- UK public votes 52% to 48% to leave the EU: the exit process could take 2 to 4 years.
- Regional differences will create further constitutional strain on the UK
- Pound plunging, and expect UK Equities to follow suit. Expect flight to safety away from risk assets as the market digests the potential for structural change.
Brexit it is
The UK public has voted to leave the European Union after 43 years in yesterday’s referendum.
Leave has 51.7% of votes so far with 71.8% turnout (higher than pervious general election) suggests a vote for Brexit by a narrow margin.
The leaving process could take a minimum of two years, and even Leave campaigners don’t expect the process to complete until 2020.
Opinion polls were too close to call
Polling pointed to a closer result and recent momentum for the Remain campaign which had given markets an element of (false) security: the final poll put 45% Leave, 44% Remain, 11% Don’t Know. While the binary nature of the debate suggested that those undecided might abstain, turn out has been high at 72%, despite (you guessed) it bad weather.
The Prime Minister, David Cameron, must now decide whether invoke Article 50 of the Treaty of Lisbon (to leave the EU) which starts a 2 year exit negotiation process. If not invoked there is potentially more time for negotiation, but it would create additional uncertainty, in terms of direction, timing and mandate.
The Remain campaign was able to rely on the expertise of economists, business leaders, and international bodies such as the IMF, all warning of dire economic and security consequences under a Brexit scenario. The Leave camp, in rebellious vein, dismissed this as “project fear” being rolled out by a self-serving elite. Ultimately, the vote was as much about emotions as it was about argument.
One of the second-order risks that the Referendum has unleashed is the risk of the UK finding itself regionally split. At present, England is 53.2% Leave on 72.9% turn out and Wales is 52.5% Leave on 71.7% turn out. By contrast, Scotland is 62.0% Remain on 67.2% turnout, and Northern Ireland is 55.8% Remain on 62.9% turnout. One of the unintended consequences of a “Brexit” from the EU could be an independent Scotland remaining part of the EU. How Northern Ireland would be affected if it is outwith the EU with an open border with the Republic of Ireland that is within the EU is also going to require focus.
With the UK being the first country to leave the EU, a precedent will now be set. Remaining members of the bloc may also start to “think the unthinkable”. Brexit will shake the foundations of the European project and trigger introspection in Brussels and, possibly, reform. Ironically, a reformed EU (focusing on trade only, without ambitions of statehood) is something that many Leave campaigners would want. But the vote suggests that expectations in the ability of the EU to reform are low.
Whereas a Remain vote would have enabled a business as usual relief rally, the Brexit vote means prolonged uncertainty as the UK attempts to shape what its future looks like outwith the EU.
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