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BREXIT – What Next? Part 2
Jul 12, 2016

Commentary by David Chitty, International Audit & Accounting Director, Crowe Horwath International

My recent article Brexit – What Next? discussed some initial thoughts about the implications of the Brexit vote in the United Kingdom for international businesses and investors.  

Since the first article was published, discussion and debate has continued regarding the status of the UK in the European Union as well as the implications for the wider EU. This new commentary attempts to update the briefing for international businesses and investors.  

The process for Brexit to take place involves the UK invoking Article 50 of the Treaty of Lisbon. Initial, public, reactions from many politicians in EU Member States and officials in the European Commission have been that negotiations cannot take place before Article 50 is invoked. In practice, it is widely believed that negotiations will take place before Article 50 is invoked. Therefore, it could be sometime before Article 50 is invoked and the UK begins the two-year journey to leaving that is envisaged by Article 50. The UK could remain a EU member until 2020 or later.

One of the uncertainties immediately following from the referendum was the resignation of David Cameron as Prime Minister and leader of the Conservative Party, the largest party in the House of Commons. The Conservative Party leadership contest has come to a dramatic and quick close with the result that Theresa May, currently Home Secretary, will be the next party leader and succeed David Cameron as Prime Minister. The restoration of focused government will help the UK’s situation and should mean that both the UK and the EU can begin to address what they want to achieve in agreeing their long-term relationship with each other.

For practical purposes, it is unlikely that there will be any meaningful discussions before September. The uncertain factor is how these discussions will progress, and what form of agreement could be reached. The uncertainty is as much as an issue for the continuing Member States of the EU. In recent days, there have been signs that the initial “hard” lines on negotiations have eased and some European politicians have spoken of an accommodation being found that means that UK never leaves the EU or becomes an “associate member” of the EU.

Full UK departure does have its own implications for the rest of the EU, as the UK is a large contributor to the EU budget, it is the second largest economy in Europe, it is a major export market for many EU countries and Europe could change without the UK’s influence on the policy making agenda. Without UK influence, the internal market could become more regulated and restrictive, making the continuing EU a less attractive place for foreign businesses and investors. 

Therefore what might be the outcome? This is pure speculation and somewhat political, but the UK would retain some form of access to the EU single market, but there would be some restrictions on the free movement of people from the EU, perhaps to those who have job offers or firm places of study in the UK. Probably the majority opinion in UK business is that single market access is essential. This outcome would placate the 48% who voted “remain” but would not satisfy the “hard Brexiters” among the leavers. It is, however, pragmatic.

Where does this leave international business and investors? Uncertainty remains for some time to come, but the appointment of a new Prime Minister is at least a step in the right direction. The devaluation since the referendum of Sterling creates opportunities in the UK that might be attractive for investors, even taking into account the other uncertainties. An ultimate pragmatic resolution of the UK / EU relationship might mean that for all practical purposes, nothing has changed for an international business or investor, regardless of whether the business or investor is looking to work with the UK or the continuing EU.