Now’s the time to reduce divisions
Sooner uncertainties can be reduced the better
by John Redwood in London
Mon 27 Jun 2016
On Friday the markets reacted strongly to the Brexit vote. Many had not thought such a result likely. I was a lonely voice, posting out immediately the poll closed on Thursday evening that Leave had won. I had always thought a Leave victory likely, judging from the mood of British voters.
The good news is that, despite the disappointment and wrong-book positions of many in the market, UK government bonds rose strongly on the news. Shares soon rallied after initial violent mark-downs. We no longer have to guess the short term impact of Brexit. It has taken UK government bond prices to record highs. The UK can now borrow for under 1.1% for 10 years, and for under 2% for 30 years.
Shares as measured by the FTSE 100 index ended the day at the same levels as on the Wednesday before the vote, following a spirited rally in previous weeks in anticipation of a vote which many traders miscalled. That was remarkable. Bank, property and housebuilding shares were down, though there could be second thoughts in the days ahead.
Only sterling suffered, with a sharp fall in the pound against the dollar.
The first task of the government and the Bank of England must be to ensure as much stability as possible. The message of plentiful liquidity can be reinforced by early action to establish a senior, well-equipped negotiating team to open talks with the EU over how best to proceed.
Once the initial anger and shock has calmed, many on the continent will share the UK interest in avoiding damage to trade and investment flows. Their economy is bigger than the UK’s so it has a smaller percentage at risk, but it has many more jobs in total at risk than the UK if trade is damaged. The euro area will not want policies that worsen their high unemployment.
The EU sells to the UK many more goods than we sell them. German business has already come out for little change in the relationship. Chancellor Angela Merkel understands the UK has to resolve its political issues and choose a new prime minister before anything can be signed and completed.
These next few days will see political turmoil at Westminster, with the Conservatives starting the leadership selection process, and Labour in a major row over its own leader and shadow cabinet team. This is not helpful, if unavoidable in the circumstances. The official machine and well-wishing ministers need to ensure this time is used productively, putting together the negotiating team and the briefings over the issues that need to be resolved in a professional way.
The more that can be said to narrow disagreements and make for a smoother transition the better. I would welcome more statements from the government identifying all the ways that adverse change can be avoided, while not undermining the point of the popular vote.
The Leave campaign did not propose any changes to tariffs or ways of regulating and supervising trade and services flowing across borders to the rest of the EU. The central requirement to take back control relates to taxes, borders and future laws.
Ministers need to stress that the public voted to leave the EU, not to leave Europe. Most of us want to see more trade, more investment, more collaboration, more academic exchanges, more tourism and more joint cultural activity.
We manage this with the US and Canada, for example, without belonging to a Union with them. We will manage it with the rest of the EU. The sooner uncertainties can be reduced, the better. Now is a time for reassurance and for reducing the divisions that the referendum has inevitably created.
John Redwood is MP for Wokingham, Chairman of the Conservative Economic Affairs Committee and a former Secretary of State for Wales.
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