(http://www.telegraph.co.uk/news/2 016/06/26/i-cannot — stress-too- much-that- britain-is-part-of-europe—and-a Iw/)
The Conservatives have to elect a new PM whilst Merkel, Renzi and Hollande have confirmed that the other EU countries would not enter any ‘informal’ discussions until the Article 50 exit procedures had been triggered by the new UK PM. There are two realistic choices:
‘Norway’ solution: Rejoin Switzerland, Norway, Iceland and Liechtenstein in the EFTA. Accept free movement of goods, capital, services and people, make a contribution to the EU budget (Norway’s contribution is the same as the UK’s on a per capita basis). Regain control of agriculture, fishing, justice and security amongst other things. Opt-outs can be negotiated with the EU before admission but the rest of the EU will be reluctant to compromise on key issues given the circumstances. In particular, maintaining a passport for financial services, our largest export. This would be a key concession if EEA is to be a worthwhile option. EEA membership would need agreement from all 27 EU members but is achievable.
‘Canada’ solution: UK loses access to the single market, with a free-trade agreement to be agreed at some point in the future. In the meantime, no access to the single market, no free movement. Initially after exit, standard tariffs are likely to apply. The average tariff is only 3-4% but some sectors are protected e.g. cars 10%, agricultural products 18% and clothes are 30%. No passport for financial services. The hit for the UK economy will be the transition as EUR-based financial services and non-EU companies need to relocate whilst export fall to the EU. Over time, this does allow the opportunity for a more dynamic economy but with high initial costs.
The key issue for the FX market is that these two solutions have a radically different impact on GBP and on risk sentiment generally. The ‘Norway’ solution would be seen in a much more positive light, favoured by UK business and surely Germany, given the risk to losing direct access to one of their largest export markets. However, others in Europe including the EU Commission, would like to see a clean break, to make exit less attractive to others. Keeping free movement of labour would be a major problem for the ‘Leave’ group given that immigration proved to be the decisive issue.
Also important would be the impact on the United Kingdom of the two solutions. An EU-light ‘Norway’ solution with access to the single market is unlikely to trigger a new referendum for Scotland to leave, which could be decisive given an opinion poll at the weekend showing 59% of Scots in favour of independence. Similarly, keeping an open border in Ireland would be very well received. The ‘Norway’ style solution would, at the very least, be a stabilizing ‘interim’ step. With 450 out of 650 MPs supporting EU membership a ‘Norway’ solution may also be the only way to get parliamentary approval, even if it is unacceptable to most of the 17mio who voted to ‘Leave’.
The case against a clean break is helped by the ‘Leave’ campaign not spelling out a specific exit plan. That being said, a Scottish vote for independence is by no means assured even if it is a complete break. The Scottish economy runs a 10% of GDP budget deficit, on the back of lower oil revenues, it would have to create a new currency and would have customs border with the rest of the UK (which buys 70% of their exports).
There is disarray in the UK political system. A new PM will not be in place until 9 Sep. The initial favourite to take over from Cameron, Johnson, is the figurehead of the ‘Leave’ campaign but he is a divisive figure. There is a growing support for an ‘Anyone but Boris’ candidate and Theresa May would provide a more reassurance to UK financial markets.
At the time of writing, 24 members of Labour’s cabinet have resigned in protest about Corbyn’s leadership during the campaign. It has become clear that his Leaders office undermined the ‘Remain’ campaign, confirming that he was a reluctant supporter. With the possibility of an early election in the autumn, Labour MPs are desperate to replace him. He has now lost a ·no confidence’ vote by 172 votes to 40 but will not resign.