What The First 100 Days After Brexit Would Look Like
When it comes to “Plan B” Europe is funny: it never has one.
The best example is, of course, Greece most notably from an April 2013 press conference, when Mario Draghi responded to a question from Zero Hedge readers about a worst case scenario for Greece. This was the exchange that took place:
Scott Solano, DPA: Mr Draghi, I’ve got a couple of question from the viewers at Zero Hedge, and one of them goes like this: say the situation in Greece or Spain deteriorates even further, and they want to or are forced to step out of the Eurozone, is there a plan in place so that the markets don’t basically collapse? Is there some kind of structural system, structural safety net, especially in the area of derivatives? And the second questions is: you spoke earlier about the Emergency Liquidity Assistance, and what would have happened to the ELA in Cyprus, the approximately €10 billion, if the country had decided to leave the Eurozone?
Mario Draghi, ECB: Well you really are asking questions that are so hypothetical that I don’t have an answer to them. Well, I may have a partial answer. These questions are formulated by people who vastly underestimate what the Euro means for the Europeans, for the Euro area. They vastly underestimate the amount of political capital that has been invested in the Euro. And so they keep on asking questions like: “If the Euro breaks down, and if a country leaves the Euro, it’s not like a sliding door. It’s a very important thing. It’s a project in the European Union. That’s why you have a very hard time asking people like me “what would happened if.” No Plan B.
To be sure, we learned just one year later that Mario Draghi was lying, when thanks to a series of FT articles, we learned that Europe did indeed have a Plan B, only it was called a “Plan Z.” However, we also learned that when it comes to worst case scenarios, Europe’s unelected bureaucrats and central bankers pretend – purely for public optics and “confidence-boosting” reasons – that any scenario that is anything less than the desired one, is so inconceivable, they choose to stick their head in the sand instead of even evaluating its impact.
Fast forward three years when Europe finds itself in the same situation, only this time not with Grexit but with Brexit staring Europe in the face just one week from today.
And just like last time, Bloomberg reports that “there’s no road map for European authorities facing the prospect of a British exit from their 28-nation union — by design.”
Incidentally that’s not true: as the CIO of JPM Private Bank reminded us today, “The Lisbon Treaty includes Article 50 which does contemplate the departure of an EU member. As messy as it might be, a Brexit would be managed by the parties involved, and be a far cry from dissolving a monetary and fiscal union to which member states had “pledged their lives, their fortunes and their sacred honor”.“
But let’s assume Bloomberg is right, because it is more dramatic that way because according to its sources, “officials in Brussels are under orders not to commit any scenarios to paper to avoid alarmist leaks, according to a senior official from one European government tasked with making preparations.”
Wait, “to avoid alamist leaks?”
The IIF, which earlier today said a Brexit would be a bigger threat to the global economy than Lehman, must not have gotten the memo. And certainly not David Cameron and his merry scaremongering men: after all did the PM not say that Brexit would lead to world war?
Ironically, Europe itself appears to have ignored what Europe’s directive are: “Given the potential political and financial shockwaves surrounding a Brexit vote, it’s not clear a map would do much good. Global markets are already sputtering as anxiety mounts about the impact on the world economy. EU President Donald Tusk goes so far as to say that it could spell the end of “western political civilization itself.”
Sounds just a little alarmist to us.
But we get it: scare the crap out of people to avoid the outcome that nobody in Europe actually has any idea how it would play out:
Tusk’s exaggeration highlights the task in self-preservation awaiting European officials as they confront the potential departure of a country from the EU — something that was inconceivable when the union was established. The mechanism for an exit was only written into law in 2009.
So now that the inconceivale is all too conceivable, and in fact, donwright realistic, here is a thought experiment conducted by Bloomberg, looking at what the first 100 days after a Brexit vote would look like.
But before we get there, the first 24 hours.
Before dawn on June 24, if an exit vote becomes clear, the EU’s top brass from Berlin to Brussels will be forced into damage control. In echoes of the Greek debt crisis, euro-area finance ministers may hold an emergency meeting as soon as that evening. Wild swings in the pound, more aggressive interventions by the Swiss National Bank and a ratcheting up of global instability rank as likely market reactions.
