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Maitland Political Insight EU Referendum

Brexit and what it means Contents

Introduction 3

The Verdict 4

What now? Politics 5

A view from Business and Markets 6

The Economy 8

Leaving the 9

What do EU think? 10

2 Introduction

Here we are. Britain has voted to leave the EU, in a vote which has divided the country down the middle. The Prime Minister has announced his resignation and a band of Labour MPs are calling for to be sacked. We live in extraordinary times. Where should we start?

Well, fi rstly it is important to recognise that the current state of politics and the markets is based on the shock of the result and not necessarily the fundamentals of our situation. once said “the Kaleidoscope has been shaken, the pieces are in fl ux” and never have these words appeared so relevant.

There is no doubt that – even though it remains two or three years away – presents business with signifi cant challenges. When the markets open again next Monday morning we do not know if they will continue to show volatility or straighten out to a position of stability.

We do not know when George Osborne will announce his departure from the Treasury, or who will be our next Prime Minister. Nor who will be sent to Brussels to handle our renegotiations. Nor indeed which Minister will be sent to China, the USA and all over the world setting up these heralded free trade deals. And, crucially, we do not know whether we will retain access to the single market, or at what cost.

In this pithy guide, we provide guidance on possible outcomes and what this result means for business. Maitland Political will continue to be on hand to help businesses of all diff erent shapes and sizes navigate through the choppy waters ahead, making sure their concerns are heard by governments and thought leaders alike.

If you would like to hear more about our service please don’t hesitate to get in touch, please sign up to our morning monitor by email politicalbriefi [email protected] and follow us on Twitter @Maitland_Pol

Yours faithfully,

Pete Bowyer

3 The Verdict

Source:

Britain has voted to Leave the European Union by a relatively slim margin. e way the vote divided between the regions will have a signi cant impact on UK politics. Labour, who dominate Welsh politics, failed to secure a Remain vote, the nation voted nearly 52% in favour of Leave, whilst the wider Stronger In campaign could not get the vote out in England. Meanwhile Scotland and Northern Ireland voted a majority in favour of Remain, raising deep constitutional questions.

Source: The Telegraph 4 What now? Politics

e has voted to Leave the a half-hearted EU referendum campaign and the European Union. e impact of these words is vast make-up of the UK is in question. Scotland’s and and still yet to be fully understood but, in short, Northern Ireland’s majority support for Remain has Prime Minister David Cameron’s political career is put their relationship with the UK in question. Front over having made an emotional resignation speech and centre in everyone’s minds, though, is who will outside No 10 this morning. Jeremy Corbyn is facing be Britain’s next Prime Minister. a backlash from his MPs a er what they view as

Conservative Party Leadership e ri s in the Conservative party between those who supported Remain and Brexit are self- evident. e Tory leadership election process dictates that two candidates go head-to-head. What is certain is that the Conservative party membership will choose a Eurosceptic candidate, but what will be interesting to see is whether the Parliamentary party select two Eurosceptic candidates in a bid to  ght o Boris Johnson. He is clearly the front runner and the centre of speculation as his fortunes surged since being the  gure head of Vote Leave. Britain has voted to leave and he’s on the right side of the argument.

Several other Tory MPs are said to be “on manoeuvres” for the Tory leadership. • George Osborne is regarded as the Cameronite option but it is now widely accepted the Chancellor will be moved from his position in a post referendum reshu e • eresa May is a highly possible option to be on the ballot and she has kept her head down during the EU referendum campaign. As a sceptical Remainer, Mrs May could have the best chance of challenging the inevitable Brexiteer who will be on the ballot • Vote Leave campaigner, Michael Gove, could also be in the running who has in recent weeks experienced a surge of support amongst Tory grassroots for him to be leader

Note: Tory leadership elections have been characterised by an outsider coming through at the last minute to make the unexpected happen, making for an interesting summer.

SNP eyes up breaking another union Tony Blair and John Major shared a platform throughout the campaign to warn of the potential destabilising e ect of Brexit on the Peace Process in Northern Ireland, highlighting the potential constitutional crisis that could now unfold. But the SNP could cause the most immediate constitutional upset as Nicola Sturgeon’s criteria for calling a second independence referendum has been met. Scotland voted 62% Remain and 38% Leave compared to England’s 53% Leave to 47% Remain.

