On Tuesday, September 13, APCO Worldwide hosted a special APCO Forum Presents breakfast titled “Brexit Aftermath: The Challenges and Opportunities for the Global Business Community” featuring Sir Graham Watson, former member of the European Parliament from the United Kingdom. Sir Graham was deeply engaged in the EU referendum and offered our clients and special friends his expert assessment on the future of the UK and Europe. Below are Sir Graham’s observations on what’s next.

Looking back, it now seems rather odd that there was no real popular demand for the referendum before it was announced, with polls showing that only about one out of every ten people supported separation prior to the early 2016 announcement by Prime Minister Cameron that an “in/out” referendum would be held to decide the future of the United Kingdom in the European Union. There was, however, demand from a very specific and well-organized group of far-right conservatives who were able to push Cameron into putting the vote to the people. Conservatives were able to tap into this nascent anti-European sentiment, the media provided an outlet, and the UK effectively divorced itself from Europe on May 23, 2016. Sir Graham noted that the French aristocrat De Tocqueville came to America in 1791 to observe democracy while France was still a monarchy. Generally, his observations were favorable. But he also observed that if a monarch makes a serious mistake he can be ousted, while in a democracy, if the people get it wrong, nobody has the legitimacy to tell them.

Of the available options to replace David Cameron after his abrupt departure the day after the vote, Theresa May was arguably the best of the available options. During her six years as Home Secretary before her rapid election to Prime Minister, May was observed to be cautious, determined, organized, and always prepared. Although she campaigned on behalf of former PM Cameron’s Remain campaign, May demonstrated a lack of pro-European leanings in the past; she, for example, moved the European police college out of the UK. She has demonstrated that she won’t champion her own view over the will of the people, and is not afraid to replace ill-suited members of her administration.

Indeed, since taking office, May’s stance on the referendum has been “Brexit means Brexit”, indicating that she plans to follow through on the public’s decision to leave the UK, but it’s incredibly unclear exactly what that entails and what that exit will look like. That exit strategy is going to depend largely on three of May’s senior ministers who are all Leave supporters (so-called “Brexiteers”). Those positions include Conservative Party MP David Davis as Secretary of State for Exiting the European Union, former London Mayor Boris Johnson as Secretary of State for Foreign and Commonwealth Affairs, and May’s former rival Liam Fox as Secretary of State for International Trade. The three have four months now to agree on a plan for exiting the European Union and get it to May, after which she will enact Article 50, the official mechanism by which the UK will begin the process of exiting the EU. Although all three were supporters of the Leave campaign, coming up with a unanimous plan won’t be simple. Each comes from a slightly different gradient of the far-right Conservative spectrum, and the three have been known to have issues in the past. The common thread seems to be immigration and restriction of movement; a point of conflict for some international allies such as Japan, who released a statement declaring that freedom of movement between the UK and EU was essential for Japan to continue their trade relationship with the UK.

The geopolitical makeup of the UK presents additional challenges and potential speedbumps to the process. Looking at how the regions of the UK voted in the referendum, England (bar London) voted to leave, Wales voted narrowly to leave, Northern Ireland voted narrowly to stay, Scotland voted by a substantial majority to stay, and the territory of Gibraltar voted at a remarkable 96% to stay. Clearly, the UK as a whole was not united in its decision to leave, and that opens the door to potential for a “WExit”, or a scenario where Wales & England exit the EU and the remaining territories stay. It’s not unheard of, as a similar situation occurred with Greenland’s 1984 withdrawal from the EU where it remained a territory of Denmark. However, this puts the concept of UK unity at risk, which many believe is the UK’s highest priority going into these negotiations.

What seems to be most likely, and also potentially the worst case scenario, is that the three ‘Brexiteers’ cannot come up with a cohesive plan that all will agree to within the time limit yet still force PM May to invoke Article 50 and in 2-3 years the UK comes out of every agreement and institution because it's unable to agree to stay in some form. This will largely depend on how creative the other 27 countries and international institutions are willing to be in fashioning the UK’s exit strategy from the EU. Whether that includes accepting Wales withdrawing and Scotland remaining, or the UK pulling out politically but still being able to create a new trade agreement, the issue is going to need a tailor-made solution, as nothing off the shelf will cut it at this point. May also has two safety valves: time & chance. The three ‘Brexiteers’ have four months to agree on a plan and there’s a good chance they won’t, and May could find a way to delay Article 50. Additionally, the Labour party still doesn’t have an acceptable leader, so May could call an early general election which she is largely predicted to win. This would enable her to come back with a stronger majority, and more importantly by that time Brexit would hopefully be a distant memory, or at least it will have evolved in some way.

In whatever way Brexit is handled, it will surely further destabilize an already unstable EU. The migrant and refugee crisis has rocked the continent, and Europe has yet to coherently respond to it in any real way. In terms of investor concerns, a few things are clear in a situation where the future is incredibly unpredictable. First, the entirety of the EU will be affected economically. There is already stagnant growth and a lack of jobs, and in its fragile state the EU likely lacks the strength to approve and fully back any new trade deals. The non-response to the refugee crisis is not helping this general lack of confidence in the institution’s abilities. The EU can bounce back, but for the moment it’s a question of exactly how. Second, there is already currency instability; this is an opportunity, but there is no guarantee that currencies won’t drop further. Third, the UK economy is clearly suffering but a full crash is at this point very unlikely. A slow decline, however, is very possible. As foreign companies are getting nervous about London, the financial capital of Europe, no longer being in the EU, some are already relocating their businesses. A major concern for London is the retention of financial passporting, which allows UK financial firms to sell their services across Europe. It’s largely seen as critical if the UK (and London specifically as the European financial capital) wants to remain economically dominant in the continent, but exactly how they intend to negotiate that remains to be seen.

The question of whether or to what extent the UK will remain part of the “single mind” of Europe, or retain its imports and exports, remains to be seen. The Transatlantic Trade and Investment Partnership (TTIP) is a concern as there has been rising public resentment in several countries like Germany and France, but seeing as it’s unlikely to see a resolution before President Obama leaves office, other European trade agreements should be taking precedence for the moment. It’s also important to note that that this prolonged period of uncertainty is likely to easily exceed a decade. Once Article 50 is invoked, there is a minimum of two years of formal exit negotiations with the EU, and at least 10 years after that for the UK to renegotiate its entrance back onto the global trade scene. At this point predictions are all that can be made, and the story that unfolds out of this vote will be a slow but monumental one, not only for Europe but for investors and allies everywhere.

Watson
Graham Watson

Graham Watson formerly served as a member of the European Parliament (MEP) and leader of the Alliance of Liberals and Democrats for Europe (ALDE) Group in the European Parliament. Read More