Posted by Rewan Tremethick on January 16th, 2018.
An unexpected public figure added their voice to those calling for the UK to hold a second referendum on leaving the European Union this week: Nigel Farage. The one that used to lead the UK Independence Party (UKIP), yes.
Farage may seem like the last person who would want to hold a second independence referendum, considering the many years of hard work he put into making the first one a reality.
However, his reasoning is that the issue of Brexit is one that needs to be firmly resolved – it will be hard for opponents of Brexit to protest if they have lost two referendums on the matter.
Speaking on The Wright Stuff, Farage explained;
‘If we had a second referendum we’d kill it off for a generation as the percentage of the vote to leave next time will be very much bigger than it was last time. And we may just finish the whole thing off…’
Remainers are surely well aware of this fact, with both sides of the campaign probably already reassessing their strategies, even though the chances of another vote remain slim.
It took the suggestion that numerous Tory rebels would side with Labour to defeat the government in Parliament to get Prime Minister Theresa May to agree on giving MPs a vote on the final Brexit deal secured by the government. It is therefore unlikely that she will agree to let the public have another say.
‘Brexit means Brexit,’ she will likely quote.
But if we do go there, what will the campaigns look like this time round? Some of the promises and forecasts made by both sides have been proven to be false, so what would be the main issues of the debate be now?
And what about Pound Sterling, which was sent on a rollercoaster ride during the first half of 2016 as campaigning got underway, fell off a cliff once the result was announced, and has been on turbulent form ever since, still trending several percentage points below its pre-referendum exchange rates?
The Leave campaign faced heavy criticism for some of its campaign materials and promises – the most memorable and controversial being those related to the NHS.
The Brexiters’ battle bus was emblazoned with the slogan ‘We send the EU £350 million a week’, followed by ‘Let’s fund our NHS instead’.
Following the victory for the Leave camp, several prominent Brexiters – including Farage himself – were quick to distance themselves from the claim. Foreign Secretary Boris Johnson, however, has recently doubled-down, stating that the figure was actually too low.
Speaking to The Guardian on the 15th January, Johnson said;
‘There was an error on the side of the bus. We grossly underestimated the sum over which we would be able to take back control.’
Incidentally, on the topic of a second referendum, Johnson said;
‘We’ve just had one, and I think it went pretty well but it was something that caused an awful lot of heartache and soul-searching, and everybody went through the wringer on it. I’m not convinced that the public is absolutely gagging for another Brexit referendum.’
Some leading Brexit figures also claimed that the exit negotiations would be very straightforward, with International Trade Secretary Dr Liam Fox stating that ‘the free trade agreement that we will have to do with the European Union should be one of the easiest in human history.’
However, considering it took the UK government nine months to sort out preliminary issues such as the ‘divorce bill’, EU citizens’ rights and the Irish border (which has been delayed, rather than resolved), many may question whether the UK has enough time to negotiate a trade deal.
The EU needs around six months to ratify any agreement and trade talks aren’t set to start until March, giving the UK just seven months to reach a deal if the Brexit date of March 29th is to be met.
While support for Brexit is still strong, what the Leave campaign could struggle with is the idea that the UK is in the right position, with the right leadership, to make a success of it. Some voters might prefer to stay and wait for a better time than to risk allowing Theresa May and her propped-up minority government to lead the UK out of the EU.
A lot of people claim that the reason the Remain campaign lost the referendum is because it focused too much on the negative economic aspects of Brexit, rather than addressing the concerns of the people voting to leave the EU.
The numerous warnings from economists – such as the recently released Brexit impact assessment commissioned by Mayor of London Sadiq Khan – published since the referendum, largely continue to uphold the consensus that leaving the European Union will be bad for the UK economy.
However, the unavoidable fact is that these are the same economists who were predicting a deep and instant recession following the vote for Brexit; something which clearly has not happened.
An article written for the New Yorker the day after the Brexit vote explained;
‘Cameron could surely have done a better job of selling an upbeat vision of the EU, one that had Britain as an active and enthusiastic member. Rather than accentuating the positive, Cameron and George Osborne, the Chancellor of the Exchequer, sought to scare the electorate into voting their way, arguing that a vote for Leave would plunge the UK economy into a recession.’
Instead, the impact – as well as the subsequent data – has been subtle and harder to interpret. The UK economy slowed over the course of 2017 but, in the context of the last few years, the growth rates seen were nothing hugely out of the ordinary.
In fact, the National Institute of Economic and Social Research (NIESR) predicts that GDP will have accelerated to 0.6% in the final quarter of last year, which would be the joint second best growth rate recorded since the beginning of 2015.
Economists claim that it is taking longer than expected for the negative effects of Brexit to filter through to the UK economy.
Part of the issue was that forecasts were prepared on the assumption that then Prime Minister David Cameron would trigger Article 50 instantly, but it instead took nine months for his replacement, Theresa May, to activate the legislation that set the UK on its path to divorcing the EU.
As Forbes columnist Andrew Cave notes;
‘Before the referendum, David Cameron announced uncompromisingly that victory at the polls for Brexit would result in proceedings for Britain to leave the EU being filed immediately.’
‘In reality, Remain’s defeat was followed by Cameron’s resignation, an abandonment of the earlier threat to expedite a Brexit and bizarre campaigns to not only hold another EU referendum but also another poll on Scottish independence.’