Labour leader under fi re is was the moment many Labour moderates expected would be the silver lining to the Brexit cloud: the opportunity to depose Jeremy Corbyn as leader. and Ann Co ey have sent a letter to John Cryer, chair of the Parliamentary Labour party, submitting a motion of no con dence is Corbyn. It carries no constitutional force and is up to John Cryer as to accept or reject it, but it would be a signi cant expression of the lack of con dence of Labour MPs in their Source: The Telegraph leader. Labour voters may have voted Brexit in the working class heartlands, but Labour members overwhelmingly supported Remain which could be enough to force a leadership contest. 6 A view from Business and Markets

As at 13:00 BST FTSE100 6,055.48 (-4.46%) GBP/USD 1.365 (-8.22%) GBP/EURO 1.2379 (-5.30%)

• Sterling drops to 30-year low • UK sovereign credit rating under pressure • Gold and the yen surging as risk aversion takes over • BoE likely to maintain easing policy

With the Leave vote now con rmed, most market economists at Capital Economics and JP Morgan analysts agree we are entering a period of signi cant Asset Management have noted that despite a uncertainty in the  nancial markets – but that how Brexit vote, the ability of the UK to repay its debts long this uncertainty will last is an unknown. While will not have changed materially and a cut to our it is impossible to know how long and how widely credit rating isn’t likely. Similarly, some economists the e ects of this shock will be felt, economists believe that the depreciation of the GBP/USD from Barclays, Bank of America Merrill Lynch and exchange rate that we have seen today may well Morgan Stanley amongst others have written that a so en the blow to equities through a boost to the recession of some magnitude is a likely scenario, a attractiveness to UK exports. Elsewhere, we have view that is shared by the BoE, Treasury and IMF. seen analysts comment that UK markets are still operating in a global context, and once the initial e widespread turbulence in global markets shock subsides, markets may well bounce back that has started this morning is being driven by sooner than expected. And with the ‘QE toolbox’ weakening equities and a continued postponement nearly exhausted, a rise in interest rates could in investment activity on the part of industry, as a provide the boost to growth that has been so widely result of which we have seen gilt yields compressed sought. in a  ight to quality as investors pile into government and corporate credit. Interest rates may While it remains to be seen which of the well be cut to zero according to Barclays analysts above scenarios will come to be, one of the and QE programmes re-started to try to boost most contentious long-term concerns are the lagging growth. is morning we have seen sectors negotiations to be started with the UK’s various such as Financials, Real Estate and Housebuilding, trade partners, most notably the EU and the US. with strong exposure to the domestic UK market, Given the two-year withdrawal period from the be the hardest hit by this vote. Credit rating Union, it will take some time to have clarity on agencies Moody’s and Standard & Poor’s have also what the rules will look like. In the meantime warned that given the market turmoil that we have we must rely on the most visible marker of inter- today been launched into, Britain’s credit rating may country trade health - the exchange rates against come under pressure. those of major trading partners, the Euro and the US Dollar, which are likely to experience heavy Despite these warnings coming from in uential volatility in the following weeks. industry bodies, there is unsurprisingly an element of uncertainty given the novelty of the situation. In response to Moody’s and Standard & Poor’s,

7 A view from Business and Markets

is market turmoil is clearly negative in the short-term, but analysts at Societe Generale amongst others have drawn parallels to the pound’s withdrawal from the European Exchange Rate Mechanism in 1992 and the speed of recovery in GDP growth that was seen at the time. It remains to be seen whether this bounce back is replicable a er today’s vote.

Market Reaction FTSE100 6,055.48 (-4.46%) as at 12:50 BST

GBP/USD 1.365 (-8.22%) as at 13:00 BST

7 The Economy

e Treasury has published studies into the costs of Brexit and the options available on leaving. eir analysis of the long-term economic impact forecast that, with trade and investment  ows restricted by lack of access to the Single Market, the UK would be permanently poorer: None of the three alternatives would o er the same bene ts: membership of the European Economic Area, like Norway; a negotiated bilateral agreement, such as that between the EU and Switzerland; and World Trade Organisation membership without any form of speci c agreement with the EU • e minimum GDP impact of leaving would equate to a long-term loss of £2,600 a year for each household, rising to £5,200 in the case of the WTO option • e fall in tax receipts would range from £20bn a year if the UK signed up to the European Economic Area, to £45bn a year in the case of relying on WTO rules Chancellor George Osborne has predicted that the UK would enter a recession on leaving. To shore up the public  nances, he has outlined details of an emergency budget containing an estimated £30 billion worth of tax rises and spending cuts: • Cutting the NHS budget by £2.5bn, defence by £1.2bn, and education spending by £1.15bn. Other departments would face similar reductions • e basic rate of income tax would increase by 10 per cent to 22p in the pound, the top rate would rise to 43 per cent, and inheritance tax would go to 45p in the pound • Spending on pensions would also be hit and fuel and alcohol duty would rise by 5 per cent

