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Brexit : Reasons to worry

Primexis Insights
15 July 2016
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The result of the referendum, long awaited by the international community, was announced Thursday, June 23, 2016 at midnight (local time). The British voted by 51.9% in favour of the “Leave”, i.e. the United Kingdom is to be the first country to quit the European Union (EU).

Terms and conditions of the Brexit

Article 50 of the Treaty of the European Union (TEU) enables any member to withdraw voluntarily from the European Union and begin negotiations on a withdrawal agreement.

This agreement should be found within a period of 2 years from the date of notification to the European Council of the decision to exit.

It is worth noting that the EU states have the power to extend that period unanimously. Indeed, ‘taking into account the volume of legal obligations and the complexity of the issues, the majority of the jurists consider that such a process could take five to ten years’ says Laurent Pech, Professor of Law at Middlesex University in London.

On the other hand, the British government still has not adopted any decision on the date of implementation of the procedure. UK Prime Minister David Cameron, after announcing his resignation said that he won’t trigger Article 50, instead leaving it to his successor as head of the Conservative Party. His announcement delays the start of the process to at least September 9, 2016, the election date for his successor.

All this leads us to believe that the result of the referendum, commonly called “Brexit” is only at the point of departure of a (very) lengthy process.

Impact on the French Economy

The announcement of the referendum results had immediate consequences on the stock and monetary markets: European shares plunged by more than 11% in two days and the pound sterling fell 10% in favour of the euro, its lowest level in 31 years.

Given the importance of the United Kingdom for French companies [in the year 2015, 7.1% of exports of goods and 11% of services exports were destined for the British for a trade surplus of 12.2 billion euros] should we fear a recession in the French economy?

At the end of the first meeting of the 27 member states in Brussels, the president of the French Republic, François Holland, remained very firm regarding on the free movement of persons, goods, services and capital:

“If the United Kingdom wants to remain in the single market it must pay in every sense of the term, including freedom of movement […] It is the four freedoms, or none.”

If in the short term (or even medium-term) no trade barriers should be erected, the question will be raised at the time of the negotiation of new trade agreements between the EU and the United Kingdom.

On the other hand, the fall of the pound sterling, should as a first step, give a competitive advantage to British companies at the expense of companies in the Eurozone, negatively impacting the French trade balance. However, the climate of uncertainty surrounding the conditions of exit of the United Kingdom, if it is not quickly resolved, would mitigate this advantage paralyzing investment and trade with the British economy.

If the reasons for concern, for the euro area, are for the time being limited, the start of negotiations should allow us to specifically consider the impact on the European and French economic landscape.

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