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Why a Leave Vote May Not Result in a Brexit

Tuesday, June 14, 2016 By Yves Smith, Naked Capitalism | Op-Ed
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The officialdom in England and in much of the rest of the advanced world is suddenly in alarm over the possibility of a Brexit. US Treasury yields sank last Friday as investors ran for cover, and the flight to safety continued today as a surge in the yen led to a 3% fall in the Nikkei.

The UK's elites had been confident that frequent, loud "Don't Touch That Dial" warnings, with vivid descriptions of all of the horrors that would ensue, would herd voters into line well before the June 23 polling date.

Instead, an online poll commissioned by the Independent showed the Leave campaign to be winning by a stunning 55% to 45%. That revelation coming on top of weak economic data from the US, put Mr. Market in a funk. The Financial Times' "poll of polls" puts Leave in the lead by a smaller margin, 46% to 44%.

Moreover, the sense is that with only 10 days to the decision date, the Leave campaign is gaining momentum. The Conservatives have realized that having a bunch of toffs, big banks, and intrusive foreign leaders tell British citizens how economically damaging a Brexit would be seems only to have persuaded voters at most that the people at the top of the food chain would take a hit. Voters seem to be in a bloody-minded enough mood to be willing to take a hit if they can inflict some pain on their putative leaders and take the banking classes down a notch or two. Another sentiment (and one that the elites appear to deny) is that voters are willing to pay an economic cost, even a large one, for more national sovereignity. So now Labor leaders have been moved to the front line of the sales campaign.

But even the referendum next week results in "Leave" getting the most results, that does not mean a Brexit will necessarily happen. There are at least two ways that the will of the public could be thwarted.

Peter Hitchens outlines one possibility, that Parliament refuses to honor the vote. From the Daily Mail:

I think we are about to have the most serious constitutional crisis since the Abdication of King Edward VIII. I suppose we had better try to enjoy it.

If -- as I think we will -- we vote to leave the EU on June 23, a democratically elected Parliament, which wants to stay, will confront a force as great as itself -- a national vote, equally democratic, which wants to quit. Are we about to find out what actually happens when an irresistible force meets an immovable object?

Since the intricacies of Parliamentary procedure are well over my pay grade, I will leave it to our British readers to game out how the Parliament could maneuver to keep the UK from departing the European Union even in the face of "Leave" winning.

Aside from some sort of crude rejection, there is a second, time-honored way that has gotten recalcitrant voters to fall into line: keep sending them back to the polls until they give the desired answer. Admittedly, it make take the European Union giving the UK some real concessions in order for voters to be swayed. For instance, Denmark required approval in a referendum as a condition for signing the Maastrict Treaty. The first vote narrowly turned the pact down. Danish officials then negotiated four exclusions from the treaty, and voters ratified in just under a year later.

More recently, Ireland was the only EU member that decided to hold a referendum on the Lisbon Treaty. The result, in June 2008, as over 53% opposed. The European Commission made concessions on three issues. Over 67% of voters supported the agreement in the next referendum in October 2009.

Thus it appears that many experts have been focusing on the wrong issue, at least for now. They've been worrying about, "Which post-Brexit trade and economic model will the UK use, how long would it take to implement, and what would the costs be?" Yet European and UK officials are highly motivated to prevent a Brexit, and given that there is no clearly defined set of next steps if Leave wins, they have plenty of latitude to improvise.

However, just because the will is there does not mean a patch-up operation would work all that well. One driver of the Brexit vote is a desire to curb immigration. While getting waivers on that would seem to be the fastest path to flipping "Leave" voters to "Remain," it would seem to be fraught to offer the UK concessions on that front. The first is the philosophical issue that restricting the free movement of people violates the spirit of the Schengen agreement, and also obviates one of the big reasons for the European Union in the first place. Second is that voters in other EU member states are unhappy about refugee quotas; letting the UK get a break (if that were to be part of the deal) means they will presumably have to take even more. What European elected official wants to have to sell that to his constituents right now? Put it another way, what does a European Union mean if big countries can rewrite what are seen to be basic rules? The vision for the European Union had been more and more integration over time, but a successful effort to reverse a Leave vote would put it on the path of more decentralization of power. In the long run, that is likely more viable, but the transition would contested and disruptive.

