The Day After

If the markets had not ended with a rally the day before the vote, people would most likely have been better prepared. However, last Thursday (23 June), while equities were up 2%, the outcome seemed certain, hedge fund managers were no doubt well-informed, Bremain would certainly prevail. But for those who did not stay up past midnight, it was only when they woke up in the morning, after checking their smartphones or listening to the radio, did they learn the real outcome: a Brexit victory. Waking up with a hangover after going to bed sober: it would be a long day.

It was time to get to the office and check the reliability of the stress tests, starting the day with the prospect of a 10% drop in European markets. The advantage of “known unknowns”* is that it is possible to prepare for them. Conducting crash tests, “what if” scenarios and experimenting with all those English-language formulations capable of quantifying anxiety and measuring the potential damage to come. However, in contrast to the Lehman Brothers bankruptcy, Brexit had been on the agendas for the last two years: a piece of unknown binary data for an outcome that could only result in a trading session offering either a relief or punishment.

The ensuing punishment today opens up a period of “unknown unknowns”. Everything seems possible: other referendums elsewhere in Europe, rising populism, the breakup of the euro zone and even …a step backwards! In light of the number of petitions calling for the organisation of a new vote and the apparent lack of enthusiasm of the UK to act on its decision to exit, it is almost possible to imagine that all this was an enormous misunderstanding, setting the stage for the United Kingdom to obtain yet more concessions.

However, let us however return to the most likely scenarios. Many possible models have been suggested: the Swiss model, the Norwegian model, the Canadian model… All the texts and treaties that the United Kingdom might refer to organize its exchanges with the European Union are being dissected. The ramifications of the event trees are countless. And of course, one reads here and there quantitative assessments of the consequences of this new reality on British or European growth, though the uncertainties are considerable: for example, for British growth, forecasts range between -0.25%… And -2.50% per year!”

On top of this, the opening words of warning offered by those issuing these figures were numerous. They conveyed a lack of conviction. We must henceforth navigate with our eyes fixed on the horizon, rely on concrete information – corporate earnings, for example, – keep in mind also that there are no foregone conclusions: Sweden or Norway have been doing just fine without being a member of the European Union. Ultimately, the only certainty is the short-term negative impact of this vote for the United Kingdom itself. Triggering Article 50, followed by a two-year period of negotiation will adversely impact the British economy in the short term. But in 10 years, who knows? History remains to be written.

The necessity of constantly rewriting European history and setting sights on an ideal that is never reached is perhaps unavoidable, as we keep in mind Milan Kundera’s definition : “European: one who is nostalgic for Europe“. Today, we all feel very European.

Didier Le Menestrel, with the complicity of Marc Craquelin

* « There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. » Donald Rumsfeld