Bank of England Governor Mark Carney spoke shortly a er the Prime Minister about his contingency plans, claiming that the Bank was “well prepared” and promising to supply as much liquidity as is needed to stop this political crisis becoming a  nancial failure. He said:

• It will take time for the UK to establish new relationships with Europe and the rest of the world • Britain can expect continued economic volatility in the short-term • e Bank stands ready to provide more than £250 billion of additional funds for its normal market operations. • e Bank will not hesitate to implement and additional measures it deems necessary

e Leave campaign rejected the proposed emergency budget, which they characterised as part of the Remain camp’s “Project Fear”. Sixty  ve Conservative MPs have con rmed that they will vote against any such measures, wiping out the government’s slim majority and throwing Osborne’s plan into doubt. e campaign has instead put forward a roadmap Britain’s future trading relationships: Britain’s future trading relationships: • Enact a Free Trade Bill before the next election. is legislation would ensure that the UK withdraws from the EU’s common commercial policy. Britain would thus regain its seat on the World Trade Organization, which Vote Leave argue would make the country a more in uential force for free trade and friendly cooperation. • Commence negotiating new trade deals immediately. Vote Leave has issued a priority list of countries including the US, China and Japan, as well as Canada, Australia, South Korea, New Zealand. ey muse that the deals could enter into force immediately a er the UK leaves the EU. 8 Leaving the European Union Despite the referendum result being non-binding, the Government have a democratic duty to the British people to give e ect to the electorate’s decision to leave the EU. e immediate steps still remain, however a matter of politics and not law. Short Term • David Cameron has said he will leave to his successor the Australia are supportive of the result. Opposition parties task of activating Article 50 of the Lisbon Treaty: “Any in France, the Netherlands, Denmark and Italy have Member State may decide to withdraw from the Union all called for referendums to be held. Key government in accordance with its own constitutional requirements”. institutions in South Korea have also held emergency However, technically, under Article 50 only the EU is meetings, with Japan expected to follow suit. required to seek a renegotiation, and therefore, they • President of the European Council, Donald Tusk, has may dictate the pace of Brexit. e PM has stated a urged against ‘hysterical reaction’, adding that the EU is conservative leadership contest should be concluded by prepared for Brexit. He has o ered an informal meeting the start of the party conference in October. to remaining member of the Council at next Tuesday’s • France, Ireland and the UK have all already held European Summit in Brussels. ere have already been emergency cabinet meetings to discuss the implications calls for the UK’s Commissioner, Jonathan Hill, to be of Brexit. Statements from many EU members have been stripped of his role within the next couple of months. issued already expressing concern, while Russia and

Mid Term

• Britain has two years, from the date of application, to • Britain will be bound by any new EU legislation whilst reach a withdrawal agreement. However, the European we negotiate exit and right up to the moment we le . Council can extend this period. e agreement shall British negotiations will cover areas as diverse as  shing be concluded on behalf of the Union by the European quotas,  nancial-services legislation and health and Council, acting by a quali ed majority, a er obtaining safety standards. While these negotiations continue, the consent of the European Parliament. we will be constrained in our ability to negotiate and • ere is speculation that the UK is being relieved of its conclude new trade agreements with countries outside duty to hold the presidency of the European Council the EU. from July – December 2017. Member states feel it would • e countries with which we currently have trade be illogical and impractical for the UK hold this post in agreements through the EU are likely to want to review the midst negotiating divorce from the Union. the outcome of our post-Brexit agreement with the EU before negotiating any new trade agreements with the UK.

Long Term • e complexity of negotiations, as well as the need to • e UK will face a constitutional headache as much of secure adequate access to the Single Market, could take the legislation embedded within the nation is EU law, negotiations beyond the two year deadline (if this is which will need to be redra ed or revoked. Key a ected approved). areas are the Northern Irish peace process, ‘passporting’ • However, even if an agreement cannot be reached, for  nancial services, and nearly all legislation in the Britain will become an independent state and cease to be devolved parliaments of the UK. e 1998 Scotland Act, subject of EU treaties at the end of the two year period for example, states acts of the Scottish Parliament which from the date that notice was given. are not compatible with EU legislation are ‘not law’. • Activating article 50 of the Lisbon Treaty is the start of a long process; there is speculation that a total withdrawal could take up to ten years. 9 What do EU think?

