The June 2016 decision by voters in the United Kingdom to approve the country’s withdrawal from the European Union (EU) was one of last year’s biggest surprises. As the UK government undertakes the formal process of exiting the EU trading bloc, important questions remain about how the decision might affect the financial services industry and markets more broadly.
Natixis Global Asset Management’s Chief Market Strategist David Lafferty recently sat down with Robert Condon, Managing Director of Public Affairs in the London office of Hume Brophy, an international communications firm. Mr. Condon directs strategic UK and international media and public affairs campaigns for a variety of clients in the financial services space and for trade associations and non-governmental organizations.
Lafferty: We in the financial services sector think of Brexit as being very economically driven, but you’ve made the point that politics is underneath all of it. Can you talk about how prepared the UK was for this, not only on the government side, but on the business side as well?
Condon: Absolutely. [Brexit] is intrinsically a political issue. It was political in cause – the growth of UK Independence Party, the hardening on the right of the British Conservative Party vis-à-vis the EU and their desire to leave. It was political in that it was a democratic vote of the people of Britain to leave, and it [will] be political in terms of a solution – a political deal negotiated between Britain and the EU. So Brexit is intrinsically political, and yet its main outcomes will be economic. And these are things that will harm or help the people of Britain and the economies of the EU beyond that.
Was Britain prepared? I’m afraid not. There was no "Plan B." The British government, in fact, forbade its civil servants from having an [exit] scenario plan, and therefore we're in an unprecedented situation. Added to that, you have a genuine capacity crisis within the British government. There simply are not the numbers and the brains and the experienced trade negotiators to do this in the way you would want. Again, this is somewhat unusual. It's on the back of some tough cuts during an austerity era in the British government, so a lot of departments are much smaller than they were.
On top of that, you have a timing issue. We have an extremely tight timeline to get this negotiated. We're talking about over 60,000 pages of regulatory and legal documents that have to be unpicked and worked on. It's almost impossible to do that in the time we have. The British government will make a good go of it, and it needs to make it work for the British people. I think business needs to engage positively, constructively, and with its brain power to help the government at this time, and also on the EU side. I think we all need to come together to help solve it.
Lafferty: It's interesting that you mentioned looking for better outcomes for the constituents, both business, government, and the various geographies. The results of the vote [varied] geographically. It seems like they are not all moving in one direction. Can you talk about those results and what they really meant?
Condon: Great point, great question. The result was 52% Leave to 48% Remain. That is close, but that belies the realities. London was overwhelmingly a Remain vote. The same applies to a lot of larger cities. Scotland also wished to stay in, and Northern Ireland the same. Wales and the rural Britain and rural England voted overwhelmingly to leave. Over 430 of the 650 constituencies voted to leave. So a vast majority of English people were very comfortable with leaving, for a number of reasons.
Despite all the establishment of Britain urging its people to remain, the people chose to leave, and that shows how strong the feeling was. It was a practical vote, but it was also an emotional vote, and a vote that's made a lot of English people happy.
Now, on the flip side, it was a vote that maybe is counterintuitive in many ways. There is a direct correlation between your propensity to vote Leave and the amount of EU funds you were receiving. The areas that got most EU funds, the poorer areas, actually voted to leave more than the wealthier areas. Also, there was a seeming correlation between those who were concerned about immigration. There was less concern about [immigration] in places with more immigrants, places like London, for example. On the whole, [conservative] Tory voters voted to leave; two-thirds of Labour Party voted to remain. But many of the more working-class Labour voters, who have been hit by these years of austerity and some of the impacts of a globalized economy and some of those industrial jobs leaving – they voted to leave against their party's judgment. So we do have some ruptures in British politics, which Prime Minister Theresa May is trying to capitalize on by claiming to move towards the center ground, to take some of those Labour voters into the Tory fold. So we've yet to see the outcomes of this, but a very interesting, again, political result that will later have business and economic results, I think.
Lafferty: It seems that the big lack of compromise here might be between the free movement of people and the open access to markets. How will the UK maintain some type of open access?
