Posted by Andrew Marshall on Thu, Jun 30 2016

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Brexit: One week after the vote

Photo for Brexit: One week after the vote

So I’m glad I waited until the Conservative party’s leadership nominations closed before writing a few words on Brexit.  Like many, we at Cognito have been talking to clients about short and long term issues, we’ve been handling a range of media enquiries and we’ve been promoting experts and content for various companies. 

Here are a few top-line thoughts as the Conservative leadership election gets underway in a spectacularly confused manner and the Labour leadership crisis continues. 

Brexit seems inevitable but the triggering of Article 50 will be a momentous and turbulent event, in politics and the markets, perhaps all the more so the longer it is delayed.

The mood towards the UK in Brussels became harsh on Friday very quickly.  As we’ve seen, the great bulk of EU leaders want the UK withdrawal underway so they can focus back on Eurozone stresses like Greece, and the migrant issue.  There’s no desire for further negotiation on the UK’s future status before the Article 50 withdrawal process (which involves negotiations as well) is underway, and Commission staff being forbidden to engage in any kind of informal “negotiation” with British officials.

So much will remain in limbo for many months, while financial services firms get busy with contingency plans, start creating subsidiaries in EU markets, and plan for how divergence/equivalence might work. (See excellent work by New Financial on this).

There is still a large reality gap with the Conservative party about what can be achieved in terms of the trade-off between free movement and single market access; indeed what can be achieved around single market access at all.  Given that the ultimate electorate – 150,000 Conservative party members – are largely elderly and deeply Eurosceptic – it does not suit any of the candidates for the leadership to be too candid yet about the coming car crash with reality, whatever they privately believe.

If there is an EEA type deal ultimately, whether it’s “Norway plus” or “Norway minus” (more likely), it seems possible that whoever is the Prime Minister will then be denounced by the hard liners in Parliament and beyond as a sell-out.  If the vote had been 52-48 to stay, there’s no doubt that the Tories’ 30 Years War on Europe would have continued, but it now looks likely that as the UK leaves, any cessation of hostilities around “we’re all leavers now” might be a truce at best.   

Fresh elections in UK are really not likely.  Even though the Conservative majority is small, the current parliament has four years to go.  However much personal animosity the Conservatives are often able to generate, any breakup of the party or realignment still seems a bit of a stretch.

Reading the German media, the German establishment is particularly worried, not least because the UK not only supplied 20% of the EU budget, but also so often votes in the Council of Ministers for a blocking northern/free-market majority.  The German elections next September will now move centre-stage. Merkel seems somewhat more stable in the polls but CDU is still down at around 30% - she will undoubtedly need the SPD (as well as possibly the Greens), and at some point the pain barrier for the SPD as a perpetual junior coalition partner may get too much.  The odds on a left-of-centre government, while still unlikely, have probably shortened a little, and that would make a British deal with the EU even harder.

The British commentariat theory that the French and Germans will play nice because they want things wrapped up before their elections next year (April in France and September in Germany) doesn’t fly in Brussels, or in Paris and Berlin.  Instead the argument is that the governments will need to be tough to impress their voters.  It’s pretty hard to see the withdrawal negotiations sorted out before these elections if Article 50 is only triggered around the end of the year.

While some impacts of Brexit are already obvious, it’s striking how many financial services marketing launches and other activities seem to be entirely unaffected, reflecting the fact that London is above all a global – or non-US – financial centre.

A year ago at the MarketAxess Capital Markets Forum event in London, City of London MP Mark Field was asked what Brexit (then an apparently remote possibility) would mean for London.  His response bears repeating – while London would remain a major centre, the challenge would be to the quality of the financial business done here.  In other words, as a pure offshore centre, we might become more dependent on emerging markets business, global wealth management and so on, rather than capital raising.

The delay on airport expansion announced today was entirely predictable but depressing, and infrastructure and real estate decisions may well come to epitomise Brexit uncertainty more than any other sector. 

Perversely, many journalists - and market participants – in financial services in London will have to become more acquainted with EU matters now than they ever have been before.

As Bill Gates and others have often said, we always tend to overestimate the impact of new developments over a two year timescale, and to underestimate the impact over ten years.  We live in interesting times.

Eurozone, Financial News, Financial Services, London,
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