Money seekingalpha-Living4DividendsThe newspapers from April 23 and 24 presented the worst case scenarios for British business in case of Brexit.

One of the reasons the government is delaying triggering Article 50, which formally begins Leave proceedings with Brussels, is to give businesses time to plan for the future. There are, of course, other reasons for the delay, mainly David Cameron’s resignation. He clearly said that his successor, to be decided by October, will be the one to invoke the article.

The business section of Le Monde on June 23 had two good articles about Brexit. One of their correspondents, Eric Albert, interviewed a few British business experts (‘Le casse-tête des accords commerciaux post-Brexit’, Économie et Entreprise, p. 4). Highlights follow, translation and emphases mine.

How much of British trade is with the EU?

Currently, the European Union (EU) represents 45% of British exports and clarifying the commercial trading framework will be a matter of urgency.

Article 50 provides for a two-year period of exit negotiation. After two years, it can be renewed and extended.

‘The most rapid EU free trade agreement to date, with South Korea, took four years to be negotiated,’ recalls Jessica Gladstone from the legal firm Clifford Chance. ‘Negotiations between the EU and the United Kingdom could be accelerated, but both parties would have to agree to that.’

At the moment, there are no trade frameworks that would ideally suit the UK’s position.

Norway is not part of the EU, but it is a member of the European Economic Area (EEA) and benefits from full access to the single market. But, in return, it is obliged to follow the rules and regulations from Brussels; it contributes annually to the EU budget and it abides by free movement of persons. For the United Kingdom, this would change nothing.

Relations between Switzerland and the EU are founded on nearly 120 bilateral agreements. But these do not include financial services, extremely important to the United Kingdom.

Turkey currently has access to the single market without accepting free movement. But that agreement pertains only to goods, not services. Yet, 80% of the British economy relies on services, particularly financial services. Furthermore, Turkey is obliged to adopt European rules and regulations.

Other countries — Albania, Bosnia, Serbia and Ukraine — have distinctive agreements which include various aspects of political collaboration. However, those agreements are designed to help those countries become members of the EU. Britain would not benefit from that type of framework.

Another possibility is for Britain to return as a member of the World Trade Organisation. However, that would mean that customs and tariffs applied between the UK and EU. In short, the UK would be no different to India or China in that respect.

So, this leaves the UK in a position of having to renegotiate all 53 free trade agreements which exist between the EU and the rest of the world in order to maintain the commercial status quo in a Brexit Britain. Brussels would have to make significant concessions to Britain, which seems unlikely, but who knows? We would need to have a trading framework specifically tailored to our needs.

Another article on the same page in Le Monde was a Q&A with Andrew Balls, fund manager at Pimco (‘”La faiblesse des salaires nourrit le rejet d’Europe“‘). Balls explained — as the title says — that the British rejected Europe because of increasingly weak salaries.

Reporter Marie Charrel asked Balls whether Brexit would have as ‘violent’ an effect on the UK as the economic crash of 2008. Balls said that, outside of initial market and currency dips in the immediate aftermath, he did not foresee chronic problems in the long term. This is because everyone was aware we were undertaking an EU referendum, whereas no one foresaw Lehman Brothers failing in 2008.

Charrel then asked him what the overall financial impact of Brexit would be. Balls replied:

The heaviest consequences would be concentrated on the British economy. The doubts about an exit process, which could last for months, would penalise investment. A recession is not out of the question, but, overall, [making] any estimates would be tricky.

For the European Union, economic consequences would be more limited. We are much more worried about political risks that a Brexit would only amplify: the rise of Eurosceptic populists, Spanish legislative elections on June 26, the Italian referendum on constitutional reform this autumn … The list is a long one.

She then asked Balls the reasons for these political risks. He said:

Populist movements in Italy or in France, just as the rejection of the EU in the United Kingdom and even the popularity of the Republican Donald Trump in the United States have one thing in common: they are fed by weak growth and salaries which have been going on for years. Moreover, a number of citizens feel that aid given to the banking sector has not actually benefited the economy, and that income inequality has been further reinforced during this crisis [of 2008].

One wonders if our Treasury started developing Brexit plans during the campaign, despite our Chancellor George Osborne’s Project Fear. It could be he was so confident of Remain winning that no one thought of developing — or was allowed to formulate — a Plan B(rexit).

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