Currency markets haven’t priced in the U.K.’s exit from the EU, so if it happens, “a crash is pretty likely,” Lothar Mentel, chief executive officer of Tatton Investment Management in London, said on Bloomberg Television. “We would have to brace ourselves for quite a rough awakening on that Friday.”
The political fallout may be even more fraught. Europe’s traditional counterweights, France and Germany, whose enmity the EU was set up to banish, will seek to gain some of the initiative. They are planning a response as early as June 24 that could include a commitment to deeper euro-area integration as well as a declaration that the EU dream remains alive, according to three people familiar with the plans.
“The European Union will need to have a credible strategy,” said Guntram Wolff, of the Brussels-based policy group Bruegel. “To avoid a gradual disintegration of the EU, political leaders will need to strengthen the attractiveness of the EU and especially the Franco-German alliance.”
Then the first week:
As the weekend begins and the reality dawns in the U.K. that it has voted to leave the world’s largest trading bloc, the rest of Europe will have their own questions to answer. Amid fears that a “Leave” vote could further fuel populist and anti-establishment sentiment throughout Europe, the EU’s leaders could choose to take the unprecedented step of calling an emergency summit without British representation as early as Saturday, June 25.
The reason would be two-fold: send a message to Spanish voters who go to the polls June 26 that the EU remains strong; and to work out what to offer — or, more likely, what not to offer — the U.K. in areas such as free movement of people and access to the EU’s single market.
There will be divisions to overcome even without the British. In France, where opinion polls say the euroskeptic National Front may make it through to the runoff in next year’s presidential elections, President Francois Hollande will have cause to show the electorate that leaving the bloc carries negative consequences. Other leaders, such as those of the Netherlands and Denmark, where anti-EU feeling is also growing, may consider it more politically beneficial to offer support to Britain, their traditional ally.
Nations outside the euro area, especially those where anti-EU sentiment has been on the rise, such as Hungary, Poland and Sweden, could form a group of countries resisting any French and German attempts to move the EU in a more integrationist direction. With Britain’s exit, non-euro countries would lose their crucial partner — they would represent only 14 percent of the EU’s gross domestic product. David Cameron is scheduled to meet the other 27 EU leaders at a summit in Brussels the following week. It’s at this gathering that the prime minister is likely to trigger the EU’s Article 50 — the never-before-used law that catapults nations out of the club.
That would set a deadline of two years — until the end of June 2018, during which time the U.K. would have to negotiate its exit. Will Cameron want the U.K. to become like Norway or Iceland and maintain a close working relationship with the bloc as part of the European Economic Area? Or could there be another set-up that means the U.K. would have to trade with the EU under the World Trade Organization framework?
Finally the first 100 days.
EU chiefs fear the referendum will spark similar demands across the continent. With elections due in the Netherlands, France and Germany in 2017, there’s reason to discourage others from following the U.K.’s course, and this could weaken Britain’s hand in negotiations. It could also divert the EU’s attention away from other issues, including Greek finances, the refugee crisis and tackling instability in Ukraine, according to Michael Leigh, senior fellow at the German Marshall Fund.
By this time, the political mist in the U.K. may be clearing. The EU could find itself dealing with another prime minister — someone like former London Mayor Boris Johnson, who supported Brexit and whom bookmakers have installed as the favorite to lead the Conservative Party. Whoever it is, the new British leader would probably have to extricate the U.K. from the EU while facing the prospect of a further referendum, on Scottish independence.
The U.K. would start talks to renegotiate EU agreements in areas as diverse as fishing quotas, financial-services legislation and health and safety standards established over more than 50 years, simultaneously having to start negotiating its own trade deals with the rest of the world. Talks would also have to begin on the relocation of EU bodies headquartered in the U.K., such as the European Banking Authority. Each step of the way must be agreed upon by the EU’s other members and the European Parliament, a process lasting at least seven years and with no guarantee of success, EU President Tusk told Germany’s Bild newspaper.
“No one can predict the long-term consequences,” Tusk said in the interview. “I fear that Brexit could be the beginning of the end not only of the EU, but of the entire western political civilization.”
Why stop there and not look at the second 100 days? Because after Brexit, for the European “Union” there most likely will not be a second 100 days. And it all may start one week from tomorrow.