Out is In. The referendum campaign has made it clearer how an EU exit would work

In a stunning surprise to the commentators and the markets alike, the UK has voted to leave the European Union. Although late polls had indicated a move back towards Remain, the sheer force of the migration issue appears to have been decisive. While nothing will happen instantaneously, the country is now set for a protracted period of negotiations before an exit. The biggest impact in the short-term will be political. The largest effects in the medium and longer-term will be economic.
The referendum campaign itself was hardly a dignified or an educational exercise. It did, though, act to clarify some of the uncertainties over the who, when and what of how withdrawal would work. Before David Cameron had named the date of the ballot his opponents on EU membership could be legitimately accused of being ambiguous, uncertain or contradictory about what they perceived the alternative to the EU for the UK to be and how they might achieve whatever that model might be. The questioning from the Remain camp and the nature of the campaign itself has forced answers.
Who will lead Britain out of the EU?
Mr Cameron’s tenure at 10 Downing Street is all but over. His resignation was inevitable. He has said that he is willing to carry on for just a short interim period until his party has selected a successor.
This might not take very long. At most it will be three months but the Conservative Party may want a new leader well before its conference in Birmingham in early October. That leader really has to be someone associated with the Leave camp. This in turn suggests that only two names are in the frame: Boris Johnson and Michael Gove. As Mr Gove has repeated disavowed any ambition to be Prime Minister and would in any case calculate that his chances of defeating the former Mayor of London were somewhat slim, this makes the elevation of Mr Johnson close to inevitable. The only uncertain issue is whether Theresa May, who was very much a ‘Reluctant Remain’ figure during the referendum, decides to make a contest of the ballot or whether she instead concludes a bargain with Mr Johnson as to what role she would play in the new administration. If the two of them can reach a deal, then the UK could have a new Prime Minister (and Chancellor) in less than a month.
Mr Johnson would head the negotiating team but is unlikely to exercise day-to-day political control over it. That task is more likely to be overseen by Mr Gove acting either as Deputy Prime Minister or Foreign Secretary or in a bespoke role that enables him to focus full-time on the task. Although there is some speculation about an early general election as a result of events yesterday, the Fixed-Term Parliaments Act 2011 makes this difficult (but admittedly not impossible) to implement. There may be an informal consensus that the uncertainty that this referendum result has already triggered would be compounded by any rush towards a fresh election. What would it actually achieve?
It is more probable that the new Government will focus on negotiating an exit from the EU first – and it will be a massive drive for which there is no meaningful precedent – and that the May 2020 election will be, at least in part, a de facto referendum on how well it has risen to the challenge (although if he is still at the helm of the Labour Party, which has also to be a matter of substantial doubt, then it will be a de facto referendum on Jeremy Corbyn as well). The Remain faction within the parliamentary Conservative Party will accept the outcome of the referendum, blame Mr Cameron and George Osborne for the debacle, and reconcile itself to new leadership, which in turn will be keen to see peace restored in its Westminster ranks. Mr Johnson will be charitable towards those who disagreed with him on the referendum. There may be an eerie calm by the Autumn.
How long will the process take?
This has also become somewhat clearer in the past few weeks. Strictly speaking, Mr Cameron could invoke Article 50 of the Lisbon Treaty which triggers a two-year period for a negotiated exit (but this can be extended further by unanimous consent) but has understandably decided to hold fire and allow the next occupant of Downing Street to determine his own timetable. The preference of Mr Johnson and Mr Gove would be to hold extensive ‘pre-negotiations’ with the European Union first to establish a basic structure for what an exit would look like and to pass a number of laws through Parliament which would again pave the way for the departure. A credible schedule would thus see perhaps 12-18 months of preliminary but important dialogue before Article 50 is brought in to legal effect. An exit date at some point between July 1 2019 and January 1 2020 looks plausible.
What will the future relationship between the UK and the EU look like?
The character of the campaign has also clarified this matter. Before February, the Leave campaign seemed to be divided between those who sympathised with an ‘EU-lite’ arrangement such as that associated with Norway and Switzerland, through which the UK would still have extensive links to the institutions of the EU but be separate from it, and those who wanted a more distant free trade treaty of a manner not unlike that which has been hammered out between the EU and Canada. Any kind of ‘EU-lite’ agreement would, however, need to involve the free movement of people and might well require the UK to donate to the EU budget.
The nature of the Leave message as it evolved in the last few weeks of the contest – with the relentless emphasis on migration and the much invoked (and much disputed) argument that the EU cost the UK £350 million per week that could and should be better spent elsewhere – now makes it inconceivable that the new administration could settle for any agreement that fell short of taking full control over the UK’s borders. Norway Mark II is not on.
So the future relationship will be more formal and consist almost entirely of a free trade treaty. This would be complicated to conclude and there would be exceptions to it where tariffs persisted but the existence of a blueprint in the form of the Canadian accord would make matters a little easier. It should thus be possible to reach a framework agreement at least to suit a 2019/2020 exit schedule.
And Scotland?
It would be very surprising if there were not a second independence referendum within four years.
What will be the impact on the economy?
In the short-term it will inevitably involve more uncertainty and have negative implications. There will be a sharp and sustained decline in sterling and the stock market will take a hammering. It would be no shock at all if growth were to slow notably in the remainder of 2016 and the risk of a technical recession is a real one. The Bank of England (whether under the current Governor or not) may have to contemplate cutting interest rates to 0.1% as part of an effort to stabilise a volatile situation. The Office of Budget Responsibility would feel obliged to issue a new set of lower growth projections.
The Leave advocates are, though, aware of this and there is an outline of a strategy emerging. A new Chancellor will put more weight on tax cuts (and as a consequence less on deficit reduction) in an attempt to stimulate the economy and a sweeping bill to eliminate virtually every example of any Brussels regulation that the business community does not like (au revoir AIFMD?) will be put before Parliament as soon as possible. Large corporations will be actively courted and encouraged to keep calm and carry on until a free trade treaty with the EU has been concluded. An enormous amount of energy would be expended in seeking other free trade understandings as well. What the end effect will be depends on how quickly the UK economy can adjust to a more global export environment. It will be this that determines whether by 2026 the decision to leave the EU appears to be vindicated.