The pound is in free fall. The London stock market tanked for two days. Big banks are looking for offices in Frankfurt and Paris, and businesses have hunkered down in their bunkers and postponed making investments.
And Facebook FB, -0.04% has been turned from a place to swap funny kitten videos into an arena for trench warfare between the outraged supporters of the EU and the die-hard Leave campaigners. To say the British have not taken last week’s vote to leave the European Union calmly would be the understatement of the century.
A petition to hold a second referendum has hit close to four million signatures. Polling shows that more than a million of the Leave voters regret their choice. A new prime minister has still to be chosen and a negotiating strategy for getting out has yet to be decided. There are at least two years until the U.K. finally goes through the exit door, and the political mood is so febrile, it can hardly be guaranteed that step will ever be taken.
The markets have yet to take this into account. While traders have been furiously pricing in the impact of Brexit on both the British and the global economy, there is another possibility they have not even begun to consider: The U.K. may not leave the EU at all, or it may do so in such a tepid way that it hardly counts as quitting. Let’s call it a “Breturn,” as the country returns to the status quo. And since the currency GBPUSD, -0.6702% and the stock market UKX, +2.27% plunged on quitting, presumably they should soar should a Breturn take place.
There is growing evidence that many people want to fight back against the decision to leave, and their voice is growing in strength.
The markets did not see a Brexit majority coming, and nor did the political establishment. The polls always said it was going to be close, but most people chose not to believe them. The decision, when it came, took most investors by surprise, and there was a frenzied wave of panic selling that drove asset prices down right across Europe and, indeed, the world.
In the U.K., however, you would expect the mood to be one of jubilation. After all, this is what the majority of people voted for. There is very little evidence of it, however. A few die-hard Leavers aside, the mood of the past week has been one of anxiety and remorse. There is growing evidence that many people want to fight back against the decision to leave, and their voice is growing in strength.
An online petition demanding that a decision to leave the EU should mean that a majority of 60% on a 75% turnout be required has garnered huge support. It has put on 20,000 votes since I started writing this column and has now passed four million. A poll for the Independent found that 1.1 million of the 17 million Leave voters now regret their decision. On Tuesday, Health Minister Jeremy Hunt argued that there should be a second vote before the U.K. actually left. Expect to hear a lot more of that as the implications of the vote to leave sink in.
Could that actually happen? The answer is surely yes. In fact, there are three scenarios in which it is perfectly plausible that Britain might stay in the EU after all.
The most obvious is a second vote. Leaving the EU is not going to be a simple task for whoever takes over from David Cameron as prime minister. The process takes two years and will require long negotiations about a new trading relationship between Britain and the rest of Europe. A huge amount of legislation will have to be unwound and replaced. After 40 years as part of an increasingly powerful EU, getting out of the web of different treaties and responsibilities will take a huge effort. At the end of that process, a compromise will inevitably be reached, even if it might be messy and won’t please everyone. It would be perfectly sensible for the prime minister to then put that to the vote in another referendum, in which the option of remaining would be on the ballot.
Will the post-Brexit market rebound last?
Alternatively, there may well be a general election before Britain actually leaves. A new prime minister will certainly need a clear mandate to push through such a momentous change of course for the county. Who will win that? Right now it is anyone’s guess. But if people feel as strongly about staying in the EU as they say they do, there is no reason why a pro-EU party, such as the Tories’ former coalition partners the Liberal Democrats, should not storm to power. Then the decision would be reversed.
Finally, the U.K. might well negotiate a form of associate membership that is virtually identical to staying inside the EU. Already, it looks as if the most likely outcome is the “Norwegian model,” where the U.K. retains access to the single market in exchange for accepting the free movement of labor and many EU rules. It may well turn out to be Norway-plus, which involves some role for the U.K. in decision making. Given that the country is already outside the euro, it would take a very large magnifying glass to actually tell the difference between that and staying in. It would have lost some influence, but unless you are a diplomat or politician, that is of little consequence.
If the U.K. takes any of those paths, it will effectively be back in. For investors, that matters. Billions were wiped off equity markets as the result became clear. Currencies have been in turmoil ever since, and the real economy, both in Britain and the rest of the world, will be impacted soon. But if the decision is reversed, then those markets will recover as well. The pound will be back up to $1.50, as it was last Thursday night when the polls indicated Remain would win. Equities will follow.
Of course, it remains to be seen what actually happens. One thing is certain, however: The Brexit, or Breturn, saga has a long way to run.