7 July 2016

Vote Leave led Britons off a cliff – and now others need to pick up the pieces


It’s official: CapX moves markets! I confess, Twitter trolls: it’s all my fault. The plunging pound. The battered share prices. The property funds that are preventing panicky investors from withdrawing their cash. The deals cancelled in the City. The housing market wobbling. It’s all me. If only I’d known I had so much power over markets! I could have acted on it and be a billionaire by now.

While some Remainers may be in denial that Britons have voted for Brexit, many Leavers are in denial about its consequences. If markets and the economy refuse to conform to Leavers’ claims that Brexit would be painless, it must be because there is a conspiracy against them. But while post-truth populism may have won Leave the referendum, it cannot alter the post-referendum facts. Britain’s next prime minister will face huge challenges.

Fact one: the pound in your pocket is worth less. I hope you paid for your foreign holiday in advance. Since 23 June the pound has plunged by 13% against the US dollar, from $1.50 to $1.29 – its lowest level since the dollar bubble in 1985. Against the euro, sterling is down by nearly 11%: a pound that used to buy 1.31 euros now fetches only 1.17.

While the economic downturn may limit the scope for import prices to rise, the pound’s plunge in 2008 managed to spark inflation even in a depressed economy. So the supermarket shop looks set to get pricier too. Higher inflation, in turn, means your wages won’t go as far: your living standards are likely to fall.

Fact two: British assets – your savings – are worth less. Brexiteers are quick to point out that the FTSE 100 share index is up since the Brexit vote – by less than 2% as of 6 July – and suggest that this implies all is well. But that claim is either disingenuous or financially illiterate. The index of the 100 most valuable firms listed on the London Stock Exchange mostly contains international companies – including wholly foreign ones – whose foreign earnings and assets become more valuable in sterling terms as the value of the pound declines. Measured in dollar terms, the FTSE 100 is down more than 12%.

The broader FTSE 250 index, which is more focused on the domestic economy, provides a better gauge of the value of British companies. This is down by 10% in sterling terms, and by a whopping 23% in dollar terms. But companies in the FTSE 250 still make around half of their sales abroad. Businesses with the biggest sensitivity to UK investment, notably in the property sector, have taken an even bigger hammering.

Many investors are dashing for the exits. In an echo of 2007, six open-ended funds that invest in UK commercial property have decided to stop investors from taking their money out. Those funds together account for some £14 billion of the £25 billion committed to commercial property by retail investors. The moves to lock in investors by Standard Life, Aviva and M&G – followed by Henderson, Threadneedle and Columbia Life yesterday – preserve precious liquidity, avoiding a firesale of commercial property assets for now. But the funds will still need to dispose of properties reasonably soon and they may struggle to find buyers. Commercial property deals in London worth more than £650 million have collapsed since the Brexit vote.

It is too early to say how the all-important residential property market is doing. But anecdotal evidence suggests some buyers are pulling out and others are slashing their offers. Likewise, real-time indicators of how the economy is faring are worrying.

Fact three: the Brexit Bust is forcing policymakers to act. Noting that some of the financial risks that the Bank of England had warned about ahead of the Brexit vote are “crystallising”, governor Mark Carney is allowing banks to operate with lower capital buffers so as to support lending. He has also suggested an interest-rate cut may be in the pipeline. Chancellor George Osborne has been forced to tear up his plans to achieve a budget surplus by 2020.

Brexiteers have made this mess, which is only just beginning. They ought to deal with it. If they don’t take charge, they will forever be able to blame others for not delivering what they promised during the referendum campaign. But Boris Johnson has been knifed by Michael Gove, who in doing so appears to have knifed himself. That leaves Andrea Leadsom as the only Leaver with a shot of succeeding David Cameron as leader of the Conservative Party and prime minister. And while I think it’s vital that Leavers take responsibility for their recklessness, I just can’t bring myself to wish Leadsom on the country in these desperate times.

With only two years of junior ministerial experience as City minister under her belt, Leadsom makes much of her supposed experience in the City of London. But The Times has exposed that her career in the City is much less impressive than she claims: she didn’t manage “enormous” teams of people or manage funds worth billions of pounds. A spokesman for Leadsom concedes that aspects of her CV are “misleading”.

As well as being a fantasist, Leadsom is troublingly close to UKIP. At the hustings for Tory MPs, she wouldn’t rule out a partnership with UKIP. In a television interview she declined to say that she wouldn’t give Nigel Farage a job. And she is backed by UKIP and Leave.EU funder Arron Banks, who has spoken of creating a “rightwing Momentum”, like the far-left pressure group loyal to Jeremy Corbyn that tries to bolster entryists’ hijacking of the Labour Party. The Conservative Party’s small membership leaves it acutely vulnerable to entryism by UKIP supporters.

In short, Conservative Party members should not compound the calamitous Brexit vote by choosing a woefully inexperienced, CV-inflating, UKIP-tinged prime minister. Unlike Leadsom, Theresa May has ample cabinet experience of how government works and how negotiations with EU governments are conducted.

Since the Brexit negotiations will dominate government for the foreseeable future, that is crucial. There is no surer way to get Britain the worst deal possible than Leadsom’s impetuous desire to trigger the formal two-year Article 50 exit process as soon as possible and then conclude the negotiations as quickly as possible. Since the negotiation objectives have not been agreed and there is no plan for how to deliver them, it would be reckless to start the clock ticking immediately.

But make no mistake: choosing May will partly let the Leave camp off the hook. Vote Leave led Britons off a cliff – and now others need to pick up the pieces.

Philippe Legrain, who was economic adviser to the President of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.