What does out look like 2 (short run)

Following on from part 1, a look at some of the evidence leads naturally to part 2. What are the realistic expectations in Britain votes to leave. There are of course alternative scenarios.

Much of the debate so far has been shaped by the Prime Minister. A large part of the focus has been in international trade and trade deals. He has highlighted the drawbacks of different models such as Norway and Switzerland, according to the IMF 6th and 9th globally in per capita income, 2nd and 4th in the continent of Europe (sandwiching non EU San Marino) behind Luxembourg.

According to Cameron, trade deals are a problem. Canada provides an example, 20th on the same IMF list. Britain is 25th on per capita income. He also teases us with Albania in 97th place.

A question mark has been raised over Cameron’s assertions that trade deals with the rest of the world will take years to negotiate. Lawyers for Britain identify that existing deals, made on behalf of the EU and its member states will continue.

Brexit means that the EU loses its majority on G7. Britain is no longer bound to support EU policies on the global stage. There is an element of bargaining power that goes with being the 5th largest economy in the world.

Scenario 1
Britain votes Leave, Cameron is still in charge with his sidekick Osborne beside him. Cameron decides he wants to cling on so that he can chair the council of Ministers.

Based on his manifesto commitments, the Prime Minister and his team failed to negotiate his promises to the British people. In a fit of pique, he immediately files for Article 50.

Having painted a picture of doom and gloom, Cameron gives in again. He and Osborne prove themselves right by accepting free movement of people, a contribution to the EU budget. Little change on the trade front, Cameron and Osborne step aside at the next election, taking up positions with a European bank and the IMF respectively.

Scenario 2

A leader steps forward in the Conservative party. Motions are put before Parliament, the first a vote of no confidence in the Prime Minister after his running down the UK economy, the second postponing debate about Article 50 until Parliament resumes.

The summer recess is used for lobbying with other groups, stressing that the will of the British people is to take a plunge from the fish in a small pond into an ocean that allows for growth, subject of course to not being caught by the Dutch or Spanish.

During the recess, a position is agreed across parties. A proposal is formulated along with an agreement to have a transparent debate in the House of Commons. MPs are encouraged to speak openly, a free vote resulting in a desire to seek a trade agreement with the EU.

The agreed position is that the preference is for an outline deal to be put forward during Britain’s Presidency of the EU in July 2017. The aim will be to file under with a view to negotiations being complete in 2019, before an election in 2020.

The outline of that negotiation stresses that we wish to retain a neighbourly relationship with the EU, as both parties are required under Article 8. There is a default position of reverting to WTO status. That would involve tariffs on EU manufactured goods from washing machines to cars and agriculture making EU goods relatively more expensive as compared to world prices.

Spanish, Portuguese and Greek holidays may take a back seat compared with other destinations. American and Japanese cars will become relatively cheaper. A Mercedes Benz might be cheaper to import from Brazil rather than Germany. In all, yes, the EU can block a sensible deal if it wishes to push its marginal countries to the edge.

It may be that British companies have to look at other markets. The EU may insist on freedom of movement, Britain does not have to deal on that basis. So be it. The USA is a bigger market by value. The Commonwealth is growing faster and accounts for 1/6th of global economic activity with 1/3rd of the world population.

Britain has bigger fish to fry, particularly from reclaimed fishing rights around the British coast. The EU has a chance to preserve its preferential status. Certainly the EU can expand where it likes, Britain however has her red lines, no to freedom of movement, yes to freedom for financial services.

Over to you EU, do you want our £80 billion trade deficit or would you rather risking your workers losing jobs?

In case we didn’t mention it, Britain is the 4th largest global military power and we wish to use our nuclear deterrent to protect your interests under the maintained umbrella of NATO. We are now an independent voice on the WTO, IMF and in the UN. You may lose the majority on G7 but you can count on our support in times of need and rational argument. We are friends and will act as friends unless you choose otherwise.

In the meantime, there are other decisions for a government to make. How should fishing grounds be licensed, agricultural support, allocating funds to research, reform of VAT, not least immigration policy, potentially reform of labour markets and thousands of pieces of EU law to select from. Infrastructure projects can guarantee British resource use.

Of course in the short term there may be an inflationary shock that could accompany a potential devaluation. This is something for the government and Bank of England to manage. Evidence given to the Treasury Select committee suggests that interest rate rises would be delayed. The Foreign Select Committee heard that world prices might lead to an 8% decrease in the cost of living.

It could be that exchange rates have already been discounted due to uncertainty. Inflationary effects are mitigated by cheaper imports from elsewhere in the world.

It could be that the lower relative cost base which follows a devaluation promotes inward investment and export led growth, as it did following ERM exit in 1992. As for government borrowing, Britain looks safer than big borrowers in the EU.

It is up to the government of the day to present a positive message about the economy.

The EU perspective

EU budgets will have to change, after all, there will be a net loss of around £10bn from the second largest net contributor. Will that amount be cut or will it be raised elsewhere? Will some be reclaimed in a trade deal?

There is an uncertainty factor for the EU too, on top of having to deal with weaker Mediterranean countries. Is the political climate right for further integration? Can the Euro survive without further political integration or at least co-operation over fiscal policies?

Initially, EU members might expect a soft approach to negotiations, after all, the EU is used to being dominant. What have been red lines over free movement have to be decided upon. Are the EU capable of compromise, will red lines be erased?

Britain gradually confirms exiting trade agreements with countries around the world. Early signs of growth in American and Korean car sales, Chilean and Australian wines start to show a trend. EU voters who sell to the UK become restless. EU negotiators feel pressure as Southern Europe suffers high unemployment with further austerity.

Pressure increases as Japanese car makers invest more in the UK to satisfy the ever buoyant demand. Perhaps even one of the American giants returns production to the UK, maybe even Transit van production relocated back from Turkey as a Middle East solution appears increasingly remote.

Market forces dictate that far from being a messy divorce, an amicable alimony settlement of the trade deficit is a welcome relief which at least gives us access to the kids. Article 50 does not need to be extended. Germany has to contribute more, perhaps even France but it is a necessary step to keep their economies alive.

Non-Eurozone EU members will be watching with interest with their own decisions to make.

Summary

Of course, we do not know for certain what the outcomes will be. Neither do we have any idea who will be Prime Minister. Cameron will have a hard time to stay in position. The nature of debate has eroded trust in him. What we do know is that the electorate will have sent an instruction.

For those who believe the Treasury, IMF and other intertwined bodies, a hit on the scale that they predict might be balanced against evidence given to the Defence Select Committee, that “successful” sanctions against Russia over Crimea amounted to a 1-1.5% reduction in Russia’s GDP.

Of course, there may be a scenario 3, 4 5 or 6. It is up to voters to judge which is most probable.

Author: RexN

I am a freelance writer, anything from bids and tenders to journalism, covering sports, finance, current affairs and anything of interest. Feel free to contact me on rex@rexn.uk or on Twitter @Rex_N

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