And third impediment is that, as Hitchens argues, voters are deeply disaffected with the political classes:

It has been a mystery to me that these voters stayed loyal to organisations that repeatedly spat on them from a great height. Labour doesn't love the poor. It loves the London elite. The Tories don't love the country. They love only money. The referendum, in which the parties are split and uncertain, has freed us all from silly tribal loyalties and allowed us to vote instead according to reason. We can all vote against the heedless, arrogant snobs who inflicted mass immigration on the poor (while making sure they lived far from its consequences themselves). And nobody can call us 'racists' for doing so. That's not to say that the voters are ignoring the actual issue of EU membership as a whole. As I have known for decades, this country has gained nothing from belonging to the European Union, and lost a great deal.

If Zambia can be independent, why cannot we? If membership is so good for us, why has it been accompanied by savage industrial and commercial decline? If the Brussels system of sclerotic, centralised bureaucracy is so good, why doesn't anyone else in the world adopt it?

In other words, the Leave vote is to a large degree a repudiation of the political elite. Thus trying to deny voters their way by cobbling together a deal may enrage them further and thus backfire. Of course, the officialdom may hope that a period of market turmoil and economic dislocation may discipline them, um, bring them to reason.

So even if the ruling classes pull out the stops to keep the UK in the EU, it's going to be a fraught, messy process. The past precedent show that with smaller countries, with less central issues at play, in times of much lower political stress, the effort still took over a year. That is an eternity in financial time. While a Brexit would be a seismic event, a protracted effort to reverse a Leave vote would be an ongoing source of uncertainty and hence volatility.

And if the last-ditch push works and Remain prevails? While it would stave off a crisis, it still leaves the European Union damaged The UK would be seen as only a provisional member, and having come so close to a win, the Brexit advocates are certain to keep the issue in play.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.

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Why a Leave Vote May Not Result in a Brexit

Tuesday, June 14, 2016 By Yves Smith, Naked Capitalism | Op-Ed
  • font size decrease font size decrease font size increase font size increase font size
  • Print

The officialdom in England and in much of the rest of the advanced world is suddenly in alarm over the possibility of a Brexit. US Treasury yields sank last Friday as investors ran for cover, and the flight to safety continued today as a surge in the yen led to a 3% fall in the Nikkei.

The UK's elites had been confident that frequent, loud "Don't Touch That Dial" warnings, with vivid descriptions of all of the horrors that would ensue, would herd voters into line well before the June 23 polling date.

Instead, an online poll commissioned by the Independent showed the Leave campaign to be winning by a stunning 55% to 45%. That revelation coming on top of weak economic data from the US, put Mr. Market in a funk. The Financial Times' "poll of polls" puts Leave in the lead by a smaller margin, 46% to 44%.

Moreover, the sense is that with only 10 days to the decision date, the Leave campaign is gaining momentum. The Conservatives have realized that having a bunch of toffs, big banks, and intrusive foreign leaders tell British citizens how economically damaging a Brexit would be seems only to have persuaded voters at most that the people at the top of the food chain would take a hit. Voters seem to be in a bloody-minded enough mood to be willing to take a hit if they can inflict some pain on their putative leaders and take the banking classes down a notch or two. Another sentiment (and one that the elites appear to deny) is that voters are willing to pay an economic cost, even a large one, for more national sovereignity. So now Labor leaders have been moved to the front line of the sales campaign.

But even the referendum next week results in "Leave" getting the most results, that does not mean a Brexit will necessarily happen. There are at least two ways that the will of the public could be thwarted.

Peter Hitchens outlines one possibility, that Parliament refuses to honor the vote. From the Daily Mail:

I think we are about to have the most serious constitutional crisis since the Abdication of King Edward VIII. I suppose we had better try to enjoy it.

