Economist 6/24/16

  1. BRITAIN is on its way out of the European Union. In a referendum on June 23rd 51.9% of voters opted for Brexit, on a high turnout of 72.2%. London, Scotland and Northern Ireland plumped for “Remain”, while the rest of Britain voted “Leave”.A striking amount of the variation in the vote can be explained by demographics. According to an exit poll by Lord Ashcroft, 73% of voters aged 18-24 voted for Remain, while 60% of voters aged 65 and over voted for Leave. Similar divisions were apparent across education levels: 57% of degree-holders voted to stay in the European Union, while most of those with only secondary-school educations wanted to leave.Once the dust has settled migration and visa-free travel will, for many, be the greatest worry of a looming Brexit. Some 3.3m EU citizens in Britain are bracing for the uncertain months—or years—ahead. The biggest community affected will be the Polish with 900,000 immigrants, followed by the Irish and Germans with 400,000 and just under 300,000, respectively.More than 1.2m Brits currently live in other EU member states, primarily in Spain, Ireland, France and Germany. The expat community will be unsure of what its future holds—just like Britain herself.
  2. BRITAIN has voted for Brexit. What happens now? Nothing immediate, is the answer for EU nationals living in Britain and Britons living elsewhere in the EU, as well as for businesses on both sides of the Channel. It will all depend on negotiations that could take years—and no one is sure quite how many years, because the only precedent is Greenland, with a population today of around 50,000, which voted to leave in 1982.Mr Cameron has promised that Britain would immediately invoke article 50 of the Lisbon treaty, which sets a two-year timetable to agree the terms of departure. But uncertainty about his own position could raise questions about this. If he steps down and a Brexiteer takes over as leader of the Tory party and as prime minister, he or she is likely to argue that Article 50 is biased against the interests of a country leaving the EU. Under Article 50, the terms of Britain’s departure would be agreed by the other 27 EU countries, without a British vote. So Brexiteers would prefer to negotiate informally, without invoking Article 50. The other 27 countries are unlikely to go for this.
  3. The kind of deal offered is a longer-term question, with neither main option very palatable. The first is to become like Norway, which is a member of the European Economic Area (EEA), in return for which it is required to contribute to the EU’s budget and allow the free movement of people. The second is to opt out entirely, trading with the EU under the rules of the World Trade Organisation like America, China or any other country. Most economists agree that this would do more damage to the British economy.
  4. The world’s biggest banks must brace themselves for Britain’s departure from the European Union.Banks’ share prices have been hammered, and those of British lenders hit especially hard.Barclays and Lloyds down by almost 30% when the market opened. European banks were not spared: Deutsche Bank shed 21%, Credit Suisse and UBS 13% each.For all that, banks’ stability should not be in question. They have known for months that the vote was coming.In the longer run, however, Britain’s financial industry could face severe difficulties. It thrives on the EU’s “passport” rules, under which banks, asset managers and other financial firms in one member state may serve customers in the other 27 without setting up local operations. That is how the British subsidiaries of non-EU banks (eg, Americans, Japanese and Swiss) are able to do business throughout Europe from London, and a big reason why London has become the EU’s financial capital.
  5. Unless passports are renewed or replaced, they will lapse when Britain leaves. A deal is imaginable: the EU may deem Britain’s regulations as “equivalent” to its own. But agreement may not come easily. French and German politicians, keen to bolster their own financial centres and facing elections next year, may drive a hard bargain. No other non-member has full passport rights.Alternative models do not look attractive. Switzerland is a member of the European Free Trade Association, and has 120-odd bilateral agreements with the EU. Canada’s trade deal with the EU excludes most financial services. Norway has broad access to the single market, but has no say in setting the rules. Norway has broad access to the single market, but has no say in setting the rules.The City is not going to crumble. But it is likely to lose some business to other, smaller financial centres, meaning Dublin and Luxembourg as well as Frankfurt and Paris.

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