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Brexit report
by Euro Reporter
2016-06-24 10:59:15
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Brexit: the world’s most complex divorce begins

There are rough guidelines on how to proceed, but the negotiation will be largely improvised. Estimates of how long it will take range from two years to a decade or more. For officials involved, it is a legal and political no man’s land. One senior EU official said: “We are faced with a million mad questions and we won’t have answers any time soon.” The goal is to unwind Britain’s 43-year membership of the bloc, disentangle and sever the legacy of shared sovereignty, and then re-shape the biggest single market on earth. On substance, what political and commercial arrangements will Brexit Britain demand and will the EU accept them? In execution, will the exit deal — the divorce and breaking of old obligations — be struck at the same time as a trade agreement covering post-Brexit trade? And if no, is a transition possible to ensure a soft landing? Across the continent, markets, officials, presidents and prime ministers know that Britain and its former partners in the EU are embarking on a potentially dangerous political voyage, navigating largely in the dark. “This decision could trigger an emotional rollercoaster right across Europe whose ultimate effects are impossible to predict,” said John Bruton, the former Irish prime minister.

brex02_400To calm nerves in the immediate aftermath, EU leaders want to show there is a timely and orderly means to part ways. In the event of a vote to leave, Emmanuel Macron, France’s economy minister, said EU leaders would promptly send “a very firm message and timetable” on Brexit. “In the interests of the EU, we can’t leave any margin of ambiguity or let too much time go by,” he told Le Monde. Lawyers in Whitehall and Brussels see two distinct tracks. The first is under Article 50 of the EU treaties — the so-called “exit clause” — which lays down a two-year renewable deadline for a country to leave. A second track makes arrangements for future relations, from trade to co-operation on security or law enforcement. This is a more complex negotiation and, once agreed, harder to ratify. It requires unanimity and approval by more than 30 European, national and regional parliaments, possibly after national referendums.

There are alternatives. One is to attempt a divorce on British terms. The Leave campaign has outlined plans to legislate in the House of Commons to repeal some EU obligations immediately, while holding-off on invoking the Article 50 divorce clause to deprive the EU of leverage on timing. Any unilateral steps would seriously raise tensions with the EU. Brussels is looking at options to retaliate, including suspending the privileges enjoyed by British companies under the single market. Sir Andrew Cahn, a former head of UK Trade and Investment, Britain’s trade promotion body, said: “Acting unilaterally would throw the law of the land into uncertainty, and risk a tit-for-tat response from others. It could be a slippery slope to real chaos.” By law, nothing fundamental will change for British companies in the coming weeks, months and possibly years. The formal EU rupture is some time away. But Britain will be thrown into political turmoil as the fate of David Cameron and his government is settled. A Conservative party leadership race could take several months to nominate a new prime minister. An early general election cannot be ruled out.

This means a substantial delay is likely. Technical work will begin at the level of officials on Friday. But no serious negotiation can start until Britain decides how it wants to conduct the divorce, and what arrangements it will request after the exit. The House of Commons will also have a say on any mandate to negotiate Brexit. Leave campaigners such as Michael Gove and Boris Johnson have advocated departing from the single market altogether and negotiating a bespoke trade deal with the EU. Some Labour MPs have said they would fight to stay in the single market as a non-EU member, even if it involves accepting free movement obligations and EU budget bills. Most MPs in the Commons supported Remain in the referendum. While that argument plays out through 2016 and possibly beyond, Europe will sit tight. “There will be no time for romantic visions. The Leave camp would have to face reality rather quickly,” wrote Adam Lazowski, a law professor at the University of Westminster. “Although both sides have a lot to lose, it will be one against 27. It would not be the EU leaving the UK, but the other way round.” One of the biggest economic risks is a long wait between Britain’s exit and new trade arrangements. Donald Tusk, the European Council president, has said cancelling treaty obligations would be “relatively easy” and take about two years. This would settle outstanding bills from the budget and spending projects, the legacy rights of expatriates around the EU and in Britain, and the withdrawal of British nationals from EU institutions.

But he added it would be “much more difficult” to negotiate a new relationship. That would take at least a further five years “without any guarantee of a success”. France and Germany are open to starting such trade talks in parallel with divorce talks, but are unwilling to give any guarantee that the two deals would be rapidly concluded simultaneously — the ideal scenario for Britain.  “There will be a gap,” said one diplomat intimately involved in planning. “It is unthinkable that a [trade] agreement would be in force after two years.” A hard landing would mean that Britain would be left relying on basic World Trade Organisation trading terms, with no privileged access to European markets for UK companies. A softer transition could be arranged, but it would require agreement among all 28 members.  If, for instance, EU member states rapidly agree a trade deal, it could be provisionally applied while the lengthy and unpredictable process of ratification begins at national level.

Another option is to temporarily revert to an established model — such as that for Norway — to give Britain full access to the single market while its new trade deal is pushed through. That may be impossible for a Brexit government; for several years it would live by EU rules it cannot influence, pay EU budget dues and accept free movement of workers — just the things many voters rejected in the referendum.  Backers of the victorious Leave campaign are optimistic that common sense will ultimately prevail. Daniel Hannan, one of the most influential Brexit thinkers, pointed in an EuroMoney interview to the example of Irish secession and its bloody birth and aftermath. “And yet here we are nearly 100 years on; we still have a common free movement zone, common social security claims, common voting rights, because it didn’t suit either party to unpick that deal,” he said. Sceptics think the political omens are less auspicious. Gordon Bajnai, Hungary’s former prime minister, said: “There are too many changing factors to speculate clearly, but the logic of politics would be a bitter, nasty and not technically optimal solution.”


