Contributed by MIT Sloan Senior Lecturer, Phil Budden
Late last June, the British referendum on the EU resulted in a "vote heard 'round the world." In the weeks after that shocking result, we saw market volatility, the departure of British Prime Minister David Cameron, and much speculation around how and when the UK would formally leave the EU. Fortunately, the state’s automatic stabilisers kicked in—from the Bank of England, through the Civil Service, to the reassuring presence of the Queen.
As the summer comes to an end, and the initial turmoil has subsided, many executives are asking what’s now going on, and what do they need to know for the fall. One thing is clear: the so-called "Brexi"” is a process, not a single event. The referendum on the 23rd of June was "advisory," so—in the British parliamentary system—it is for the Government (now led by Theresa May) to take this forward, including when to trigger the formal two-year process of negotiating with the EU under Article 50, and when to bring a deal to Parliament.
While the initial shock waves of uncertainty roiled the currency and stock markets (as well as the political parties), the immediate economic picture is still uncertain: it could have been much worse without the major efforts of the Bank of England, HM Treasury and wider Civil Service. Markets have now stabilised, but the fundamental economic picture will not be clear for a while. This is unsettling for executives making medium-to long-term plans, as the short-term state will remain so unclear until further data comes in, with those for the first quarter after the referendum (i.e. Q3) perhaps not being out before Thanksgiving.
Post Brexit: What to watch for?
I am often asked what sorts of issues executives might be watching out for in the coming months. A challenge is that those advocating Brexit did not have a fixed plan: this is partly how the "Leave" coalition secured the 52% vote, i.e. by not specifying what a vote for Brexit would entail.
At the end of this piece, I set out two extremes on the spectrum for Brexit options, with Britain's opening negotiating position likely somewhere between, depending on how the following key issues are addressed
Reviewing the statements of the “Leave” campaign’s members (and polling of its voters), it is possible to identify four key issues which would need to be addressed in the UK’s negotiating position: these are immigration, "control," budget, and the market (mnemonic: 'ICBM'). The issue now is for the Government—assisted by its professional Civil Service (known informally as "Whitehall")—to define a negotiating position that respects the 52%'s vote, identifies the national interest for the whole country, is acceptable to a majority in Parliament, and might be negotiable with the rest of the EU.
Immigration was, effectively, the emotional issue that won the Brexit vote, but it is not clear how this will translate into a negotiating position. In the heat of the debate, it was often forgotten that “immigration” is a two-way street (with many Brits benefitting from living in the rest of the EU), and that most of the immigrants come into the UK from outside the EU. Exiting the EU (with its "free movement of people") would not stop the bulk of the immigrants into the UK, but it would put in jeopardy the rights of Brits in the rest of the EU.
Looking closely at immigration into the UK, it’s clear that some places with the greatest numbers (e.g. London) were in favour of this influx (as its Mayors had recognized), and it voted heavily to remain in the EU. This openness had helped London become Europe's hotbed of innovation-driven entrepreneurship. Other communities—which had already been experiencing wider social and economic challenges, and then faced a recent rapid rise in immigration—voted to leave the EU. (Sadly, one of the side effects of the Brexit vote has been a spike in racist attacks in England.) Immigration will clearly be one of the thorniest topics.