Bloomberg reports that “there’s no road map for European authorities facing the prospect of a British exit from their 28-nation union — by design.”
Incidentally that’s not true: as the CIO of JPM Private Bank reminded us today, “The Lisbon Treaty includes Article 50 which does contemplate the departure of an EU member. As messy as it might be, a Brexit would be managed by the parties involved, and be a far cry from dissolving a monetary and fiscal union to which member states had “pledged their lives, their fortunes and their sacred honor”.”
If the UK votes for a Brexit next week, what could it mean for the UK, investors, and the EU itself?
Let’s assume Bloomberg is right, because it is more dramatic that way because according to its sources, “officials in Brussels are under orders not to commit any scenarios to paper to avoid alarmist leaks, according to a senior official from one European government tasked with making preparations.”
The Institute of International Finance, which earlier today said a Brexit would be a bigger threat to the global economy than Lehman, must not have gotten the memo.
Ironically, Europe itself appears to have ignored what Europe’s directive are: “Given the potential political and financial shockwaves surrounding a Brexit vote, it’s not clear a map would do much good. Global markets are already sputtering as anxiety mounts about the impact on the world economy. EU President Donald Tusk goes so far as to say that it could spell the end of “western political civilization itself.”
Which sounds somewhat alarmist.
Tusk’s exaggeration highlights the task in self-preservation awaiting European officials as they confront the potential departure of a country from the EU – something that was inconceivable when the union was established. The mechanism for an exit was only written into law in 2009.
So now that the inconceivale is all too conceivable, and in fact, donwright realistic, here is a thought experiment conducted by Bloomberg, looking at what the first 100 days after a Brexit vote would look like.
But before we get there, the first 24 hours.
Before dawn on June 24, if an exit vote becomes clear, the EU’s top brass from Berlin to Brussels will be forced into damage control. In echoes of the Greek debt crisis, euro-area finance ministers may hold an emergency meeting as soon as that evening. Wild swings in the pound, more aggressive interventions by the Swiss National Bank and a ratcheting up of global instability rank as likely market reactions.
Currency markets haven’t priced in the U.K.’s exit from the EU, so if it happens, “a crash is pretty likely,” Lothar Mentel, chief executive officer of Tatton Investment Management in London, said on Bloomberg Television. “We would have to brace ourselves for quite a rough awakening on that Friday.”
The political fallout may be even more fraught. Europe’s traditional counterweights, France and Germany, whose enmity the EU was set up to banish, will seek to gain some of the initiative. They are planning a response as early as June 24 that could include a commitment to deeper euro-area integration as well as a declaration that the EU dream remains alive, according to three people familiar with the plans.
“The European Union will need to have a credible strategy,” said Guntram Wolff, of the Brussels-based policy group Bruegel. “To avoid a gradual disintegration of the EU, political leaders will need to strengthen the attractiveness of the EU and especially the Franco-German alliance.”
Then the first week:
As the weekend begins and the reality dawns in the U.K. that it has voted to leave the world’s largest trading bloc, the rest of Europe will have their own questions to answer. Amid fears that a “Leave” vote could further fuel populist and anti-establishment sentiment throughout Europe, the EU’s leaders could choose to take the unprecedented step of calling an emergency summit without British representation as early as Saturday, June 25.
The reason would be two-fold: send a message to Spanish voters who go to the polls June 26 that the EU remains strong; and to work out what to offer — or, more likely, what not to offer — the U.K. in areas such as free movement of people and access to the EU’s single market.
There will be divisions to overcome even without the British. In France, where opinion polls say the euroskeptic National Front may make it through to the runoff in next year’s presidential elections, President Francois Hollande will have cause to show the electorate that leaving the bloc carries negative consequences. Other leaders, such as those of the Netherlands and Denmark, where anti-EU feeling is also growing, may consider it more politically beneficial to offer support to Britain, their traditional ally.
Nations outside the euro area, especially those where anti-EU sentiment has been on the rise, such as Hungary, Poland and Sweden, could form a group of countries resisting any French and German attempts to move the EU in a more integrationist direction. With Britain’s exit, non-euro countries would lose their crucial partner — they would represent only 14 percent of the EU’s gross domestic product. David Cameron is scheduled to meet the other 27 EU leaders at a summit in Brussels the following week. It’s at this gathering that the prime minister is likely to trigger the EU’s Article 50 — the never-before-used law that catapults nations out of the club.
That would set a deadline of two years — until the end of June 2018, during which time the U.K. would have to negotiate its exit. Will Cameron want the U.K. to become like Norway or Iceland and maintain a close working relationship with the bloc as part of the European Economic Area? Or could there be another set-up that means the U.K. would have to trade with the EU under the World Trade Organization framework?
Finally the first 100 days.
EU chiefs fear the referendum will spark similar demands across the continent. With elections due in the Netherlands, France and Germany in 2017, there’s reason to discourage others from following the U.K.’s course, and this could weaken Britain’s hand in negotiations. It could also divert the EU’s attention away from other issues, including Greek finances, the refugee crisis and tackling instability in Ukraine, according to Michael Leigh, senior fellow at the German Marshall Fund.
By this time, the political mist in the UK may be clearing. The EU could find itself dealing with another prime minister — someone like former London Mayor Boris Johnson, who supported Brexit and whom bookmakers have installed as the favorite to lead the Conservative Party. Whoever it is, the new British leader would probably have to extricate the UK from the EU while facing the prospect of a further referendum, on Scottish independence.
The U.K. would start talks to renegotiate EU agreements in areas as diverse as fishing quotas, financial-services legislation and health and safety standards established over more than 50 years, simultaneously having to start negotiating its own trade deals with the rest of the world. Talks would also have to begin on the relocation of EU bodies headquartered in the U.K., such as the European Banking Authority. Each step of the way must be agreed upon by the EU’s other members and the European Parliament, a process lasting at least seven years and with no guarantee of success, EU President Tusk told Germany’s Bild newspaper.
“No one can predict the long-term consequences,” Tusk said in the interview. “I fear that Brexit could be the beginning of the end not only of the EU, but of the entire western political civilization.”
Why stop there and not look at the second 100 days? Because after Brexit, for the European “Union” there most likely will not be a second 100 days, which may all start one week from tomorrow.