Brexit fallout: Europe facing economic and political challenges – Goldman Sachs

Research Team at Goldman Sachs, suggests that a month ago, the UK electorate voted to leave the European Union and the resulting significant re-pricing of financial assets took place in an orderly manner.

Key Quotes

“But uncertainties stemming from the referendum weigh on capital expenditure, hiring and business and consumer confidence in the UK.

Brexit raises complex — and as yet unresolved — legal and and procedural issues. But echoing the new British prime minister Theresa May, we take the view that “Brexit means Brexit”.

After a necessary period of preparation and pre-discussion with Britain’s European neighbours, we expect the UK government to activate Article 50 of the Lisbon Treaty (which governs exit from the EU) in the first half of next year. Failing to implement the decision of the British people expressed in the referendum is not politically sustainable, especially in the light of the strengthening populist voices in the UK political landscape.

In developing its negotiating stance, the UK will likely seek a new bespoke relationship with the EU, which retains as much access to the Single Market as possible while imposing curbs on the free movement of people within the EU to curtail migration.

While the UK will not be allowed to cherry pick among the privileges of EU membership without accepting the responsibilities and costs entailed (no ‘Europe à la carte’), there is scope for a new deal along these lines — especially as the definition of free movement within the EU is itself under pressure from extra-EU migration and the populist political response to it across continental Europe.

Negotiations will be multi-sided and multi-dimensional. A number of negotiations will proceed in parallel, and the decision-making processes on the EU side will vary. The UK will not face a homogeneous view across the EU-27 and the European institutions: trade and financial exposures to the UK differ markedly across the EU-27 countries, so the incentives they face in negotiating with Britain and the national positions adopted on the EU side are likely to vary widely.

Aware of the economic risks associated with a disorderly Brexit, the German authorities are likely to seek a more accommodative arrangement with the UK than France’s tougher ‘love it or leave it’ position. German industry (especially in specific sectors, such as chemicals and autos) is particularly exposed to UK trade, whereas Paris has long coveted breaking London’s stranglehold on financial activities in Europe. Different national positions within the EU, as well as the difficult environment created by the refugee crisis, terrorist attacks and weaknesses in Euro area governance, make progress with deeper integration among the EU-27 unlikely.”