If "Yes" wins in the Brexit vote, what happens next?

On June 23, voters in the UK and other parts of the British Commonwealth will vote on a simple question: should the UK exit the European Union. The shorthand term for what is being proposed is “Brexit,” and Jean Michel Six, chief European economist for Standard & Poor’s Ratings, talked to the Institute about the vote and the impact of the “yes” vote carrying the day.

Kingston

What happens if the UK votes for “Brexit”? Has it ever occurred before in the EU?

Six

The case of a Member State leaving the union is addressed in the treaties that constitute the EU. It’s mostly anecdotal, but there was a previous case of secession in 1985 Greenland left what was then a predecessor of today’s EU – the European Economic Community. Of course, it is difficult to draw lessons from the Greenland economy, and Greenland is still actually an autonomous part of Denmark, which itself is still an EU Member State. What we know today is that under the EU Treaties the Member State seeking to leave and the rest of the European Union have, in the first instance, up to two years after the notification of withdrawal and before the break is completed to decide on the way both parties want to define their relationship in the future. This may mean setting up new treaties. During that time, the existing treaties will stay in place. And there is indeed another clause that says that the two years can be extended further. So during that time the existing rules on trade and freedom of movement of people remain intact as well. The one thing which is quite important to remember, and what makes it more complex, is that by definition the new agreements between the leaving party and the rest of the Union must be approved by each Member State, all 27 of them. Imagine what that means. And the vote may need to be unanimous.

Kingston

It sounds like the status quo can be in place for a while. If that’s the case, why is the pound declining so much relative to other currencies? After all, the treaties that are in place now would effectively be in place for a while. Shouldn’t we expect the currency markets to react further down the road?

Six

It's a valid theory, but that's not the way markets actually think. In other words, when market operators feel that there is something that is likely to get bad in year or two years, they don't say, well, we'll do something in six months or in two years or when it takes place. They anticipate by getting out hopefully earlier than everyone else. That has caused this run on the pound. Basically saying, “if Brexit comes about as a result of the referendum, there will be a long period of uncertainty”, which is the thing that markets hate the most. On the other hand, if Britain stays in the EU it is possible that an ongoing period of division in the ruling Conservative party could contribute to further uncertainty about economic policy in the UK. So in both cases, uncertainty is likely to prevail. And that is what markets like the least.

Kingston

The framework of the EU governs the movement of people and of capital flows. What’s driving the push in the UK for Brexit?

Six

There are two major issues that are generally pointed to by the Brexit supporters. One is immigration, and the other is more of a general question of leadership and sovereignty. But the most important is undoubtedly immigration. Brexit supporters believe that the UK has lost control of its immigration policy, as almost half of the immigration comes from the rest of the EU. A European Union citizen can currently work and live wherever  they want, with very few restrictions. This is not the same as the Schengen regime which has abolished borders  across much of continental Europe including 22 of the 28 EU Member States. The UK is not a signatory of Schengen. But that doesn’t mean they are exempt from the immigration rules that prevail across the Union. It is for this reason that new assurances designed to curb immigration to the UK were considered some of the most important elements of the UK reform package which agreed with other EU Member States at the recent EU summit on Brexit.

Kingston

The issue of economics and markets in a post-Brexit world sounds like it is getting dragged into a dispute that has little to do with economics. Would you agree with that characterization?

Six

Economics is part of the debate. Immigration is being viewed by some as a downside of belonging to the EU in the sense that the free flow of migrants into the UK is seen to be creating unemployment and adding downward pressure on wages. That’s a very typical argument you can hear around the world, including the US, from anti-immigration voices. And so that is ultimately an economics argument.

Kingston

Does the economy of the UK face a great deal of risk if it chooses Brexit?

Six

On the general economic impact of Brexit, the UK has more to lose than the rest of the EU. Here's one set of specific data: half of British exports go to the EU. However, on the other side, Britain takes less than 10% of exports from the other 27 countries of the EU. So there's a big imbalance there and access to the EU Single Market for the UK is really essential for the future economic prospects of the UK. Don't forget that the EU Single Market is the world's largest market. It is an essential destination for UK trade, and regaining access to this market in the case of Brexit could be long, painful and costly.

Kingston

If the UK and the EU negotiate economic treaties in a post-Brexit world that are largely the same as what they have now, does it really make that much of a difference? Can we just assume things will stay mostly the same?

Six

No. One possible outcome with a major difference is that the UK, having left the union, would no longer have a say in EU decision making. Let’s look at Norway. It isn’t part of the EU, but it has a very large set of treaties with the EU, especially on trade, that links it to the rest of the union. One very important aspect is that they must comply with the regulations and directives of the EU if they want to export to the Union. But they do not have any say in the decisions surrounding those rules. As Norway Conservative Party spokesman Nikolai Astrup famously said once, “If you want to run the EU, stay in the EU. If you want to be run by the EU, feel free to join us in the EEA.” (The EEA is a trade-facilitating agreement of non-EU members that includes Norway and Iceland, among others). For the UK, the question is do you want to be more of an island or less of an island?