It is absolutely true that the markets got the Brexit referendum outcome totally wrong. That said most of the negativity, selling and re-pricing have been reversed as we settle into the process. And that is what it is now — a process.
One of two halves really, the first, to elect a new leader of the Tories and then to invoke Article 50 and set the negotiations in place to exit the EU.
The Conservative leadership election has started with no Boris. The markets rallied on that because they believe the contest is likely to be more conciliatory in nature.
Certaintly, what we need and a UK leader who can unite the Tory party. Contrast that with the Labour Party who are imploding.
The due date for a new UK leader is expected to be around September 9. It is possible, the UK ends up with a strong leader — whether it’s Theresa May or Michael Gove — who has the full support of the party and little or no effective opposition.
If the UK gets there by avoiding speculation about a new referendum or a statement to the effect that there will be no new Brexit referendum re-run would help markets settle without serious turmoil.
The second half begins with the UK decision on how and when to invoke Article 50. How long has the UK got from a leader being chosen to starting the clock on negotiations?
The UK government is the only party that can initiate the process. Will it stall and risk the ire of the 27 countries on the other side of the table?
It could be 2017 before the second half of this game kicks off in earnest.
Angela Merkel has bluntly stated the opening EU battle line: “I can only advise our British friends not to delude themselves… If you want to leave the family, you cannot expect to keep all the privileges while giving up all the obligations.”
But following an initial flurry of foot-stamping, lines in the sand and jawboning, I am betting that pragmatism will break out. There is a stunning amount at stake on all sides.
Politicians and bureaucrats will be heading the talks but they won’t be driving them. The exporters of Germany, France, Italy, Spain, Holland and Ireland will be the heavy influencers as will the exporters on the UK side.
The extent of trade both ways is colossal — Germany alone exports €90bn of goods and services to the UK. That’s in stark contrast to its €20bn of exports to China.
We are not going to be raising restrictive barriers to damage that activity in a hurry. Trade too will be the driver of compromise on the other sticky areas such as immigration, freedom of movement and regulation.
Let’s not fool ourselves there are serious and very difficult issues at stake here: Scotland and the North, for starters.
Questions about when Article 50 will be invoked will extend for maybe more than two years. But it is clear that not everybody is going to be happy with the outcome.
It is going to be a lot like the issue of mortgage debt forgiveness here: Borrowers are unhappy because they didn’t get enough of a write-down; lenders are unhappy because they had to write off debt and the neighbours are livid.
Compromise solutions are going to happen and that will disadvantage some groups. The UK is going to be allowed to trade with the EU in some fashion, and not in a restrictive manner.
The UK is going to have to pay into the pot in some manner for its access to the common market. Irish farmers may find themelves at a disadvantage, having to stick to EU regulations, while their UK counterparts are let off. It won’t be fair.
Politicians on all sides are going to have to sell the outcome to their respective constituents whether they like it or not. The big risk for Ireland and the UK is a lack of faith in the process. The UK is running a serious current account deficit of around 7% of its GDP.
Meanwhile, UK bond rates are currently below 1%. If the markets decide the UK will be seriously restricted from trading with the EU, the outlook for current account could worsen and the outlook for sterling could darken. That would have a major effect on Irish exporters.
For us observers, we want to see firstly steady progress towards a Conservative leader who is capable of uniting the Tory party. Secondly, we want to see a process where Article 50 is triggered soon after September 9 — October would be a good date.
And we want a dialogue, never mind if it’s heated, lengthy and difficult, but just as long it does not become entrenched. After all, they have two years to get it right. They are aiming for a resolution which will not be popular with all but one which is just about acceptable.
The agreement needs to keep the British neighbours happy, but still discourages any other Europeans from going down the same path.
The one thing the EU can do is fudge, and we need the mother of all fudges now.
Peter Brown is head of wealth management at Baggot Asset Management. He is at www.baggot.ie
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