Friday 21 October 2016

Apocalypse now?: Hints, rumours and downright myths of the post-Brexit future...

In a week of drama for the global financial markets, Eoin Fahy busts five of the most common myths

Eoin Fahy

Published 03/07/2016 | 02:30

Eoin Fahy is chief economist at Kleinwort Benson Investors
Eoin Fahy is chief economist at Kleinwort Benson Investors

Myth 1: As the UK is set to leave the European Union, governments will now move quickly to introduce border controls on trade between the UK and the EU, including Ireland.

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The UK's vote to leave the EU is the start - not the end - of the exit process. It is likely to be late 2018 at the earliest before the UK can legally exit.

There is a lot of work to be done before detailed negotiations between the UK and the EU even begin and those negotiations are expected to last years, not months, when they do get under way. While it is still possible that we will once again see 'Stop, Customs' signs on the road from Dundalk to Newry, it is unlikely that this could happen before 2019.


Myth 2

The result of the referendum means that the issue is now closed. The electorate has spoken and the UK will certainly now leave the EU.


While it is certainly very likely that the UK will leave, it is not a certainty. The long lead-in time for UK exit allows plenty of time for UK and European politicians to reach an agreement on revised terms for UK membership of the EU.

If a week is a long time in politics, the two- to three-year period before UK exit is an eternity and pretty much anything is possible. A new deal for the UK could allow a second referendum to be held, this time - potentially - resulting in a vote to remain in the EU.

That said, a reversal of the decision would not be easy to achieve. What politician wants to turn around and tell the electorate that they got it wrong and must vote again?


Myth 3

Brexit will inevitably lead to a recession in the UK.


Arguably, the fact that almost every economist agreed on something (that Brexit is bad for the UK economy, at least in the short term) was an even bigger shock than the Brexit vote, or England's loss to Iceland in Euro 2016. But just because all economists agree on something doesn't necessarily mean they are wrong (!) and I have no doubt that the UK economy will take a real hit from the Brexit vote.

But we need to be careful not to confuse 'slow growth' with 'recession'. A recession is a distinct possibility; there is no doubt about that, particularly if the UK's exit is badly handled.

Uncertainty is bad for growth, as it tends to make businesses delay or cancel decisions to expand, to spend money on new projects or, indeed, to take on new staff.

If the UK and EU are at serious loggerheads for the next few months, the uncertainty about the future could be enough to tip the economy into recession. But it also possible that tempers will cool and the prospects for a reasonable deal will improve.

Then business and consumer confidence will recover - slowly - and a recession will be avoided.

So a recession is possible, but not certain.


Myth 4

Protest parties now dominate European politics


It is easy to look at the UK electorate's vote to leave the EU, combined with the strong showing of many other protest/populist parties across Europe, and conclude that these protest parties are about to take power in Europe. But the facts say otherwise.

In the most recent national elections, most of these parties obtained support in a range from about 15pc to 25pc.

In Spain, Podemos took 21pc of the vote in last weekend's general election (a very disappointing outcome for it), while the Five Star movement in Italy got 26pc, Sinn Fein here took 14pc, the National Front in France took 18pc and the UK Independence Party (Ukip) took 13pc.

The exception is Greece, where Syriza took about 35pc of the votes in the unique circumstances there.

These vote shares show a high level of support, certainly, but far below a level where these parties would be taking control of government. And there are some indications, most recently in Spain, that their level of support is topping out.


Myth 5

The European Union is falling apart.


The Brexit vote is a real blow to the EU - but it cannot be said to be 'falling apart'. The entrance door is busier than the exit door - there are currently more countries trying to get into the EU than get out.

That's hardly a sign of a union about to collapse.

Still, the EU is unpopular in some countries such as Denmark, and the Dutch electorate recently voted against an EU agreement with Ukraine in a sign, perhaps, of its disaffection with the EU. There is always the possibility that the UK will lead to populist parties in other countries organising similar referenda, potentially with similar results. But this does seem unlikely at this stage and certainly is not a 'done deal'.

Eoin Fahy is chief economist at Kleinwort Benson Investors

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