CER’s commission on the single market and the UK, on which I served alongside Martin Wolf, Peter Mandelson and others, makes a robust economic case for the UK’s continuing membership of the EU.

The UK already has the best deal possible with the rest of the EU. It has opt-outs from the euro, Schengen and “Ever Closer Union” and punches above its weight in terms of influence on the EU’s economic, financial and trade and security agenda.

Much of the scenario that unfolds above is consistent with the current private views of David Cameron and senior UK civil servants. Why then did the prime minister promise a referendum? All evidence points to Mr Cameron having put the petty interests of the anti-EU wing of the Tory party over national interest. But it is all of us who may end up paying the price.

In the likely event the Remain camp wins narrowly, this would hardly be the end of the matter, as Pandora’s box has been opened and the pro-Brexit camp will not rest.

The UK would continue to suffer from at least some of the economic, regulatory and political uncertainty that a fully-fledged Brexit would bring.

Sony Kapoor, Managing Director, Re-Define