Brexit

Europe makes Brexit-voting UK look like a safe haven

A former British premier urges the political centre to regain the trust of voters, while two writers look for the silver lining in the cloud

I'm starting to quite like referendums. That might be partly because I've been rooting for the winning side in the last two (I voted for Scotland to stay in the United Kingdom and for the United Kingdom to leave the European Union). But it is also because they represent something of a triumph of democracy.

Both the Scottish referendum and the EU referendum have been pretty uncomfortable but they have also made the United Kingdom more politically engaged than I can ever remember it being before: A turnout of over 70 per cent for any vote, in a country that has been fretting about low turnout rates for decades, is something to be celebrated, however you feel about the result.

The way we run these plebiscites, though, does come with a problem: Huge change can be too easily forced by a very small majority. Look back to the Scottish referendum of 1979 on devolution. Then, 51.4 per cent of those who voted, voted for devolution. They didn't get it. Why? Because it wasn't just about getting 50 per cent of the vote. To win, the nationalists also had to have 40 per cent of the total electorate voting yes. Turnout was 64 per cent, something that meant that only 33 per cent of the electorate actually voted yes.

That, in essence, is a pretty good system. It means that if there is to be major change there has to be a pretty strong mandate for it. This brings me to last Thursday's vote. In this referendum, 51.9 per cent of the turnout voted Leave. That's good. But it's still only 37.4 per cent of the electorate. Is that enough for a full Brexit?

I'd expect a fudge. Note that Article 50, which starts the process of negotiating a new deal with the EU, is not to be invoked immediately. This was an advisory, not a legally binding referendum, so there's no rush.

The EU is unlikely to want to see the United Kingdom actually leave (it's difficult, hard work, it's boring and it sets a bad precedent). Its leaders might also spend the weekend slowly realising that genuine reform might be no bad thing. This weekend, they talked tough to tell us that there will be "no renegotiation". That doesn't preclude some actual reform of the kind almost everyone wants - after all, the current EU isn't the only possible kind of EU - and the United Kingdom to be given a chance to vote again.

Either way, the United Kingdom will now definitely be a member of the EU for at least 28 more months and then, after months of negotiations, it will one way or another have a perfectly reasonable trading relationship with the EU.

That's obviously not how unscary things would look to someone with a chart of sterling and the British stock market last Friday morning. Their first glance would have shown the FTSE 100 and the pound down 8 per cent and 10 per cent respectively.

However, had they looked a little further back, they would have noted that the FTSE was lower in February than it was by the end of last week and that both the FTSE and sterling ended last Friday not so far from where they closed the week before. Like most mini-market panics, this turned out to be short-lived stuff.

So what happens next? I can't tell you when your British passport will stop working, whether Scotland can find a way to stay in the EU and in the UK, or who the next Tory PM will be. But I can give you some hints as to things to watch out for in the markets.

The first is much looser monetary policy. The Bank of England has already started to talk about "liquidity injections". This vote is set to provide the big central banks with a good excuse to do what they have been hoping to do for a while - get on with the next round of money printing. This will be good for some markets (maybe Japan) and some stocks.

The second is the weak pound. Sterling has been unsustainably high for years now, as evidenced by our out-of-control current account deficit, and was set for a fall however we voted. It's no bad thing: It should mean booming profits for our exporters, some inflation and maybe even a rise in wages.

The third is overpriced markets - think US equities, perhaps. Sometimes a market needs a crisis as an excuse to correct - and any old crisis will do.

The last is Europe, home to politics and markets that make Brexit-voting UK look like a safe haven. Our vote is going to make other countries demand referendums, do nasty things to their sovereign bond markets and, assuming EU leaders don't spend the weekend thinking of ways to make things better, accelerate the demise of the current phase of the whole project. There's a reason why European stock markets fell more than Britain's last Friday.

Finally, a word on gold. If you followed my advice at the beginning of the year, you'll be holding more than usual. It rose 22 per cent in sterling terms overnight last Thursday.

I have been writing for years about the mega global challenges surrounding us at the moment - demographics, deflation, debt and the popular disillusionment with all three. These are all still with us. That means there will be many more shocks ahead. Elections in all five of the largest euro area economies in the next 18 months are going to give other populations opportunities to reject elites, for starters. The good news is that the United Kingdom, as the last few days have proven, is a safe, stable and highly active democracy.

That - along with a little gold - should help us cope.

FINANCIAL TIMES

•The writer is editor-in-chief of MoneyWeek, a weekly investment magazine based in London.

A version of this article appeared in the print edition of The Straits Times on June 27, 2016, with the headline 'Europe makes Brexit-voting UK look like a safe haven'. Print Edition | Subscribe