- Neither side of the Brexit divide in the UK has a clear plan on what to do next
- Fellow EU leaders have told David Cameron to quickly trigger Article 50
- Remaining EU leaders say the UK cannot "cherry pick" on EU rules
- The sum wiped off Britain's FTSE 100 index has reached £100bn already
- The UK will have to make compromises to maintain access to EU markets
Less than a week after a majority of UK voters elected to leave the European Union (EU), promises from those in charge of the "leave" campaign heralding a new dawn outside the EU appear to be unraveling, leaving many to question what kind of relationship the U.K. can now expect with continental Europe.
Prime Minister David Cameron
was in Brussels on Tuesday to speak to his EU counterparts about the result and next steps Britain and the EU could take. He in turn was told that the UK needed to quickly trigger Article 50 of the Lisbon Treaty which starts the withdrawal process, expected to be tortuous as the UK disentangles itself from the EU.
Forlorn hope ... The prospect of another vote in the near future seems remote, as does the UK's hope of keeping some features of its EU membership while ditching the rest. Photo: CNBC.
Trade, security and immigration – key issues in the run-up to the referendum – remain as crucial in the withdrawal negotiations, however, and are already causing a headache, with neither the pro-Brexit nor the remain camp seeming to have a clear plan on what to do next.
Cameron resigned after the referendum result and said a new leader should be in place by September to oversee withdrawal talks – bequeathing to his successor something of a poisoned chalice. Here's what could happen next.
The Norway option
In an ideal world, the UK would like access to the single market (seen as one of the EU's greatest assets) and would also like to retain the financial sector's access to the EU too – known as "passporting" – but without the freedom of movement (that is, immigration) that such access entails.
Dream on, the EU has said, quick to disabuse the UK of the notion that it can "cherry-pick" on EU rules. It has said that if the UK wants to continue to have access to the single market, it must join the European Economic Area (EEA) – an extension of the single market to other European countries that are not in the EU, such as Norway.
As such, the "Norway option" has become a bit of a buzzword among analysts discussing whether it could be the best of what most agree is a bad situation with £100 billion already wiped off Britain's FTSE 100 index.
However, both Norway and Switzerland (which is neither an EU nor EEA member) have agreed to take on aspects of EU legislation in exchange for accessing the single EU market.
Members of the EEA are required to apply relevant free movement of goods, persons, services and capital along with a host of other regulations in areas such as transport, competition, consumer protection and the environment. Agriculture and fisheries are not covered by the EEA agreement.
Unlike EU states, EEA members have no say over decision-making in Brussels, but have to abide by EU rules – an option hardly likely to be popular in Britain but one it might have to accept if it wants to maintain the full economic benefits of the EU and access to its 500 million inhabitants.
Economists at JPMorgan David Mackie and Malcolm Barr said in a note on Tuesday that "it was very unlikely" that the UK would, as "leave" campaigners hope, get "full access to the single market but no EU oversight, contributions to the EU budget or acceptance of the free movement of labour."
Not all analysts think that a "Norway-style" EU relationship is impossible, however. Political analyst Alastair Newton, co-founder and director at Alavan Business Advisory, said on Tuesday that he was confident that the UK would win some kind of single market access – particularly given that EU exporters like Germany will be keen to continue to have "unfettered access" to the UK market too.
"My base case remains that the UK will ultimately negotiate continued access to the single market Norway-style despite significant hurdles to overcome both among the 27 (EU nations) and at home," he said in a note.
"I think that ultimately the offer of a Norway-type relationship will be on the table, that is. including free movement of labour, and will be reluctantly accepted by the Westminster government," he said.
Talks impasse ... The UK hopes to put good market access deals on the table before the exit process kicks off, but EU leaders won't negotiate until Article 50 is triggered. Photo: iStock
No going back?
As uncertainty continues over the future relationship, many are worried about the decline of sterling and potentially rising living and import costs, jobs, economic prospects and the state of British society which is now sorely divided on the issue of the EU.
Millions of people have signed a petition asking for a second referendum and many are angry at an apparent U-turn by prominent members of the Brexit campaign over promises made ahead of the vote.
Pledges were made by Brexiteers about funding (that money saved on the EU would be spent on the UK's health service), immigration (that the number of immigrants arriving in Britain could be controlled) and trade – that the UK will get a trade deal with the EU without having to allow for the free movement of people – something never achieved so far by other countries outside the EU such as Norway and Switzerland.
There have been hopes that a last option could be not to leave the EU altogether. Analysts say that is very unlikely, however. JPMorgan's Mackie and Barr said there was only the vaguest of possibilities that Article 50, if and when enacted, could be reversed, although EU leaders like Germany's Angela Merkel said there is "no way to turn this around" on Tuesday.
"If the UK economy goes into a deep downturn, it becomes clear corporates are relocating to the EU, and there is a change in political leadership in the UK (perhaps after a general election), then perhaps the UK could reconsider its decision. It is not clear to us, however, that the rest of the EU would be particularly accommodating should that occur."
"Much would depend on the context, and it appears clear that the UK would not be able to secure all of the special treatment as a member of the EU it had negotiated previously. Moreover, with a significant amount of time and effort likely having been invested in the exit process by then, there may be a view that it is simply more efficient to have the UK exit and then reapply for membership. Given that the exit process will take years, lots can happen. But this route to staying in the EU appears very unlikely to us."
No quickie divorce
Whatever the substance of a future relationship between the UK and EU, the split is not expected to be painless for either side, or quick. Cameron said on Tuesday that he wanted a "constructive" divorce but the separation process has not even yet begun officially.
In fact, the absence of Article 50 being triggered has led to perhaps the first of several impasses yet to come over a future rest of EU-UK relationship. Britain does not want to start the withdrawal process until it knows what deals are on the table but European leaders have vetoed any formal or informal talks before the withdrawal process is locked in.
Cameron returned to London Tuesday night and the remaining 27 members of the EU are to meet on Wednesday to discuss how to respond to the EU referendum.
Grant Lewis, head of research at Daiwa Capital Markets, said on Wednesday that the UK will not get any special treatment and he, like most analysts, believes that until a new Conservative party leader is elected there will be no progress in talks.
"The past few days have also demonstrated that the U.K. is not going to get any sort of special deal – Single Market access will require free movement of people, a position expressed by every EU leader that has spoken out. Both of these positions are, of course, hugely problematic for the 'leave' side, which has (to the extent that it has any plan at all) predicated its entire hopes on informal negotiations before triggering Article 50 and being able to maintain Single Market access without free movement of people," Lewis said in a note Wednesday.
"So, an impasse for now, not least as the Conservative Party elects a new leader between now and the start of September. And even after that there may well be a snap general election, delaying further the real work of starting the process of getting the UK out of the EU in earnest and merely prolonging the political uncertainty. All the while, of course, the economy and markets will suffer," he said.
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– Edited by Robert Ryan