The transition in British politics has taken place much faster than anyone anticipated. Just three weeks after the United Kingdom’s (U.K.) historic vote to leave the European Union (EU), the country has a new Prime Minister, Theresa May. May was not a supporter of the “leave” movement; however, she has promised to fulfill the wishes of the people, stating that “Brexit means Brexit.” In addition, there has been a change in cabinet members, with former London mayor Boris Johnson, a leading campaigner for Brexit and a previous (and future?) candidate for Prime Minister, now the Foreign Secretary. Johnson is an odd choice for a diplomat. He has no experience in foreign affairs and is known for making outlandish comments.
Even more important is a new position in the British government, the so-called “Brexit Czar”—officially the Secretary of State of Exiting the European Union. Quite a mouthful, though it can be abbreviated to SSEE-U. This new role will be filled by David Davis, an experienced diplomat and long-time skeptic on Europe. In his writings prior to the vote, Davis presented his view that the U.K. could negotiate a trade deal with the EU, but could also negotiate trade agreements with the U.S. and China by itself faster than could be done by the EU. Effectively, Davis is arguing that former Prime Minister David Cameron could have struck a better deal when the terms of the U.K.’s membership in the EU were renegotiated in February 2016. Davis will attempt to maintain free trade with the EU, while freeing the U.K. from what it views as excess regulation.
Some have suggested that somehow the U.K. would “walk back” on leaving the EU, possibly through a second referendum or another election. May’s selection of Johnson, and especially Davis, makes this scenario, which was never very likely in our opinion, almost impossible.
Formally, the next step will be for the U.K. to trigger Article 50 of the Treaty of Lisbon. Prime Minister May suggested that this would not be done until next year, but the time frame has been accelerated for many aspects of English politics. Perhaps the formal announcement that the U.K. will leave the EU will be accelerated as well.
The default scenario coming out of Brexit is not the absence of trade, or even very high tariffs, but rather the U.K. and the EU trading under the rules of the World Trade Organization (WTO). The major outstanding issue is passporting—the ability of U.K.-based financial companies to operate within the EU on equal terms with EU-based banks. Those advocating for Brexit, including Davis, have suggested that they will be able to get a new agreement on largely the same terms. This issue is not only the most important, but also one of the most contentious.
The economic forecasts set forth in the presentation may not develop as predicted.
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