If -- as I think we will -- we vote to leave the EU on June 23, a democratically elected Parliament, which wants to stay, will confront a force as great as itself -- a national vote, equally democratic, which wants to quit. Are we about to find out what actually happens when an irresistible force meets an immovable object?

Since the intricacies of Parliamentary procedure are well over my pay grade, I will leave it to our British readers to game out how the Parliament could maneuver to keep the UK from departing the European Union even in the face of "Leave" winning.

Aside from some sort of crude rejection, there is a second, time-honored way that has gotten recalcitrant voters to fall into line: keep sending them back to the polls until they give the desired answer. Admittedly, it make take the European Union giving the UK some real concessions in order for voters to be swayed. For instance, Denmark required approval in a referendum as a condition for signing the Maastrict Treaty. The first vote narrowly turned the pact down. Danish officials then negotiated four exclusions from the treaty, and voters ratified in just under a year later.

More recently, Ireland was the only EU member that decided to hold a referendum on the Lisbon Treaty. The result, in June 2008, as over 53% opposed. The European Commission made concessions on three issues. Over 67% of voters supported the agreement in the next referendum in October 2009.

Thus it appears that many experts have been focusing on the wrong issue, at least for now. They've been worrying about, "Which post-Brexit trade and economic model will the UK use, how long would it take to implement, and what would the costs be?" Yet European and UK officials are highly motivated to prevent a Brexit, and given that there is no clearly defined set of next steps if Leave wins, they have plenty of latitude to improvise.

However, just because the will is there does not mean a patch-up operation would work all that well. One driver of the Brexit vote is a desire to curb immigration. While getting waivers on that would seem to be the fastest path to flipping "Leave" voters to "Remain," it would seem to be fraught to offer the UK concessions on that front. The first is the philosophical issue that restricting the free movement of people violates the spirit of the Schengen agreement, and also obviates one of the big reasons for the European Union in the first place. Second is that voters in other EU member states are unhappy about refugee quotas; letting the UK get a break (if that were to be part of the deal) means they will presumably have to take even more. What European elected official wants to have to sell that to his constituents right now? Put it another way, what does a European Union mean if big countries can rewrite what are seen to be basic rules? The vision for the European Union had been more and more integration over time, but a successful effort to reverse a Leave vote would put it on the path of more decentralization of power. In the long run, that is likely more viable, but the transition would contested and disruptive.

And third impediment is that, as Hitchens argues, voters are deeply disaffected with the political classes:

It has been a mystery to me that these voters stayed loyal to organisations that repeatedly spat on them from a great height. Labour doesn't love the poor. It loves the London elite. The Tories don't love the country. They love only money. The referendum, in which the parties are split and uncertain, has freed us all from silly tribal loyalties and allowed us to vote instead according to reason. We can all vote against the heedless, arrogant snobs who inflicted mass immigration on the poor (while making sure they lived far from its consequences themselves). And nobody can call us 'racists' for doing so. That's not to say that the voters are ignoring the actual issue of EU membership as a whole. As I have known for decades, this country has gained nothing from belonging to the European Union, and lost a great deal.

If Zambia can be independent, why cannot we? If membership is so good for us, why has it been accompanied by savage industrial and commercial decline? If the Brussels system of sclerotic, centralised bureaucracy is so good, why doesn't anyone else in the world adopt it?

In other words, the Leave vote is to a large degree a repudiation of the political elite. Thus trying to deny voters their way by cobbling together a deal may enrage them further and thus backfire. Of course, the officialdom may hope that a period of market turmoil and economic dislocation may discipline them, um, bring them to reason.

So even if the ruling classes pull out the stops to keep the UK in the EU, it's going to be a fraught, messy process. The past precedent show that with smaller countries, with less central issues at play, in times of much lower political stress, the effort still took over a year. That is an eternity in financial time. While a Brexit would be a seismic event, a protracted effort to reverse a Leave vote would be an ongoing source of uncertainty and hence volatility.

And if the last-ditch push works and Remain prevails? While it would stave off a crisis, it still leaves the European Union damaged The UK would be seen as only a provisional member, and having come so close to a win, the Brexit advocates are certain to keep the issue in play.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.