Germany - A victory of distrust Handelsblatt reports that German  nance minister has a secret plan for the UK, which would give it associate status. But also that he does not want to reveal too much of it to not encourage others. Merkel at the same time is reported to be in crisis mode, which means that she Great Britain is actually leaving the EU. ere will be will try to slow things down in order to gain time for a economic consequences – but not as severe as many a proper decision: “What the consequences will be for the traders might expect. What Brexit means for Great Britain next weeks or months or years will depend a lot on what on a long term is less obvious. Maybe Scotland will strive we, the other 27 EU members are willing and capable to to leave. Germany will have to think hard about how it will do, to not come to hasty conclusions, which would only position itself in a EU without pro-competitive Britain. divide Europe further.

Switzerland - Brexit hits Britain at a critical moment. The only certainty now is the uncertainty this vote has created.

During the next 2 years - but possibly for longer - the long-winded and di cult negotiations with Brussels will dominate domestic UK politics. A total voiding of all contracts with the EU is not realistic. Also it will become during this time which economic a ects the vote has had.

Spain - The UK votes for Brexit

e results are a total shock for British politics as well as the EU and for markets on a global level. e polls, including those done yesterday predicted a triumph for those wanting to Remain. e result caught investors o guard who in the early hours sold Sterling and other assets in Asian markets, a total debacle a er two days of gains. e result could change the UK, as Scotland’s government has announced another referendum, given that Scotland wants to stay in the EU.

Italy - Britain leaves the EU - A historical day versus the unknown - Italian stock exchange opens down by 8%

e rating is the result of many factors, including the collapse of the Labour vote in the rural north because of anti-immigration anxieties of the less well o . It is an anti London vote, a London seen as being more and more distant from the rest of the country. Shock is palpable in the City and the country for the march into the unknown. e Scottish leader Nicola Sturgeon that has clearly stated that she can imagine the future of Edinburgh in Europe opening the door for a new referendum that will lead to the secession of a Scotland that voted overwhelmingly for Brussels. And not just Scotland, Northern Ireland is also considering its options.

10 What do EU think?

Russia - Putin will personally comment on the events of Brexit Bracing for volatility

Russian President Vladimir Putin plans to personally According to Anton Siluanov, Russia’s Minister of Finance, comment on the results of the UK referendum results ac- the UK voting out of the EU means a drop in the price of cording to the president's press secretary Dmitry Peskov. oil, the weakening of the rouble, and a rise in volatility in Peskov stressed that the decision to Brexit is a purely in-  nancial markets. " is is an unfortunate event. However, ternal matter for the United Kingdom. He said that Russia the volatility we are experiencing now is far less than what is interested in the EU remaining a prosperous and stable Russia has already experienced, so the domestic economic economic power given what an important partner it is for impact of this event will be limited. However, the Min- Moscow. Answering the question of whether the results ister added that hope about an imminent of recovery in will impact relations between Moscow and London, markets and the world were overly optimistic. " e vote Peskov described the "the rich tradition and history” the in the UK has shown that hopes for a smooth recovery countries have shared while acknowledging the “presence were overly optimistic. e world will be faced with two of baggage in the current relationship.” He continued, key consequences as a result of the referendum: a sharp “We hope that in this new reality, the UK will understand increase in market volatility and uncertainty about the the necessity of building strong relations with Russia.” future development of the global economy .”

Ireland

Commenting on Brexit, the Irish Times have highlight how the self-image of English conservatives is one of slow, careful, moderate change but now “the sti upper lips have parted and released a wild and inarticulate cry of rage and triumph.” ey believe that the old illusion of England being “a vigorous world power with a secure sense of its own identity that stands de antly alone” is certainly not going to be restored. More speci cally from Irelands perspective they acknowledge that they will have to intensify their relationship with their “gallant allies in Europe”. Acknowledging that Sinn Féin has been campaigning for a Border poll on the way to a united Ireland, it is broadly accepted that the party will push that agenda much harder now. Furthermore, if there is a referendum on Scotland to leave the UK then the future of Northern Ireland will also become a live political issue

France - The Brexit vote is a tough

Hollande stated that the choice to quit the EU « was a painful decision which he regrets profoundly, but that France will continue to work with its friend the UK. e EU is a great idea and not simply a great market, as the people expect of the EU to stand up for freedom, tolerance and peace

10 maitland political

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