Here's the Brexit Worst Case Scenario

The pound could take a beating, but a full Brexigeddon is not likely. Polls show that only 28% of Americans know what Brexit is, but if Britain does vote to leave the European Union Thursday, chances are that number could rise significantly. That’s because some economists are worrying that a vote for Brexit could trigger a currency crisis that could even threaten the soundness of some British financial institutions. And while a Brexit vote would likely have a limited effect on the U.S. economy, turmoil in financial markets could affect American investors and Federal Reserve policy decisions. So how could a Brexit vote cause a currency crisis? Carl Weinberg of High Frequency Economics explained as much in a note to clients Thursday morning. He estimated that the value of the British pound could fall by 15% as currency traders worry that leaving the EU could dampen exports and therefore British growth. Under normal circumstances, a drop in the currency would boost exports, but Weinberg argues that because British companies tend to price their exports in foreign currency, that would not be the case here, and the price of both exports and imports would rise as a result.

The result: A £2 billion per month hole in the Britain’s trade deficit. “A malicious cycle would begin, because who in their right minds thinks a [trade deficit] equal to 8% of GDP is sustainable for poor old Britain,” Weinberg asks. In order to finance such a large trade deficit, Weinberg writes, it would require the foreign investors to pour another £24 billion per year into the British economy just at the time when global investors would be growing increasingly suspicious of the economy. This could trigger a vicious cycle in which the pound continues to fall, forcing the Bank of England to raise rates to defend the currency and stamp out imported inflation, which would lead to the British economy weakening further.

Weinberg also writes that “you can make this story even scarier by noting that sterling denominated assets—like gilts, corporate bonds and equities—will all drop like a stone immediately as the currency breaks,” and that this dynamic could trigger serious losses at global financial institutions. He points to the “Swiss franc event,” when the Swiss National Bank unexpectedly scrapped its cap on the Swiss franc’s exchange rate against the euro as an example of a surprise currency move that cause a financial institution to fail. Weinberg says that this story is an “illustration not a forecast.” He’s not predicting that these are the events that will happen if Britons vote to leave, merely that big changes to political systems can sometimes wreak havoc in financial markets and cause wide ranging consequences. In terms of how Brexit will affect the United States, the ramifications will likely be limited. The United States exported just $56 billion to the U.K. last year, and so even a large decline in those exports wouldn’t do much to an economy that produces $18 trillion worth of goods and services per year. But Fed Chair Janet Yellen has said that turmoil in financial markets caused by Brexit could affect her policy decisions, possibly causing the central bank to delay a hike in interest rates for fear of further rattling investors.


What happens now that Britain has voted for Brexit?

BRITAIN has voted for Brexit. What happens now? Nothing immediate, is the answer for EU nationals living in Britain and Britons living elsewhere in the EU, as well as for businesses on both sides of the Channel. It will all depend on negotiations that could take years—and no one is sure quite how many years, because the only precedent is Greenland, with a population today of around 50,000, which voted to leave in 1982. The first aim of David Cameron, the prime minister, will be to calm the markets. In Asia they have already responded to the news. The pound plunged by 9% against the dollar and as much as 13% against the yen, traditionally a bolthole for anxious investors. Japan’s main stock market tumbled by almost 8%. London’s stock market opens at 8am, and the FTSE 100 is likely to dive. Some experts warn that sterling could fall by as much as 20% overall. The Chancellor of the Exchequer, George Osborne, must now decide whether to issue an emergency “Brexit budget” as he controversially promised before the poll.

Mr Cameron has promised that Britain would immediately invoke article 50 of the Lisbon treaty, which sets a two-year timetable to agree the terms of departure. But uncertainty about his own position could raise questions about this. If he steps down and a Brexiteer takes over as leader of the Tory party and as prime minister, he or she is likely to argue that Article 50 is biased against the interests of a country leaving the EU. Under Article 50, the terms of Britain’s departure would be agreed by the other 27 EU countries, without a British vote. So Brexiteers would prefer to negotiate informally, without invoking Article 50. The other 27 countries are unlikely to go for this.

The kind of deal offered is a longer-term question, with neither main option very palatable. The first is to become like Norway, which is a member of the European Economic Area (EEA), in return for which it is required to contribute to the EU’s budget and allow the free movement of people. The second is to opt out entirely, trading with the EU under the rules of the World Trade Organisation like America, China or any other country. Most economists agree that this would do more damage to the British economy.

It will be hard for Mr Cameron himself to continue, though he may decide to remain prime minister over the summer in order to smooth the transition to a new Tory leader. The candidates for that post will be revving up their engines: Boris Johnson, a former mayor of London, triumphant from the Leave victory; the chancellor, George Osborne, perhaps too wounded by his attachment to the Remain side; and compromise candidates such as Theresa May, the home secretary, who made herself scarce during the campaign. The next leader will have to deal with a deeply divided party and with a Parliament whose MPs mostly supported Remain, and some of whom may want to block approval of full economic secession. Mr Cameron hoped his referendum would settle the question of Europe within the Conservative Party once and for all. It has done the opposite, and the storm is only just beginning.


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Emanuel Paparella2016-06-24 11:49:23
The Pope may have a point: there are marriages that were never such from the very beginning because people were forming a union without understanding what they were doing. Therefore rather than calling it a divorce, it should be called an annulment; there was never a marriage to begin with.

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