July 2016

We can now say that June 23rd is a seminal moment in Great Britain’s history.

The outcome of the referendum was unexpected and extraordinary. The weight of the whole government machine and its marshalling of forces from outside the country, from the President of the United States to the President of the EU, along with the tactic of putting out frightening, what can only be described as propaganda, did not manage to get a majority vote. Regardless of the arguments, the fact that a majority, albeit relatively small, opposed the establishment, indicates a very deep level of dissatisfaction amongst the population. This leaves us a country politically in a very dangerous position, particularly as there must have been a very large number of people who felt the “safest” way to vote would be for the status quo.

The most surprising outcome in the days since the referendum has been the often vitriolic comments by “Remainers” on the people who voted. To hear senior politicians who profess to believe in democracy, publically announcing that they want to unpick the outcome is bad enough, but the denigration of the voting public that voted against their wishes is alarming and highly unparliamentary. If the process of negotiating with the EU over the next few years is undermined, then there could be an enormous backlash not only from those who do not like the fact that our Courts, Parliament and Sovereignty is overruled by the Commission, but also from those who felt the best option was to stick with the status quo.

The question of “what next?” is now critical. Our system of government needs an opposition. It also needs a government and we won’t have the makings of one until the leadership elections run their course in September. Hopefully the Labour Party will also have resolved their problems by then. The new Prime Minister will then have to form a government and start dealing with the issues of how it conducts the negotiations with the Commission. If the Commission follows its current stance of refusing to discuss the situation until Article 50 is invoked, then the government will inevitably have to delay the process. After Article 50 is invoked, then there is a rule, which may or may not hold, that a treaty must be signed in two years. Bearing in mind the Commission has been working on Trade Treaties with the other major countries of the world, East and West, for many years and has failed, the chances of getting a Treaty in the two year period are slim. In theory then, the World Trade Organisation rules would apply as the fall-back situation. Not so bad as those are the rules which govern trade with most of the world today.

There will of course be much complexity vis-à-vis the movement of people but, to a large extent, that can be determined by our Parliament.

While there may be disruption to the financial services industry, I think one can put in the ring a provocative thought:-
Our financial services are in London and are run by some of the greatest brains that we have in the country and I don’t think the tens of thousands of people involved in all the complex issues that make London a great financial centre are going to move anywhere any time soon!

With regard to the noises about forcing finance to move to Frankfurt or Paris, it is useful to remember that the Euro/Dollar market started in London in the 1960s as a result of US capital controls and taxation. London is the centre for trade in the Euro in spite of crashing out of the ERM in September 1992, and every effort by Brussels to move trading to Frankfurt has failed owing to London’s expertise and, most importantly, the British trusted judicial system. If trade in the Euro were restricted, then it would put in doubt the Euro’s position as a Reserve Currency. Whatever and wherever financial services move, it would inevitably take an exceedingly long time.

Leaving the City aside, on the trade front, as I said, the default position is WTO rules. However if the Commission tried to be vindictive, not only would the negotiations grind to a halt, but I can see a lot of pressure being brought to bear on the governments of Germany and France, to name only two, by their own commercial companies. French agriculture and the German car industry carry a lot of weight and the deterioration in those two industries would be rapid if trade was interfered with between the UK and EU.

Many of the directors of our very large companies (FTSE 100 etc.), while they may have felt the need to back the government line on the gloom publicly, went on after the vote to take advantage of the bargains in share prices in the aftermath. A lot of announcements are coming out that would have probably come out anyway in due course regardless of the vote, but it has been convenient to blame the actions on the vote.

All this is not to say that we are not going to be in a situation of short term uncertainty, particularly as the establishment media and economists fan the flames and enjoy the limelight of public headlines. Most likely though, as we settle down and the news, in its normal way, starts to focus on other things, cooler heads will start to work out the real issues that have to be addressed, both in the UK and in the Commission.

At the end of the day, trade is what we do and the days when the drawbridges can be pulled up to the detriment of the population in general are long gone.

Damon de Laszlo 5th July 2016