Davy Private Clients Insights

Investing Insights

Investing Insights June 2016

Brexit: What Next?

Alan_Werlau_resized.jpg Alan Werlau
Head of Investment Advisory

The UK's historic vote to leave the European Union (EU) is the start, not the end, of the exit process. The political and economic impacts of this decision will play out over time, but here we attempt to lay out the initial steps towards an exit.

Political path

The first casualty of the referendum is Prime Minister, David Cameron, who has already announced that he will step down at the October Conservative Party Conference. This will open the path for a new leader to be elected who will then be charged with creating a framework for discussions with the EU. This framework will outline the two parallel negotiations regarding both the UK’s withdrawal from the EU and the new trade agreement between the UK and EU.

The tone, and eventually terms, of the UK’s negotiations will need to reflect the majority view of Parliament rather than just a narrow view of the Leave campaign. The House of Commons as it currently stands has a majority of pro-Remain Members of Parliament (MPs) (454 MPs to 147) who will have a significant say in the eventual UK proposals. Previous statements by these MPs have indicated a preference to keep Britain inside the EU single market. 

Long and winding road

Staying inside the single market would mean Britain would have to keep its borders open to EU workers and continue to contribute to the EU budget. Prime Minister Cameron’s post-referendum statement made clear that the interests of all the UK, including Scotland, Northern Ireland and Wales, will need to be taken into account. Leave campaign leaders have already adopted a conciliatory stance, stating that they want a friendly relationship with the European Union but will struggle to reconcile their referendum platform with the British body politic.

The new government’s proposed framework will be debated and require the approval of Parliament. The process could continue through the rest of the year and we would expect significant debate before a consensus is reached. The 15th December European Council summit is a likely target date for the UK to formally invoke Article 50(2) of the Treaty on European Union (as amended by the Lisbon Treaty). 

Trading places

The best-case scenario would see the terms of withdrawal concluded within a two-year period. The timetable for an alternative trade agreement seems to present a greater challenge and could take significantly longer to complete. There is a scenario where the UK could exit without a free-trade agreement and be subject to much more unfavourable terms under the World Trade Organization (WTO). This is clearly the worst case and the least likely scenario.

We would expect, however, a preference to exit under a negotiated arrangement, most likely beyond the ‘most favoured nation’ status provided by the WTO. The more closely the arrangement is to accepting EU requirements on free movement of people and EU budget contributions, the more quickly an agreement could be reached. This would most likely require the UK to stay in the European Free Trade Area (EFTA), replicating the position of Norway, Iceland and Liechtenstein. Given the polemic issue of migration, this could be too high of a hurdle to overcome. Negotiating a bespoke bilateral trade arrangement similar to Switzerland would seem the most likely option. However, this could drag on for years, and based on previous EU trade negotiations, could take the better part of a decade. 

Brexit: 3 avenues available to the UK post-exit

Our view is that the third scenario is the most likely one. A bilateral trade agreement could safeguard single market access, with a fudge on migration providing some limited autonomy for the UK while largely maintaining the status quo of free movement of people.
Brexit: likely timeline for the UK’s exit
(click on the image to enlarge)