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‘Brexit’ Analysis: UK Votes to Leave the European Union

June 24, 2016

Stephen Day, UK Public Affairs and Government Relations, Burson-MarstellerThe UK’s Electoral Commission has formally confirmed that the UK has voted to leave the European Union (EU) by 51.9% to 48.1%, in a result that has sent shockwaves through Westminster, the City of London and far beyond.Cameron to stand downAs we have continually predicted in the event of a Leave vote, David Cameron has announced that he intends to stand down as Prime Minister and leader of the Conservative Party, making way for “fresh leadership.” Cameron reflected on his legacy at the helm of the British Government over the past six years, before stating that, whilst he does not believe he is the “captain to steer the ship to the next destination,” he would ensure a “steady ship” over the coming weeks and months.Cameron’s resignation will now lead into a full leadership race within the governing Conservative Party, with the next leader due to become Prime Minister prior to the Conservative Party conference in early October.The process will see Conservative MPs conducting an exhaustive ballot, whittling down potential candidates to two individuals, who will then be put to a vote of Party members.It is difficult to see anyone but a Eurosceptic being elected leader of the Conservative Party in these circumstances: this could include MPs that campaigned on both side of the referendum. This therefore leaves Boris Johnson, even though he is widely seen in Conservative circles as not having had a good referendum campaign, Michael Gove and Andrea Leadsom as potential frontrunners. Former Ministers such as Liam Fox and even David Davis from the old-guard might also throw their hats into the ring. Home Secretary Theresa May – who has campaigned for Remain, but taken a low profile – will also stand a strong chance of election.In his speech, Cameron noted that he would continue to lead for the next three months, supported by his Cabinet. Speculation will now follow as to the winners and losers of this morning’s result and the resignations and appointments to the Cabinet that will follow. George Osborne will stay on as Chancellor until a new Prime Minister is elected in September, although his authority to make major policy decisions is hampered.Corbyn and LabourThe impact on Jeremy Corbyn’s Labour will potentially be equally significant. Corbyn has been roundly criticized for not throwing himself wholeheartedly into the Remain campaign. Many of his own MPs have expressed frustration that his lackluster engagement has meant that traditional Labour voters in the North were unclear on the Party’s position and as such could not be counted on to turn out for Remain.The results in the North of England suggest that this was borne out, and will almost inevitably lead to moderate Labour MPs calling for the leader to go.News is now emerging that the Labour Shadow Cabinet is preparing to convene this morning with rumors stating that some MPs are preparing to sign a motion of no confidence in him and for him to resign immediately.ScotlandWith 62% of Scots voting to Remain in the EU, Scotland’s First Minister, Nicola Sturgeon, has been quick to state that the “results make clear that the people of Scotland see their future as part of the EU.” This will likely be used by the Scottish National Party (SNP) as a rationale for a second independence referendum. The SNP’s manifesto at May’s Scottish Parliament election said there should be another referendum if there was a "significant and material" change in circumstances. Sturgeon is due to speak later this morning.In reality, however, the SNP will recognize that the time is not right for a second referendum. They will be acutely aware that, in order to secure Scottish independence, they will have to present a credible fiscal case. This case has deteriorated significantly over the past two years, due to the plummeting North Sea oil price.Reaction in EuropeThe response from Brussels has been both somber and direct, demonstrating the desire from the EU for a quick and orderly Brexit, in an attempt to avoid prolonged uncertainty in the financial markets.Reports from within the EU suggest that, despite the hard-line statement, “there is no plan B,” officials have been preparing for a while for the scenario of Brexit, the greatest threat to its very existence since its inception. President Tusk was keen last week to emphasize the EU’s readiness to respond, whatever the result.The heads of the main EU institutions are to meet at 10:30am EST. fearing a knock on effect, a number of leading officials within the EU will make clear once again the result is irreversible.This result has led a number of parties from the right to call for referenda on the EU in their respective countries, most notably Dutch anti-immigration politician, Geert Wilders, and French National Front leader, Marie Le Pen.In an attempt to counter this, European Commission President, Donald Tusk, has said this morning he is “determined” to hold the European Union together, adding that there would be “no legal vacuum” until the UK formally leaves. In a brief statement, Tusk reiterated that until the UK formally leaves the EU, its laws, rights and obligations will continue to apply.Cameron has said that he will attend the forthcoming European Council Summit, where the first signs of Britain’s isolation are likely to be felt.Economic falloutIn a sign of the severity of the shock hitting financial markets, the governor of the Bank of England was forced to intervene this morning to reassure the public that Britain’s banks are adequately capitalized. With sterling plummeting, Mark Carney summoned TV crews to Thread needle Street to pledge up to £250 billion of funds to provide credit and support the markets.In the rockiest day since the collapse of Lehman Brothers in 2008, the FTSE 100 index opened with a drop of more than 400 points, equivalent to over 6%. Shares in Barclays, Royal Bank of Scotland and Lloyds plunged by more than a fifth on anxiety and uncertainty about the UK’s future economic policy.Contingency plans are being dusted down across the City. David Cameron’s abrupt resignation will not help the situation – in the eyes of the markets, it leaves a leadership vacuum and heightens uncertainty about the direction of fiscal and monetary policy. Looking further ahead, uncertainty is likely to trouble foreign investors, with questions looming about whether austerity will continue under a new Prime Minister and even whether a left-wing Labour government could ultimately take over.This outcome has taken financial institutions very much by surprise – seduced by inaccurate opinion polls, investors’ chips were largely placed on the “remain” side of the table. In fact, speculators were so confident of the outcome that sterling touched $1.50 late last night, its highest rate against the dollar since December. This morning, it plunged to $1.33, its lowest level since 1985, in an extraordinary turnaround.


At the main City of London banks, senior staff were in all night monitoring the voting figures and their impact on markets as distant as Hong Kong, Tokyo and Sydney. At some financial institutions, algorithmic, computer-driven models that buy or sell at specific price triggers have been switched off, with staff wary of a repetition of the 2008 financial crisis which was aggravated by automated trading.It is hard to overstate just how worried the City is about this outcome. Analysts at UBS suggested that in a worst case scenario, a “leave” vote could cause the FTSE 100 index to fall by 21%. Further ahead, Citigroup forecast that the pound could lose 15% of its value over three years, while GDP could drop by up to four percentage points.Standard & Poor's, the credit rating agency, is likely to strip the UK of its triple-A credit rating. Many City commentators believe the country could be facing a recession.Piers Hillier, chief investment officer at Royal London Asset Management, said this morning: "On the back of this morning's result, we expect the UK will fall into recession. Unfortunately I see unstable market conditions lasting for between three and five years while new trade agreements are drawn up. In our view, the UK Government will be left with no choice but to stimulate the economy through fiscal and monetary means, flooding the system with liquidity if necessary."

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