The exit of the United Kingdom from the European Union (EU), also dubbed as Brexit, is anything but certain at present. After months of tense negotiations, both sides have been expressing cautious signs of optimism, while smaller countries such as Greece have been using the ratification of a new treaty with the U.K. as a bargaining chip.
‘Brexit’ couldn’t have come at a worse time for both the European Union and the United Kingdom – with massive exposure to continental banks, the U.K. financial system is set to catch fire should Deutsche Bank’s woes persist. Under a common legal and regulatory framework, the governments and watchdogs on both sides could come up with an adequate response.
At the same time European Union officials have made it clear that the financial capital of Europe is going to have to reshape should the U.K. exit from the E.U.. While polls are varying and inconclusive for the time being, a worthy observation is the mention of the latest survey in Scotland. David Clegg, a political editor of the Daily Record and Scottish Political Journalist of the Year highlighted on his Twitter profile the mood in Scotland.
BREAKING: #brexit Scotland poll (with change from last month).
Remain: 66% (+1)
Leave: 34% (-1)
— David Clegg (@davieclegg) February 18, 2016
While the Prime Minister of the U.K. is in Brussels and is fighting for additional reforms to avert a Brexit scenario, Scotland’s vote seems overwhelmingly one-sided. With the rise of the Scottish National Party, an exit of the U.K. from the European Union seems less likely. Lingering negotiations, which have continued until early morning on Friday, have yet to yield conclusive results, however David Cameron and Jean-Claude Juncker have both expressed confidence that an agreement on a new treaty will be reached.
It’s the economy, stupid
With all the opinions about prospective damages to the European Union and the United Kingdom circulating around the press, one particular aspect of a Brexit is central to the issue. London’s financial sector growth in the past couple of decades has been fueled by the establishment of a cross-border regulatory framework.
The U.K.’s Financial Conduct Authority (FCA) and the Bank of England have been undeniably the most prominent watchdogs in the European Union, acting much more swiftly in times of crisis than its bureaucrat peers in Brussels. However, with the threats from the European Union to exclude the United Kingdom from a single regulatory framework if a Brexit does indeed materialize, the initial damage to the UK’s financial sector is likely to be substantial.
A research note by Deutsche Bank is highlighting the risks for the economies on both sides of the aisle: “We see the EU referendum as a risk for bank equity performance principally because of the uncertainty of the implications of Brexit for the outlook of the UK economy, and for the legal and regulatory framework of providing financial services into and out of the EU.”
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One of the leading bond funds in the world, PIMCO, sporting over $1.5 trillion of assets under management and led by CEO Douglas Hodge, is highlighting that it sees a 40 per cent probability for a Brexit, while still assuming that the U.K. will vote to remain in the E.U. “Irrespective of the twists and turns of the debate, uncertainty over the outcome is likely to weigh on UK markets for a good few months yet,” a note published by the California headquartered investment company states.
— PIMCO (@PIMCO) February 19, 2016
A Brexit will take time
Lastly, we have to point out the mechanisms under which the United Kingdom may exit the European Union. The process is far from straightforward and it actually would take quite a bit of time. Should the UK’s Prime Minister David Cameron inform the European Council that the United Kingdom is to leave the European Union, a legal framework is triggered. Negotiations at the European Council would have to agree on the terms under which the country will exit the E.U..
The deal would have to be acceptable to both sides and does require a qualified majority vote on the part of the leaders of the member states. The next hurdle would the the European Parliament and contingent to the terms of the deal, a vote in some national parliaments could also be required. The Brexit process could take up to two years.
Provided that no agreement is reached, the U.K. would be facing either a unanimous extension of the negotiation period, or a Brexit with no deal in place. In the meantime, we are joining the call of our colleague, the Brussels bureau chief of the Financial Times Peter Spiegel, after a sleepless night on his Twitter profile: