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And Now For Something Completely Different...

Key points

  • Expect years not months until Article 50 is triggered
  • Boris Johnson to lead the UK out of Europe
  • Liberal Leavers only looking to leave “political structures” of the European Union
  • So Norwegian style deal most likely, with continued access to single market
  • Freedom of movement to stay, but further compromises on welfare
  • Short term recession likely

Prepare for a pause

With the dust from Thursday’s explosive result beginning to settle, eyes are beginning to turn to the question of what next. In short, we won’t know for a while. With Cameron tendering his resignation, Article 50 won’t be triggered until the Conservatives have a new leader in October. Even then, without a credible thought-out plan, it looks like Leave have a lot of thinking to do before they pull the trigger. On the European side, Merkel has already blessed a protracted discussion, so don’t give too much credence to the early clamour for an immediate decision from some European ministers.

We expect the time period before Article 50 to be invoked to be measured in years not months. The EU is still negotiating with Switzerland two years after it voted to end freedom of movement and does not look like reaching a deal any time soon. The Leave leaders quickly moved to push back any suggestion of a quick decision.

In our view, the two year timer for exit negotiations will only be started once the outline of a proposed deal has been soft approved by both sides.

BoJo’s dilemma

With a new leader for the Conservative party needed, Boris is already hot favourite with the bookies. His rhetoric during the majority of his career and during his victory speech (or was it defeat acceptance?), was that on policy he is effectively a Bremainer.

Ingredients for a deal

Knowingly or not, the leaders of Leave have started outlining what looks like a deal. Gove explicitly framed the referendum as a question on whether we should leave “the political structures of the European Union” (the emphasis is ours). This suggests that the principle goal of any leave negotiation will be to end our membership of the European parliament, European commission and the European Council of Ministers.

This was proceeded, on Friday morning by Farage labelling the Leave battle bus slogan of £350m for the NHS as a mistake. While Daniel Hannan, a key conservative Eurosceptic MP, has claimed that the Leave campaign only promised to “control" immigration while denying any promise the end to the free movement of labour or a cap on absolute numbers.

Finally, Boris has started to make assurances that the trappings of the EU will remain, even saying that cooperation with the EU is likely to increase after our formal departure.

A Nordic-style truce

A Norway style relationship looks like an obvious template for a deal. Heavy business lobbying over the coming months is like to scare away any thoughts of removing access to the single market. While the increased control of fisheries and agriculture being an EEA member provides evidence of Britain taking back control as well as a victory over the deeply unpopular Common Agricultural Policy. The ability to negotiate our own trade deals should placate the liberal Leavers aching to do trade deals with the fast growing emerging giants. While, removing ourselves officially from the EU and its legislative institutions allows the Leave campaign to claim the democratic will of the people has been carried out.

On the European front such a deal looks feasible. The European business lobby will be as keen to avoid any disruption to their supply lines as UK PLC. In return, the EU's protectionist elements - with France to the fore - will look for their pound of flesh in recompense. London’s Eurozone rivals have long looked for a way of repatriating business to within the geographic confines of the single currency and the exit negotiations look like an easy way to start that process. Expect Euro denominated clearing to be the first to go, with the European Court of Justice no longer able to prevent its relocation.

The one big question that remains is in with regards to immigration. As has been the case with other non-EU members, continued access to the single market will necessitate continuing free movement of labour. However, doing so would contradict a major Leave promise. So finding a compromise to sell to the British public will be the hardest part of the negotiations. We expect a deal to further restrict access to welfare for newly arrived migrants, potentially combined with fast tracking of criminal deportations. Again don’t expect a deal to be struck any time soon - the new government will wait for the post-referendum media glare to be long departed and for the flood of European migrants to thin once (hopefully) conditions in Europe improve.

What next

The political ramifications of Thursday’s events are still being worked through. In addition to a Conservative leadership election, Jeremy Corbyn’s position as Labour’s leader looks increasingly untenable. Nonetheless, the current expectation is that he continues to maintain the support of the party’s base and would win any future leadership election.

The uncertainty in the left, could present an opportune time for the Conservatives to strengthen their mandate at a General Election this Autumn. However, wary of being forced to present an explicit plan for Brexit, we suspect Boris will prefer to wait.

On an economic front, the uncertainty will put off investment in the UK and likely lead to a mild recession. However, as the immediate storm passes, single market access looks to be maintained and without material legislative changes, we expect the UK to slowly return to business as usual – all be it with multinationals preferring to invest in their continental operations where the choice is available.