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EU Referendum – Madano Analysis

Introduction


The UK has voted to the leave the European Union. The full impact of this decision is still unfolding, but below Madano has condensed the key issues to consider over the coming days and weeks.

Key figures


Leave – 51.9% (17,410,000)
Remain – 48.1% (16, 141,000)


Government and EU
 

  • David Cameron has announced his resignation as PM, though will stay on until a new Conservative party leader is elected by October.
  • The priority for the UK Government will be balancing stability alongside its need to reorganise itself following David Cameron’s resignation.
  • George Osborne’s position as Chancellor is in question due to his role as one of the lead doomsayers of the Remain campaign. Delivering calm will be highly difficult.
  • Some form of at least limited reshuffle is expected over the coming days to unite the Government and reassure the markets, with key ‘leavers’ given an enhanced role to shore up the Government’s mandate.
  • Simultaneously, the EU will be working out how best to respond to the referendum outcome and secure its own future.
  • A General Election could be called earlier than the expected 2020 date to shore up the mandate of the new leader.


Next steps
 

  • The process of the UK leaving the EU will begin informally, though Cameron has confirmed it will be the responsibility of the next Prime Minister to invoke Article 50.
  • It will be at least a two-year exit process from the EU, though it could take longer with multiple twists and turns along the way.
  • The Civil Service is said to be relatively unprepared for Brexit and so will now be gearing up for a major process. Ministers and officials will have to balance that with the need to keep the country and investment going.
  • It will take some time for the full response from Brussels to come through and the negotiation position of the UK Government to be decided given the forthcoming change of PM.


Economy
 

  • There has already been an immediate drop in the value of the pound.
  • The Government and international organisations have warned that recession is likely, with GDP being lost for the immediate years following the vote.
  • The Bank of England has introduced £250 billion in liquidity funding to shore up the banks and return to some level of stability.
  • The European Central Bank and the Federal Reserve in the USA will have prepared for this and we will likely see key messages and actions from these institutions over the coming days.
  • The Treasury will work with the Bank of England to introduce stability measures, but the key focus will be the Autumn Statement, which is likely to be delivered by a new Chancellor.
  • Economic shock is inevitable, but the question will be whether it is short lived or drags the UK into recession.
  • The long-term question will be whether the market sees the UK economy as having positive fundamentals that are maintained regardless of its membership of the EU.
  • However, other factors such as current account and budget deficit combined with uncertainty provide a negative picture to investors and markets.


Investment into the UK
 

  • Key Government decisions on energy investments and related support and policy may be subject to some delay as Ministers and the Civil Service grapple with the reshuffles, the workload created by Brexit and the distraction of a Conservative leadership election.
  • Conversely, Government will wish to continue to promote investment to ensure the economic outfall of the vote is limited.
  • The crucial question for investors will be how much the UK’s regulatory regimes may change as part of Brexit.
  • With regards to energy, key issues such as low carbon capacity remain and will be the job of the Government to reassure investors to keep working towards delivery of new projects.


Further implications for energy
 

Climate change Policy
 

  • Irrespective of the referendum results, UK climate policy and targets are enshrined in UK law and there has been no push from leaders of Leave for this to change.
  • Investment in low carbon energy will remain a priority, irrespective of who is the next Prime Minister, or how Brexit negotiations proceed. There is broad consensus on this across the Conservative Party and Parliament.
  • Whether the UK develops its own CO2 related regulations on goods such as cars, or adheres to EU rules to enjoy market access, will be subject to the major debate in the next two years and beyond.
  • UK’s influence on the global climate issues will be highly uncertain but with the Paris Agreement done, and UK targets set, this will have limited impact in the next few years.

Energy generation policy and market policy
 

  • The impact of Brexit on UK access to energy from the continent was one of the main energy issues raised in the debate.
  • However, commercial logic of balancing demand and supply across countries will remain and the flow of energy from the continent is made by commercial agreements. As a result, little will change in the short term.
  • How the UK will interact with and influence the rules governing free market access long term will be subject to future trade discussions. This is also the case with UK’s access to the EU emissions trading system.
  • Domestic policy direction is likely to remain unchanged as fundamental energy challenges for the UK will remain and EU influence over domestic market policy has been minimal or in the same direction as UK policy.


Broader business regulation
 

  • The UK is still today and, at least until the end of any Brexit negotiation, subject to all the same EU rules and regulations.
  • Even after Brexit, the starting point will be the existing framework, so one key area of concern for leaving will not change for many years.
  • Whether the UK decides to be bound by the EU’s regulations and rules for Norway style single market access without influence remains to be seen.
  • State aid rules may be loosened up, especially in the energy and industrial sectors. However, this doesn’t necessarily mean greater state involvement considering the views of the Conservative Party towards state involvement in business.

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Brexit and its implications for the UK communications industry
 

To find out more about Brexit and its implications for the UK communications industry, read this insightful blog post by our International Managing Partner Ralph Sutton.