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Analysis
Cameron quits, Britain and Europe face convulsion

Cameron quits, Britain and Europe face convulsion

Biggest setback since Community formed in 1958

by David Marsh in London

Fri 24 Jun 2016

Britain and the rest of Europe face political, economic and constitutional convulsion after a narrow vote favouring UK withdrawal from the European Union in yesterday’s referendum. Prime Minister David Cameron’s announcement he will step down in the wake of his defeat opens the Conservative party to months of blood-letting while he attempts to ‘steady the ship’ before quitting office in October.

The 52% to 48% ‘Brexit’ majority, showing a pronounced swing to euroscepticsm as well as deep divisions among UK voters and regions, accentuates a mood of disunity and discontent across the continent.

By far the biggest setback to the EU since it was set up in 1958 as the six-member European Economic Community, the vote will set off shockwaves across the continent, including in hard-hit peripheral euro members. At a time of crisis in many areas of the EU, it poses significant medium-term threats both to economic and monetary union, and to the survival of the EU itself.

Turnout was 72%, the highest in a national poll since 1992. UK voters have shown they believe the EU’s drawbacks are higher, and the departure risks are lower, than the advice given by many establishment figures in Britain and internationally who universally urged the UK to stay in.

The outcome raises the threat of political instability and economic upheaval in Britain that could spread to the rest of Europe. There is a risk that the UK itself could start to unravel, with Scotland and Northern Ireland showing a pro-EU swing since the last European referendum in 1975, while England and Wales have switched to euroscepticism.

The result is not binding on parliament; translating it into practice is complex and time-consuming. Unprecedentedly, the British people, as the ultimate sovereign, have given instructions to the government and parliament to carry out actions with which the majority of the present government and parliament disagrees. This raises the question of whether the UK will organise an early general election, difficult to do under the new fixed-term parliamentary system that foresees the next national poll in 2020.

The result confounded pre-poll predictions based on opinion polls and bookmakers’ odds indicating a pre-vote swing to Remain, partly as a consequence of an emotional response to last week’s politically motivated murder of Jo Cox, a pro-EU member of parliament.

Cameron took a high-risk stance as instigator of the referendum in 2013 and as promoter-in-chief of Remain. He must bear the consequences now that his legendary political luck has dramatically run out. Upheaval at the helm of the government greatly complicates the task of deciding when (and whether) to invoke Article 50 of the EU treaty that, under existing rules, would usher in a two-year countdown to formal departure.

George Osborne, chancellor of the exchequer, with Mark Carney, Bank of England governor, has vigorously backed EU membership in a much-denigrated campaign that emphasised the fears and risks of ‘Brexit’. Osborne, whose political position now looks untenable, is highly unlikely to make good his earlier threat of an emergency budget with cuts in spending and increased taxes.

Sterling plummeted in early morning trading to a 31-year-low against the dollar. This appears to bear out the eve-of-poll forecast by veteran fund manager George Soros of a possible ‘Black Friday’ today, with the pound down to $1.35 from $1.46 earlier. Particularly dire for Osborne and Carney, Soros warned on 21 June, ‘If a fall in house prices and loss of jobs causes a recession after Brexit, as is likely, there will be very little that monetary policy can do to stimulate the economy and counteract the consequent loss of demand.

The vote will raise spirits in anti-integration parties of the left and right, and unleash centrifugal forces from Portugal to Poland and from Italy to Ireland, and particularly in the EU’s heartlands of France and Germany. All the issues that buoyed the UK Leave camp – disquiet over high immigration and sluggish growth, desire for self-government, and widespread belief that leaders are out of touch – are reproduced, sometimes to a still greater extent, across the whole of Europe.

The north of England, wide parts of the Midlands and Wales, as well as relatively well-heeled areas around London showed stronger than expected support for Leave. Lower than expected turnout in the Remain stronghold of Scotland, as well as the inability of a lukewarm pro-EU Labour party to mobilise voters for the European cause, contributed to the Brexit shift.

The UK is clearly fragmented along a threefold set of fault lines. First, there has been a powerful split between relatively fast-growing metropolitan areas, especially London, that supported EU membership, and regions affected by high immigration and industrial decline that showed a big Leave vote.

Second, we have witnessed great disparity between discontented voters, still seeing an only modest post-recession recovery in their living standards, and governmental and other ‘expert’ opinion-formers who claimed that Brexit would lead automatically to a severe economic downturn.

Third, the overall result has laid bare a wide gulf between the EU’s vaunted aims and ambitions and the more down-to-earth preoccupations of ordinary voters displaying a blatant lack of passion, affection and commitment for European issues.

Cameron travels to Brussels next week to discuss next steps with European leaders.

In the light of the new circumstances, European leaders will now have to recalibrate all statements about the British campaign made before the vote. One of the most revealing pre-polling remarks was by Wolfgang Schäuble, the German finance minister, who stated Europe must not respond to a possible Brexit by pushing for deeper EU integration, saying voters would consider such a response to a Leave vote ‘crazy’. Almost inevitably, European leaders will issue proclamations calling for unity – but, in practice, realising that aim seems highly unlikely.

David Marsh is Managing Director of OMFIF.

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