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    Fog of Brexit could get thicker before it lifts if “leave” wins the day

    It is a well-known rule that markets dislike uncertainty.  The June 23 referendum whether or not Britain should remain in the European Union, represents a major risk event in itself.  However, it is possible that should the “leave” campaign prevail, it will open up a big range of options for the United Kingdom.  Of course the UK economy is a resilient, flexible one and in the long-run a new stable equilibrium will emerge.  The short- and medium-run could be messy however.

    The first issue of uncertainty to be resolved in the event of a Brexit is again political in nature.  The current government will probably resign and a new one should be installed.  It is less clear if a general election will be necessary as that will depend on the unity of Britain’s Conservatives.  Will the Conservative party hold together the day after the referendum following such a bitter ‘civil war’ between its Eurosceptic and pro-European wings?  Will the UK Independence Party make fresh gains amongst those dissatisfied with the Conservatives?  Will the Scottish be happy with an English “leave” if Scotland votes massively in favor of “remain”?  The same question might be asked of Northern Ireland someone might add.

    The answers to these questions of course could also largely determine what kind of a relationship the EU and its future ex-member Britain will have.  This is a fundamental issue for the UK economy’s trade as well as its financial services.  The European Union for example might be hesitant to make concessions to the UK, in fear that other non-EU countries or even existing EU members might ask for the same deal.  The UK and the EU will nevertheless have to quickly draw up the broad outlines of a deal to calm investors and businesses since if the 2 years of negotiations pass without getting a sense of what the deal will look like, uncertainty could have major negative effects on the economy.

    Right now achieving a quick, positive deal between a possible Eurosceptic government and the rest of the EU sounds like wishful thinking.  Again though, as with various elections in the past, the side that wins may not actually carry out all its pre-election promises.  This is also a relevant point to have in mind in the US election by the way, with many worried about some positions that Donald Trump has taken.  It is therefore possible that a Eurosceptic government may have to make important concessions to the EU in terms of freedom of movement or contribution to the EU budget or to adhere to European standards and regulations in exchange for continued access to the Single Market.  If the “leave” campaign on the other hand sticks to their campaign promises, this could make the negotiations a very drawn out affair and the economic damage from uncertainty could be much bigger.

    Finally, in the event of Brexit, expect a lot of damage limitation efforts from policymakers both in the UK as well as around the world.  It could be hard of course and actions will speak much louder than words.  Quickly achieving a common framework for the divorce between the UK and the EU will do much to calm things down.  Although the UK “leave” camp has been quite vocal in what goals it will pursue following referendum success, the EU has generally kept its cards close to its chest so far.  The EU might also be driven by motives other than economics; e.g. not giving incentives to others to act like Britain.  Therefore market participants must be ready for a variety of outcomes – not just “remain” versus “leave”, but also in the case of “leave”, an amicable parting of ways or a long-drawn process in the divorce courts.

    Risk Warning: Forex, Commodities, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you fully understand the risks involved and do not invest money you cannot afford to lose. Please refer to our full Risk Disclosure.


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