United Kingdom: "Leave" Vote Triggers Uncertainty, Sparks Fear of Domino Effect across European Union

Tuesday Jun. 28, 2016

United Kingdom: "Leave" Vote Triggers Uncertainty, Sparks Fear of Domino Effect across European Union

Executive Summary
While the long-term implications of Great Britain's exit from the European Union (EU) are difficult to predict in the current climate of uncertainty, it is clear that the referendum's result will have a significant impact on the economic, political, and social climate within the United Kingdom (UK) and the wider EU bloc for at least the next two to five years. Until Article 50 is implemented and negotiations on the details of the future relationship commence, expect a mix of volatility and extreme caution in British and EU financial markets and business communities, amid a tumultuous political atmosphere in both the UK and the broader EU.
 
Key Judgments:
 
  • Though unlikely, there is a slight chance that British leaders may not invoke the EU's Article 50 exit clause.
  • The success of the UK's "Leave" campaign will galvanize euroskeptic parties across the region, many of whom have already called for their own referenda.
  • Given the centrality of concerns over immigration to the referendum's success, EU leaders will likely push for a number of related policy reform measures to forestall a possible "domino effect."

What's Next for the UK and the EU?

On June 23, the UK voted to leave the EU by a narrow margin (51.9 percent for "Leave," and 48.1 percent to "Remain"). Uncertainty regarding the country's political future has prompted significant economic volatility that will likely continue in the medium- to long-term. While the immediate effects of an impending "Brexit" have been most pronounced within the UK, the decision will almost certainly impact political and economic conditions across the EU in the coming months.
 
Political Uncertainty
 
The success of the "Leave" campaign has prompted political parties in Scotland and Northern Ireland - where a majority voted "Remain" - to discuss the possibility of seceding from the UK to retain EU membership. While both outcomes remain speculative, ongoing uncertainty is likely to impact both countries, as well as relations with Westminster. 
 
The political direction of the UK following its referendum is unclear for two reasons. First, London is not obligated act upon the results of the referendum, as the vote is nonbinding. Despite Prime Minister David Cameron's resignation - likely yielding power to a member of the pro-Brexit movement - there remain a number of scenarios in which Britain does not follow through with the decision to leave the EU. Second, there is no clear roadmap for withdrawal from the EU. Because its authors never considered a member state reversing course, Article 50 of the Lisbon Treaty - which guarantees a member state's right to leave the EU - is untested and purposefully vague, indicating that negotiations on the EU-UK relationship post-Brexit will be halting and occasionally tumultuous.
 
Economic Fallout
 
For the foreseeable future, political uncertainty will likely perpetuate market instability in the UK, especially with regard to the value of the pound sterling (GBP), which fell to its lowest level against the US dollar (USD) since 1985 as markets opened on the morning of June 24. The decision not to implement Article 50, at least until a new prime minister takes office (projected for October), means that businesses and financial markets will continue operating under some level of uncertainty for at least two years; for this reason, the three major credit bureaus have cut the UK's outlook. However, despite a deep initial slump in the Financial Times Stock Exchange (FTSE) 100 and weakened GBP value, markets will likely show some recovery as the political situation stabilizes.
 
A Boon for the Euroskeptics

On a longer horizon, the biggest impact of the successful "Leave" campaign may be felt in the 27 remaining EU member states. The final political fallout from the UK's decision to turn its back on the EU may have repercussions on the wider European project, especially as a boost to far-right and euroskeptic parties across the region. Anti-EU political leaders in Austria, Denmark, France, Italy, the Netherlands, Sweden, and elsewhere have called for referenda of their own. Although it is impossible to predict the outcome of a hypothetical referendum, the same concerns that motivated British voters to cast ballots for Brexit (immigration, national sovereignty, etc.) are prevalent in other members of the bloc, suggesting that further fragmentation of the EU is possible in the long term. While the Brexit vote has emboldened Europe's far-right, most of the EU's citizens are busy taking stock of what Brexit means for them; but if there are further terrorist attacks, more economic tumult, or if there is no discernible end to the flow of refugees from Asia, the Middle East, and North Africa, sympathy for more radical agendas could transform into outright support at the ballot box and ultimately more volatile street protests between those with increasingly polarized views of Europe.

To prevent a ripple effect of "-exit" campaigns across the EU, European leaders may push for serious reforms across a range of issues. Foremost among Brexiteers' proclaimed grievances were immigration and a perceived lack of control over the UK's national borders. The surprise referendum result could motivate the EU to reform its free movement policy, for instance, or take steps to more effectively address ongoing, irregular mass migration across the Mediterranean. However, a push for closer integration across EU member states also has the potential to backfire, with many euroskeptics wary of relinquishing aspects of their countries' national sovereignty to Brussels.
 
Authors:
  • Ashley Scarfo, Intelligence Analyst, Europe & Russia/CIS Team
  • Emanuelle Espositi, Intelligence Analyst II, Europe & Intelligence Operations
  • Ed Daly, Editor in Cheif, iJET Global Intelligence Group
 

 

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