What Sort of Brexit Is It: Light Continental or Full English?

Contributed by MIT Sloan Senior Lecturer Phil Budden

Brexit

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 autumn now begins, and the initial turmoil has subsided, many executives are asking what’s now going on, and what do they need to know for the months ahead. One thing is clear: the so-called "Brexit" 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.

1. Immigration

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.

2. Control

The Leave campaign's key slogan was ultimately "take back control," and this appealed to a wide range of interests in the loose coalition that provided the 52%. This clearly had a read-across to immigration—where leaving the EU was seen as allowing the UK to "take back control" of its borders (which it had not in fact ceded to the EU)—but its appeal went further. Globalization, technology and liberalization were all seen as having undermined Britain’s control of its destiny (according to polls of those voting Leave), so the EU referendum was an opportunity to vote against these too.

While exiting the EU will not fundamentally wind back globalization, technology or liberalization, it may mean that the formal "pooling" of Britain's sovereignty in the EU will be reversed, and the UK need not be part of decisions taken in "distant" Brussels. What else "control" might mean is not yet clear. Constitutionally, however, British sovereignty is still situated in Parliament (which is why it could not be shared with its then-colonies back in 1776), so it is this body which will make the final decision about its sovereignty. Ironically, the ‘control’ issue—and concern over distant rule—looks different to some in Scotland and Northern Ireland.

3. Budget

The EU budget—or rather Britain's contributions to it—also became a major populist issue during the referendum. The Leave campaign adorned a bus with the claim that "We send the EU £350 million a week" and suggested this would be better spent on the popular National Health Service (NHS). The EU budget is certainly an emotional issue, and Mrs. Thatcher had negotiated a Rebate for Britain back in 1984 (which the £350m claim overlooks). Fact-checkers confirm that the Rebate reduces that payment sum to below £250m, but even this is misleading as it is "gross" and misses out the EU funds which Britain receives—such as research money won by British universities in pan-EU competition. The net contribution is probably £135m, less than a third of the £350m.

As such, this is a highly populist issue on which the numbers just do not add up. Though several leading Brexiteers have since distanced themselves from this claim, many were photographed in front of the bus. The real challenge is that others who supported Brexit expected their receipts from the EU to continue—whether they be generous regional funds to help economic development (e.g. in Cornwall), or extensive payments to farmers. While these payments will continue until Britain leaves the EU, there is no guarantee that a British Government will have the same priorities as the EU. For those who voted Brexit to secure that money for the NHS, there will be some disappointment.

4. Market

This topic refers to the "single European market" which Britain had pioneered in the 1980s and which re-launched the stalled European project with the "1992" programme. Britain benefits from the single market's "four freedoms," allowing its capital, goods, services and people to enjoy a "home" market which has enlarged to 500m people. Being part of that single market also made Britain an especially attractive location for foreign direct investment: being based in Britain, with full access to the rest of the EU, appealed to many companies, especially from the US.

Curiously, many in the Leave campaign seemed to assume that Britain would retain full access to the EU's single market, even if it left the EU. Access was certainly regarded by most as being in Britain's national interest. Since the Brexit vote, however, the rest of the EU has made it clear again that, if a member votes to leave the "club," then it cannot simply retain all the benefits and privileges of membership. If Britain wishes to send its capital, goods and services into the single market, then there is a commitment to the fourth freedom of movement—namely people (which touches on the immigration issue).

A spectrum of Brexit outcomes

The nature of the Brexit that Britain sets out to negotiate—and of the final deal which it one day faces (as these are not the same thing)—will therefore be strongly shaped by the four issues outlined above. As is clear, there are a variety of tensions within each issue, but also bigger ones among them (e.g., immigration and market access) that will have to be resolved to the satisfaction not just of the 52% which voted Leave, but also that of the wider interest for Britain.

As promised above, I will now set out a spectrum for Brexit outcomes, with two extreme scenarios: the opening UK negotiating position and final EU deal will both be found somewhere between.

The first scenario is as "full" a Brexit from the EU as possible. This is one in which immigration from the EU is fully restricted (at the price of access to the single market, and free movement for British people), as non-EU immigration remains hard to limit; contributions to the EU budget end, recipients may retain their payments (but now from Britain not Brussels), and the £135m might not go to the NHS (if a downturn cuts UK spending); and Parliament in London takes full "control" of its decisions from distant Brussels. A likely result of such an extreme outcome is that Scotland and Northern Ireland would then reconsider their own stance within the UK: both had voted to Remain, and—in terms of control—decisions in London can seem as distant from Edinburgh and Belfast, so the UK might be left as just England (and Wales).

As such, a nickname for this scenario could be the "full English Brexit" (in honour of the briefly-satisfying, but ultimately-unhealthy breakfast).

The second scenario—at the other end of the spectrum—is as "light" a Brexit from the EU as possible. This is the one that takes Britain out of the EU, but keeps it in the single market (perhaps in the European Economic Area): as with other states in the EEA, Britain would have to accept the free movement of people (so no ending of EU immigration) and still contribute to the EU budget (without expecting funding back), but it would retain access to the continental market. Of course, that access would depend on Britain still meeting EU rules for its goods and services, but no longer being a part of the rule-making: it might be seen as more "sovereign," but also more of a "rule-taker." In this scenario, "Britain" would probably survive intact, as Scotland and Northern Ireland would likely remain in a UK so linked to the continent.

As such, a nickname for this scenario could be the "light continental Brexit" (in honour of the healthier, but somewhat less satisfying breakfast.

Conclusions?

For executives making plans for the coming years, this framework hopefully outlines what the issues are likely to be and provides some sort of spectrum between a "full English Brexit" and a "light continental Brexit" to help manage scenarios. While the loose coalition that secured 52% in the referendum did not itself have a fixed plan for the various issues, that matters less now as the UK's negotiating position needs to reflect much wider interests. Those include the interests of all those with a stake in Britain, ranging from companies that have directly invested in the UK, to friends and allies with a perspective and advice.

Most importantly, Brexit will be a process (not just the moment of the vote), so there is time for all such views to be taken into account. Now that currency and stock markets have somewhat stabilised, the fundamental economic data (e.g., from Q3) about the consequences of the referendum can be awaited: if there is a downturn (despite all the stabilisers' efforts), the new Chancellor may have to set out a response shortly after Thanksgiving.

How to square the circle among those various issues, interests, and challenges will now be exercising the best and brightest minds in the UK Civil Service. In the meantime, the best advice for others is probably to "keep calm and carry on," as the ultimate outcome is so far from clear.

Phil Budden of MIT on the Brexit

Dr. Phil Budden is a Senior Lecturer at MIT Sloan. He served for many years as Britain’s Consul General to New England, and now teaches about innovation ecosystems, especially the role of governments and corporates. He also teaches in the Advanced Management Program (AMP) and MIT Regional Entrepreneurship Acceleration Program (REAP).

This entry was posted in Faculty Author on Sat Oct 15, 2016 by MIT Sloan Executive Education

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