Why Britain might not leave the EU and the next Prime Minister could be female

This is a quick run through of the post-Brexit vote decision tree. The opportunities and constraints after the UK vote to leave the EU are now coming into view. It is clear that the UK is likely to leave the EU given not only statements by Prime Minister Cameron but also the Home Secretary Theresa May, both of whom campaigned for ‘Remain’. But it is also clear that the EU will not broker formal or informal discussions with the UK until the UK has invoked Article 50, which can only be done by an act of Parliament. Below, I want to run through some of the constraints in order to build a few scenarios that I see as possible now that we are a week into the post-Brexit era.

The first question is about who will be the Tory leader and when they will be installed. Today, we have already heard that one of the two leaders of the ‘Leave’ campaign, Michael Gove, is standing for the Tory leadership position that would make him Prime Minister. In addition, Theresa May has also put her hat into the ring with a formal announcement. Unexpectedly, Boris Johnson has decided not to make a move for the role. And so that changes the complexion of the race somewhat, with the Brexiteers likely all lining up behind Gove, with Theresa May as the only other prominent candidate. Stephen Crabb, Liam Fox, and Andrea Leadsom have also confirmed their leadership ambitions. Jeremy Hunt has lined up behind Theresa May.

As I wrote yesterday, Theresa May has a good chance here because she does not represent the ’Leave’ campaign. Gove, on the other hand, with Johnson out, now has a much greater chance of winning. I see Andrea Leadsom as a dark horse given her desire to leave the single market altogether. But Theresa May said a number of things in her announcement I thought quite interesting and important in handicapping the strategy for the UK. So I will spell them out below:

  1. The United Kingdom is out. “Brexit means Brexit” meaning there must be no attempts to “remain through the back door”. She also said “The country voted to leave the European Union, and it is the duty of the government and of parliament to make sure we do just that.” This means that the leading ‘Remain’ candidate is telling us she is going to lead the UK out of the EU. Effectively, there is no other position left. The UK is out.
  2. The Tories will remain in power through 2020. She ruled out a general election before 2020 if she became leader. That means the Tories will be in power until the general election in 4 years’ time.
  3. No ‘emergency budget’. She said a Conservative government under her would not seek to reach a budget surplus by the end of the parliament, and would avoid tax increases that would disrupt investment. The whole cutting that George Osborne promised us was bollocks right from the start. If the UK is in jeopardy economically, as many are predicting it will be, it means interest rate cuts and fiscal stimulus, the opposite of what Osborne was promising. This is important.
  4. Article 50 invocation delayed. May said that the UK government should not invoke article 50 until the British negotiating strategy was agreed. And she said that meant it wouldn’t happen anytime before the end of this year – hence her desire to add stimulus in case investment drops.
  5. There will be immigration controls. This does not mean that May will opt out of the single market. However, she did say that there would have to be controls on freedom of movement and that there is “no silver bullet” on reducing immigration, meaning leaving the EU would not stop the flow of people into the UK altogether. To me, this suggest that she is already hedging toward EEA membership whereby there are restrictions on immigration, particularly from outside the EU, but where EU nationals still have the ability to enter the UK and vice versa.

To me, the Theresa May platform sounds duly credible. And combined with her ability to build bridges, having not campaigned to leave the EU, I rate her chances highly. Irrespective, any future British Prime Minister is likely to have to have a very similar platform, given the constraints. May said explicitly that any attempt to get out of reducing immigration would be seen as treacherous by the UK electorate, “especially [coming] from leadership candidates who campaigned to leave the EU by focusing on immigration”. And that is a very valid point.

So, if you run through the decision tree here on these points, the first question is whether the new Prime Minister campaigns to go out. And Theresa May is telling us even ‘Remain’ Prime Ministers will lobby to get Britain out because that would be following the will of the people. This does not mean the UK parliament will vote out. It means that the next Prime Minister will put forward a vote to invoke Article 50 and individual MPs will have to vote their conscience and suffer the consequences. So it is still possible that Article 50 does NOT get invoked – and we will then have to see if this occurs whether general elections get moved forward.

