First published: 29th June 2016
In the space of a week, a kind of revolution has kicked off in the UK. In the ensuing vacuum, we have no government to speak of, and no opposition. The non-party that won the referendum has not been willing or able to articulate a template for how it would like the UK to proceed, and taken its campaign promises and proposals off its website. The campaign uncorked strong feelings over immigration and now disturbing, if still sporadic, elements of xenophobia. Anyone who thinks they can predict what’s going to happen in the next 3-6 months, let alone further out, can’t. We are, as Harold Macmillan famously said, at the mercy of ‘events, dear boy, events’.
Not that it matters hugely, but the UK’s prized AAA sovereign credit rating has been cut to AA with a negative outlook, with the agencies citing not just a weak economic outlook, but concerns about governance and policy-making effectiveness. It’s not hard to see why. At the moment, we don’t even know who the key decision-makers are going to be, but even when we do, uncertainty will prevail for a long time. There is no telling how long it is going to take for the oft-predicted realignment of UK politics to adopt new form and structure; the constitutional quagmire surrounding how to extricate the UK from the EU, and the implications for Scotland, and Northern Ireland could preoccupy this and a future government for years; the EU exit negotiations, once formally started, might be concluded in 2 years but we have no idea when (or if) the now infamous Article 50 will be invoked (below), or whether, as is possible, negotiations will take considerably longer. While the next government is taking care of all this, it’s hugely divided attention will have to also focus on a deteriorating economy and budgetary position.
There’s so much to focus on, it’s hard to know where to begin. I’m just going to emphasis two things here: the economy; and some thoughts about the constitutional process according to which we might leave the EU.
Sequential shocks for the economy
Before the referendum, economic thinking tried to emphasise two shocks to which we’d be subject if voting to leave the EU. In the short-term, say through 2017, the most likely outcome was a recession in the wake of deep levels of uncertainty and risk aversion. Over the longer-term, say through 2020-25, we would succumb to a rather less well-defined supply shock, which leaves the economy weaker, and us poorer than would otherwise have been the case. It is of course possible that political decisions yet to be taken will mitigate or even offset the downside risks that lie before us. That’s why Article 50, in which leverage is everything, and any ensuing negotiations are pivotal
These are early days, and no one should make the mistake of interpolating from day-to-day or weekly movements in Sterling or the FTSE what the future holds. As Mervyn King told the BBC’s World at One on Monday 27th June, markets are volatile and were in the process of re-pricing a new situation. This self-evident truth, though, doesn’t come close to understanding what is likely to happen through the demand shock, let alone the later supply shock.
A freeze or slowdown in investment, and in lending and spending will most likely cause the economy to tail off in the final two quarters of the year, and perhaps into the first part of 2017, leaving us with negative growth for next year and a rise in unemployment. I can imagine that the next Chancellor will suspend or reverse George Osborne’s fiscal rules, which will not mean an end to spending cuts and tax rises. There may changes to ring fenced spending, including on the NHS, and perhaps an end or phase-out of the Triple Lock manifesto commitment on pensions. But it would mean accommodating a bigger fiscal deficit for longer than the current incumbent would have done. In any event, this will all erupt in the Autumn Statement in November or December with a big focus on the OBR’s report and outlook in vastly changed circumstances. The Bank of England may cut interest rates for what it’s worth, which is little, or even resume a version of QE, but we should expect the Bank’s major function and effectiveness to lie in financial stability, not macroeconomic management. Eventually, the recession will end, as is always the case, though it is premature to predict how by how much output, employment and demand will fall in the process.
The supply shock will be of a different nature. New investment plans by foreign companies would probably be diverted elsewhere, as Toyota and Nissan, for example, have already suggested. Banks, which may be required to have an EU base for doing Euro business and which may lose the right to ‘passport’ (open branches and provide financial services in other EEA countries), are already considering the movement of jobs and businesses to the continent – a process that would a long time to frame and execute. Investment spending by UK companies at home, and by UK residents on housing, which isn’t exactly on fire now, would weaken. If plans to lower immigration are put into effect successfully, this too will lower the UK’s trend growth rate. The total factor productivity benefits to the economy from trade integration in goods and services in the Single Market would dissipate. And I emphasise (repeatedly) that the task of rebuilding trade agreements if we left the Single Market – hard enough though that will be – is nowhere near as rose-spectacled as detractors insist. Remember that the rhetoric of ‘having access to the Single Market’ is not the same as being in it.
Everyone has access, anyway. But the terms of being in it, including free movement are cast in stone and probably non-negotiable. Moreover, you just have to look at the funk in world trade and in emerging markets to understand why. All the while, remember, road ageing will also be slowing our trend growth and adding to the burden of age-related public spending in any event. As a consequence of these changes to the country’s potential growth rate, we will end up poorer. An EEA type agreement would certainly be a mitigation, and yet this would have to ‘sold’ to voters who rejected free movement. This will depend importantly on circumstances at the time.
How to leave the EU
I hesitate to even get involved in this area because it’s not my expertise, and because even legal experts have differing views. There’s a lot of very useful material being put out by the UK Constitutional Law Association.
This blog published at the start of the week argues that the invoking of Article 50 immediately does two material things: it changes the UK’s constitutional arrangements, which has implications for the authority of the process; and it leads directly to a switch in negotiating leverage to other EU states. The authors insist that the UK holds leverage by not triggering Article 50 straight away, and having informal discussions with other EU states about the type of deal that they would negotiate. The problem now is that Angela Merkel has stated that this can’t happen, and that the sequencing must be the other way round. This may be for public consumption, we don’t know. But if Article 50 preceded discussions, it would shift the leverage to the EU, and the best protestations of Brexiteers that they’d ‘have to be nice to us’ will be shown to be a ruinous bravado.
The bottom line in this argument is that parliament is the only and ultimate source of authority and must pass a statute empowering or requiring the PM to issue notice of Article 50. This might be politically risky, but is constitutionally quite legitimate. In short, Parliament could immediately authorise the PM with regard to Article 50 negotiations; not grant the power at all if it felt the national interest wasn’t being served, especially because the core claims of the Leave campaign had unravelled and if the economy was in a bad state; or only authorise the PM when it could judge the terms of the new relationship with the EU. The key here is the absolute sovereignty of the UK Parliament.
In this blog, though, a different interpretation is offered, including the tease that if Parliament is the only and ultimate authority, what was the point of holding the referendum? The author’s point is that as soon as you subordinate parliamentary democracy to a referendum, direct democracy trumps our traditional representative democracy, certainly as far as the EU is concerned.
If it isn’t, to further cloud the issue there’s also the possibility, as suggested, that Article 50 might not ever be triggered. Any combination of deferments, perhaps an unwillingness to take the plunge for fear of drowning in complexity, time and healing of wounds, new political priorities and events, changed minds and economic distress could see Article 50 become a sort of Waiting for Godot.
PS: You can also look to an increasingly widely followed QC, Jolyon Maugham who blogs on these and other matters at in pretty clear English.
For those who haven’t had enough of the Brexit debate, his blog on what caused the anger behind the Brexit voters’ decision is worth a read. Sure, globalisation backlash etc etc is part of the narrative, but it’s also far more nuanced. People in work mostly voted for Remain, people not in work or retired mostly voted Leave. So there’s more to it. Tory shires and Labour heartlands voted Leave, and the blog looks to why this might be.