This left businesses and consumers in a state of limbo – banks didn’t flee the UK, because they didn’t know for certain that they were going to lose their valuable EU passporting rights; businesses largely held off on investments but otherwise continued as normal; and consumers carried on spending, even if they had to raid their savings and put more purchases on credit in order to continue.
In other words, the forecasts were made for a completely different set of variables – which, in of itself, is perhaps more of an issue for economists to address than the findings of their ‘fearmongering’ economic modelling.
If the Remain campaign wants to keep fighting on the issue of economic damage – and this is something many claim was the main mistake Cameron made – it is first going to have to convince voters why it is a trusted authority on such a topic, given how differently things have turned out from Brexit forecasts.
The Pound Sterling to US Dollar (GBP/USD) exchange rate is currently trending around something of a milestone: its highest levels since the referendum. However, at 1.38 the pairing is still 11 cents worse-off than it was on 23rd June when the markets were confident of a Remain victory.
GBP/EUR is somewhere in the middle of its best and worst post-referendum levels: around -18 cents lower than on 23rd June.
While markets don’t like votes, as they bring major uncertainty and therefore make it harder to gauge the riskiness of an investment and what the return could be, traders may respond positively to the idea of a second referendum.
Remember that markets dislike risk – the adverse movements seen in GBP since the referendum are simply a reflection of the fact that changing the status quo is always more risky than sticking to your guns, even if things do work out better in the long-term.
Therefore, considering we haven’t actually left the EU yet, this referendum represents a chance (as the markets see it) to return to the status quo. But the worst that can happen (again, from a market point of view) is that we continue with Brexit; something that is already priced-into Sterling.
It would be a surprise if the Pound to Euro exchange rate fell below 1.07 and the Pound to US Dollar exchange rate to lower than 1.20, considering these are the previous post-referendum lows, and a second loss for the Remain campaign wouldn’t see us Brexit twice.
It’s also worth noting that a ‘flash crash’ in October, caused by computerised trading, drove Pound Sterling significantly lower, so markets shouldn’t have that to deal with that again this time round.
Given the trend of UK politics over the past few years, it seems somewhat optimistic of Nigel Farage to expect a second referendum to provide a clear, complete resolution to the current situation.
For instance, many agree all round that both campaigns came short in terms of conduct and information. Although this was before Donald Trump became US President and ‘fake news’ entered daily parlance, the ‘facts’ and analyses being used to support arguments either for or against Brexit often drew intense criticism or ire.
There are no assurances that a second campaign would be fought differently, meaning the losing side is unlikely to go quietly into the dark night of whatever path the UK chooses to go down this time round. UK society would remain as divided as ever and this could continue weighing on things like consumer confidence and business investment.
But what if the population of the UK, having had a chance to see the Brexit process in action, decided it would be better to remain a part of the European Union?
For starters, we’d need to find out if this was even possible. There has been much said regarding the idea that Article 50 can be reversed and the UK could abandon its bid to leave. The EU is likely to welcome the UK back with open arms; despite its tough stance on Brexit, officials know that a split would hurt the Union as well as the UK.
Then we’d have the sticky situation of what exactly would be the democratic thing to do. One could hardly blame Brexiters if they refused to accept the result of a second referendum if it resulted in a win for Remain, even if some of their own number had called for it.
As ridiculous as it seems, the only way to resolve the situation might be a ‘best of three’ – fast forward 20 years and the UK will still be part of the EU, but holding bi-annual referendums on the matter; it’ll be like Comic Relief but without Lenny Henry hosting.
Economically the UK would likely still suffer, as inflation has shot higher, consumers have extended credit and businesses have held off on investing over the last year or so. It could take the economy a while to get back to ‘business as usual’, even if ‘business as usual’ isn’t exactly a booming state of affairs on its own.
As for the Pound, it would likely rocket higher. As mentioned before, markets don’t want Brexit simply because it is the more risky option. Therefore, a return to the status quo would see the UK retain free trade and open borders with the EU, as well as unrestricted financial access.
Pound Sterling exchange rates could therefore climb sharply, although there is always something for markets to worry about. A weak government could leave the prospect of a general election on the table and it seems unlikely the Bank of England (BoE) will hike interest rates any time soon. Sterling may not get back to its pre-referendum levels, but the recovery could still be sizeable.
Nigel Farage may have been instrumental in making the independence referendum a reality, but just because he is calling for another one doesn’t make it likely to happen. He doesn’t have much sway over other key Brexiters; other figures in the Leave campaign were keen to distance themselves from him, especially after his controversial anti-migrant poster that Michael Gove claimed made him ‘shudder’.
The chances of a second vote remain highly unlikely, as calling one would be a legislative nightmare – not to mention highly expensive. The EU would likely be supportive of the UK calling a second vote, but the domestic politics of doing so would be messy.
Just like the first referendum ended David Cameron’s political career, calling a second would likely be the end of Theresa May – and whoever followed her into power, as they would have to implement the ‘will of the people’, even if it was unclear what that will was.
Meanwhile, markets may daydream of a second referendum and the reversal of Brexit, but many traders have now accepted the reality. Pound Sterling exchange rates are still prone to losses, but GBP is gradually clawing its way higher versus a number of its peers. It may not receive another boost from news of a second referendum, but that doesn’t mean there isn’t anything positive in store for Sterling.
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