Now, if Article 50 is invoked, the Tories will likely remain in power. They have the mandate with an absolute majority. Moreover, the Prime Minister is basically forced to campaign to MPs to vote for Brexit since this is the will of the people and not doing so would open the Tories up to claims that they are not following the will of the people and need to call for new elections. So I see the no-new-elections pledge as inextricably linked to the campaigning for out pledge. Both of these variables are constraints that are binding if the new Prime Minister rationally goes through options. If Article 50 fails in Parliament because the opposition votes it down and some Conservative MPs defect, then new elections are a distinct possibilty. ANd in this case, a new referendum might be as well. If this were to happen, Britain would re-assume its place in the EU in full until the new referendum was called.

The next question regards what happens to the British economy and currency. If the currency falls and the Bank of England feels forced to raise rates rather than lower them or if investment is hurt and the economy falls into recession, fiscal stimulus in the form of tax cuts or spending is likely. Even if this doesn’t happen, it is VERY unlikely that George Osborne’s pledge of raising taxes and cutting expenditures is going to carry the day. Brexit effectively means a weaker currency and a more dovish fiscal stance – competitive currency devaluation and stimulus, if you will. I see no other options because to not go this route would be a massive policy error that could lead to recession, forcing new elections. Bottom line: Brexit forces Britain’s economic policy away from Osborne’s cutting strategy into a more expansive mode.

I know that Juncker and Tusk and Merkel are all pushing for the UK to invoke Article 50 as soon as possible. Of course they want that because it pressures the UK in a way that reduces the UK’s bargaining power and enhances the EU’s. And this is the very same reason that they will broker no formal or informal talks before Article 50 is invoked. Tusk has said so, as has Merkel. If the UK wants to increase bargaining power, then it needs to decide on a plan of attack first and invoke Article 50 only after it has done so and put that plan up for vote in Parliament. Theresa May’s statement for candidacy as Tory party leader shows she understands this. And I reckon other candidates will also understand this logic and decide, like May, that the correct thing to do is put a team in place, decide a negotiating strategy and plan and then put that plan to a vote before Parliament. And if that plan is deemed worthy, Parliament will vote to invoke Article 50. To not follow this path would be a huge policy error.

Finally, the last question is what negotiating tactic the UK takes. There are really only two options. The first option is remaining in the single market. The second option is leaving the single market. These two options are going to be seen as the electorate as a trade-off between immigration controls and trade. And because the issues are murky, I think this is the most difficult and most important option. It is the issue that caused the most angst for people at the polling stations. If the UK stays in the EEA, many are saying the EU has effectively lessened its control over the EU while still submitting itself to most of the constraints of the EU. David McWIlliams puts this best:

Over the past 48 hours, there’s a sense that after all the promises and claims from the Brexit side, the UK will probably get the same deal as Norway or Switzerland. This would be a free-trade deal with some local control over immigrant numbers. The UK would have to pay for access to the EU markets, yet would have no place at the top table to influence the EU.

Most commentators, establishment politicians and EU enthusiasts will jeer at this outcome, pointing out that the Norwegian option is financially a worse deal for Britain – and they are right.

But what these people fail to appreciate or even ask, is why Norway or Switzerland, two eminently sensible nations, do not just join the EU and get a better deal?

The reason is simple. Lots of people value sovereignty, nationalism and independence. Somewhere deep in the national psyche, the Norwegians and the Swiss (and the Icelanders, who rejected the EU last year) value their sovereignty, the right to make their own laws and run their own affairs. And they are prepared to pay for this luxury. They understand that globalisation is eroding the latitude that countries have to manoeuvre, but they prefer the feeling of independence.

My understanding here is that you do have some more control over foreign, non-EU immigration outside the EU but in the single market. And you also have some curbs on EU migration because migrants have to register in Norway, for example. This may be enough for the British electorate and Parliament.

At the same time, as Andrea Leadsom recommends, the UK could just get out of the single market altogether and be done with the whole thing. This would be a clean break, and, therefore, the easiest one to sell regarding immigration. The angst regarding trade would still be there because it is clear the EU would try to make it difficult on the UK in some fashion, so as to make leaving the EU seem onerous. But doing so would really hurt the EU as much as the UK. And I reckon this is what Leadsom would argue if she becomes the next PM.

Alright, I am going to leave it there for now. I think that is a good synopsis of the issues at play. I will provide more as time goes along.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.