Condon: Again, you've put your finger on a key issue. Of those who voted to leave in an exit poll on the day itself, 33% said that immigration was their major issue. Now, it's understood by the British government and the current prime minister that she cannot go back to the country at the next general election without having changed the immigration rules of the country. Therefore, she feels it's a red-line issue for her to change that and to make sure that she can control who comes in and out of the country by way of a quota system or a points system, etc.
The ramifications of that are quite clear from the EU side. It's one of the four freedoms of the EU, the pillars which the EU is built on, this great post-war project for European peace and reconciliation. And on their side, they have a practical and an emotional attachment to that. So if she keeps that as a red line, then she cannot have normal single-market access. So if you ask me where my money is, I think she will stick to that red line, and therefore we are moving towards a more difficult, "harder" Brexit, as they call it.
The other side of that coin is, for the EU, if Britain gets a relatively pain-free deal, then that does threaten the future. Maybe other countries who are having political issues would be more likely to leave. So there is an existential threat to the EU posed by Brexit, and both sides now have difficult political grounds that they've staked out that make the economic deal harder to achieve. And in fact, in shoring up her base in Britain and in trying to capitalize on the Brexit vote, the prime minister has arguably weakened her hand internationally. She looks less open, less free-market, and she's perhaps angered a lot of negotiators and politicians in the European capitals.
Lafferty: What is the intersection between how the Brexit process unfolds versus the political climate in the rest of the European Union?
Condon: Elections are difficult times. Positions become hardened, and it will be difficult with the two major powers in Europe – France and Germany – now going through elections in the spring and autumn of this year. And this is at a time, remember, of economic difficulty, of low growth, etc. Where France is dealing with the Front National, and Germany has seen the growth in anti-EU and anti-immigrant parties as well. So it will be difficult.
The thing about Brexit is, what is the future relationship [between the UK and EU] going to look like? People talk about the Norway model – this is a model where you have access to the single market, but in return you pay into the budget, you have to accept free movement of people, and you have to take EU and implement EU rules in your own country and around the goods and services you wish to export. That's politically unacceptable for Britain at the moment, and the prime minister's made clear that won't be the path she goes down.
Then you look at the other extreme, the World Trade Organization option. This is much more scaled-back, and would involve the application of tariffs. UK is not currently a member of the WTO – we'd have to rejoin separately. That could be vetoed by China. So that’s fraught with complexities, once you begin to peel back [issues], it just looks messy. Free trade in itself is something that's often misunderstood. It's seen as purely a good thing. So yes, free trade is good. What about British farmers? They will have to compete with farming sectors that are more export-oriented, cheaper, producing very good products. So are British farmers going to lose out to, say, Australian or Argentinian farmers? It's a two-way street, free trade, and there are some difficult decisions ahead.
Lafferty: I'm wondering if you have any lessons that you think maybe the rest of the world can learn from the Brexit vote?
Condon: Absolutely. I think one of the clear lessons from the British referendum campaign, and the loss that the government suffered, was that you cannot just campaign on economic data, on statistics. You cannot just appeal to people's pockets. You have to appeal to the emotions and to that feeling of hope as well. And giving someone a narrative and a vision of good times ahead.
Secondly, you need to be careful about the polls. One of the reasons Brexit won was that two to three million people who'd never voted in a British general election suddenly decided to vote. And the pollsters couldn't measure them. They were effectively invisible from the point of view of the political class, which in itself is a great metaphor for what's causing some of these strong movements in Western democracies today. People are a little bit angry, and they're able to express that. So I would beware of some of the polls – you never know what's going to happen until the day itself.
Investment professionals can download the NatixisTalks app to hear the full discussion with Robert Condon on our Politics and Policy podcast. Stay up to date on market and industry trends on our Latest Insights page.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
NYSE bell ringing celebrates launch of the Natixis Seeyond International Minimum Volatility ETF
Transaction costs for exchange traded funds include the spread. We look at how this figure is defined and calculated.
Beyond affordability, some passive approaches to investing may result in lost opportunities.