Britain and the European Union after Brexit

After Brexit, Britain has voted to leave the EU. What follows will be a new prime minister, volatile financial markets—and years of costly uncertainty

The Economist

So the gambler finally lost. David Cameron has usually been lucky, winning office in 2010 at the head of a coalition and then outright in 2015. He also kept the United Kingdom together in the Scottish independence referendum in 2014. But the prime minister’s gamble of promising a referendum on Britain’s European Union membership has failed. As the counting of votes cast on June 23rd neared completion in the small hours of the following day, it seemed that almost 52% of the electorate had voted for Leave against 48% for Remain. The turnout was 72%, six points higher than the level in the May 2015 general election.

The response to the victory for Brexit was immediate. Nigel Farage, leader of the UK Independence Party (pictured), said June 23rd marked independence day for Britain. The pound slumped to its lowest level against the dollar since 1985 (see chart). Europe’s stockmarkets were poised to open lower as investors marked down the prospects for the British and global economies. Most economists agree with the Treasury that the British economy is now likely to fall into recession. George Osborne, the chancellor, had warned of an emergency budget, but that is unlikely.

That is partly because political turmoil will be prolonged. Although Mr Cameron insisted before the vote that he would stay on as prime minister no matter what the result, few believed him. He is expected to resign, triggering a Tory leadership contest that cannot realistically be completed until late September. Mr Osborne may go. After the Leave victory, the next Tory leader is likely to be a Brexiteer.

What swung voters to Leave after months of bitter campaigning and name-calling, especially among Tories, when for most of the time Remain was slightly ahead? Four answers suggest themselves.

One is that, despite repeated warnings from an alphabet soup of national and international bodies—the Treasury, the IMF, the OECD, the CBI, the NIESR, the IFS and others—that the economy would suffer as Brexit led to lower trade, less investment and lower growth, many voters were unimpressed because they did not feel the economy worked for them now. Michael Gove, the justice secretary, declared that “the people have had enough of experts” and even likened the economists who warned against leaving the EU to Nazi propagandists against Einstein. Leavers also (wrongly) accused them of wanting to join the troubled European single currency or, more crudely, being in the pay of the EU.

Leavers also took on a strong anti-establishment tone, championing losers from globalisation and fiscal austerity. That message chimed well with Labour voters in northern England, who backed Leave unexpectedly heavily. The division between London, which voted strongly for Remain, and the north, which did the reverse, reveals a sharply polarised country, with a metropolitan elite that likes globalisation on one side and an angry working class that does not on the other.

The Leave campaign also won on immigration. Mr Cameron was unable to say how he could meet his twice-promised target of reducing the net annual number of immigrants to “the tens of thousands” so long as Britain was bound by the EU principle of the free movement of people. Remainers failed to convince voters that EU migrants brought economic benefits, or to explain that more than half the 330,000 net immigrants in 2015 came from outside the EU. The Leave slogan that Britain should “take back control” of its own affairs from Brussels worked especially well on this issue. It even trumped Mr Cameron’s case that Brexit would be bad for security; voters chose to believe instead that more migration might let terrorists slip in.

The Leave campaign also disguised its internal divisions. Leading Brexiteers like Mr Gove and Boris Johnson, the former mayor of London, were uncomfortable with an anti-immigration line, as they favour a liberal Britain that might take more, not fewer, migrants from outside the EU. Both disowned a poster, put up by Mr Farage, showing a line of dark-skinned migrants under the slogan “Breaking Point”. Some Leavers feared that Mr Farage would damage their campaign. Those fears were reinforced after the murder on June 16th of Jo Cox, a Labour MP who backed Remain (see article); the man charged with her killing has far-right views, as well as psychiatric problems. Her death cast a spotlight on the nasty tone of the Leave campaign. In the end, however, the tactic of running, in effect, two different campaigns—one for a more liberal, less regulated and more open Britain, the other for a more closed, protected and less global one—appealed to different sets of voters.

The fourth factor boosting Leave was the voting pattern. Old people were both anti-EU and more likely to vote, and Brexiteers were more passionate. This mattered more than the fact that young people registered in record numbers in the final weeks. A strong Leave vote in England (outside London) more than offset Remain votes in Scotland and Northern Ireland. And although the Labour Party backed Remain, many supporters were confused by the tepid stance of its leader, Jeremy Corbyn.

 

Uncertainty rules OK

What next? Mr Cameron said before the vote that he would carry out the wishes of the British people by invoking immediately Article 50 of the Lisbon treaty, the only legal route to Brexit. Yet his likely resignation casts doubt on this. Leading Brexiteers have argued against Article 50, which they say is biased against the interests of a leaving country. It provides that the terms on which Britain leaves must be agreed by a majority of the EU’s other 27 members, without a British vote. It sets a two-year deadline that can be extended only by unanimity. Because it is unlikely that a new trade deal with the EU can be completed in time, that may be negotiated separately—and it would still need the unanimous agreement of all 27 countries, as well as ratification by national parliaments.

Brexiteers want to avoid all this by negotiating informally. But diplomats in Brussels are clear that the other 27 countries will refuse to talk unless Article 50 is invoked. Nor will they be pleased by two other Leave ideas: immediately to repeal the 1972 European Communities Act and to scrap the supremacy of the European Court of Justice: such measures would be against international law and could be overturned in a British court. So the odds are that Britain will end up using Article 50.

The question is how generous the other 27 countries will be. And the answer is surely: not very. For the EU, Brexit is a catastrophe. Europe is beset by crises: the euro zone is troubled and divided, the refugee problem has not gone away, countries such as Hungary and Poland have lurched in an illiberal direction, and populist (and often anti-EU) parties are everywhere on the rise. Both France’s president, François Hollande, and Germany’s chancellor, Angela Merkel, face tricky elections next year.

The priority for the rest of the EU will be to make sure that nobody follows Britain’s example. That precludes giving Britain a good deal. Leavers have retorted that, because Britain imports more from the EU than it sells to it, the other countries must offer a generous free-trade deal. But this betrays a misunderstanding of both EU politics and trade talks. The EU cannot let Britain have full access to the single market without its obligations lest others ask for similar treatment. And Germany cannot offer Britain anything on its own, however strongly its carmakers push for it. Any deal must be approved by all 27 countries, several of which do little trade with Britain. Spanish carmakers might like tariffs on cars traded between Britain and Germany. Romania sees little gain in a free-trade deal that lets Britain block immigration.

In practice the EU will offer Britain only two possible deals. The first is to join Norway in the European Economic Area. This would preserve full access to the single market. But, like Norway, Britain would have to make a hefty contribution to the EU budget (Norway pays about 85% as much as Britain per head), observe all EU single-market regulations with no say in making them and, crucially, accept free movement of people from the EU. It is hard to imagine a post-Brexit government accepting this. The second is a free-trade deal like the EU’s with Canada. Yet this does not cover all trade, does not eliminate non-tariff barriers, excludes most financial services and could take years to agree.

The other option for Britain is to revert to trading with the EU as America, China and India do, under normal World Trade Organisation rules. But most economists say this would make the economic damage from Brexit worse. It would bring back mutual tariffs on cars, pharmaceuticals, food and fish. It would reinstate many non-tariff barriers. And it would exclude most services, including financial services.

The economic and trade problems arising from Brexit will dominate British politics for years to come. Security and foreign-policy concerns will also emerge. The home secretary, the security services and the police may try to replicate the co-ordinating measures that they have in place now with the rest of the EU, notably on intelligence-sharing. The Foreign Office may try to maintain its input into the EU’s foreign-policy discussions. But none of this will be easy and some may be impossible.

There will also be questions over the future of the United Kingdom. Both Scotland and Northern Ireland voted by clear majorities to remain in the EU, only to be overruled by the English and Welsh. Before the vote Nicola Sturgeon, leader of the Scottish National Party, said Brexit might justify a second referendum on Scottish independence, though she is likely to proceed with caution. Northern Ireland will be more immediately troubled. If Britain ends free movement of people, that may require the return of a hard border between Northern Ireland and its southern neighbour.

The political fallout from the vote will extend far beyond the issue of Mr Cameron’s successor. The Tories are more split than ever: around 185 of their MPs backed Remain, and they will not welcome a Brexiteer as leader. But Labour, too, is in trouble. Many pro-European Labour MPs blame Mr Corbyn’s weak endorsement of Remain for the Leave victory. Labour lost Scotland at the 2015 election; it may now lose northern England, which voted heavily for Leave. The grinning Mr Farage was the only happy party leader on June 24th.

This vote will reverberate for years. The economy will suffer, as will the political establishment. June 23rd will be a landmark in British and European history.

 

This article is first appeared in The Economist

 

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