Imagine ...

The morning of 24 June 2016 dawned bright and fair as British voters awoke to the news that they had voted by a margin of 52% to 48% to remain in the EU. It was a close run thing but was broadly in line with pre-referendum polling that had given the Remain camp a narrow lead. As the political establishment breathed a sigh of relief, Nigel Farage vowed to fight on to try and extricate the UK from the EU whilst influential Conservative figures such as Justice Secretary Michael Gove and charismatic backbench MP Boris Johnson – both of whom had campaigned for Leave – promised to abide by the result.

But the big story of that Friday was David Cameron’s surprise resignation as prime minister. He  justified his action on the basis that he had prevailed in holding the Union together after the September 2014 Scottish referendum, and had successfully managed to keep the UK in the EU whilst lancing the boil of Euroscepticism within the Conservative Party. As he said in his resignation speech, “I was absolutely clear about my belief that Britain is stronger, safer and better off inside the European Union … and as such I think the country requires fresh leadership to take it in this direction.” The pound soared on the news that the political slate was being wiped clean, giving cover for the BoE to begin the process of raising interest rates that had been postponed during the referendum campaign.

Meanwhile, the process of finding a new Conservative Party leader got underway. Chancellor George Osborne was the runaway favourite but he had made many enemies within his party in the preceding six years. Surprisingly, the parliamentary party began to coalesce around Ken Clarke, the 76-year old Europhile who had stood unsuccessfully for the leadership on three previous occasions and whose time in front line politics was assumed to be over. Clarke and Osborne were the last two candidates standing before Osborne pulled out of the contest, with the result that a ballot of party members became  unnecessary and Ken Clarke walked into Downing Street unopposed as the oldest first-time appointee to the job of prime minister.

Nine years older than opposition leader Jeremy Corbyn, Clarke’s tenure marked a switch towards a more mature style of politics. He reappointed Philip Hammond as Foreign Secretary whilst Home Secretary Theresa May swapped jobs with Chancellor George Osborne, and there were promotions for prominent Remain supporters such as Amber Rudd, Justine Greening and Jeremy Hunt. Admittedly, the Conservatives still had a sizeable minority of MPs who backed Leave but many of them had given up the fight after the referendum, promising to abide by the “will of the people.” But Clarke took the UK in an unexpected direction at the October 2016 Conservative  Party conference, promising a UK application to the Schengen Area and most radically of all, membership of the European single currency. As Clarke said in his conference speech, “we  are all citizens of somewhere and the referendum result has made it clear that the British people have voted categorically to align themselves with the values and institutions of the European Union.”

It was a controversial move, to say the least, and the government’s plan to apply for euro membership without parliamentary approval was only halted by the intervention of James Dyson, the businessman and prominent Leave campaigner, who sought a legal ruling as to whether parliamentary approval was required. In the event, the Supreme Court upheld his challenge prompting the Daily Mail to ask why these “Enemies of the People” should stand in the way of further European integration. But fearful of acting against the “will of the people” parliament voted through the government’s plan despite serious reservations amongst backbench MPs.

In March 2017, the government announced a formal bid for euro membership and appointed Education Minister Nicky Morgan as the lead negotiator, backed up by her new department DEnMU (Department for Entering Monetary Union).  Barely had negotiations begun than Prime Minister Clarke decided to call an election for June 2017 in order to extend his wafer thin majority of 12 seats. It turned out to be a bad call, with the Conservatives falling 9 short of a parliamentary majority and requiring the support of the 12 LibDem MPs in a rerun of the 2010-2015 coalition. It transpired that voters were not quite as enthused about further European integration after all, but the real vote loser turned out to be the ongoing austerity promised by Chancellor Theresa May. Had the Tories won the expected thumping majority, it was widely believed that Clarke would have sacked her but in the event he could not afford more disruptions to his team.

From then on, the going got really tough as the UK began to understand the restrictions which membership of the single currency would entail. More fiscal discipline would be needed in order to reduce the debt-to-GDP ratio, which was now heading towards 90% compared to an entry threshold of 60%. Having raised rates by a  total of 100 bps since summer 2016, the BoE was now under pressure to reduce them in order to converge with ECB levels and thus ensure a smooth transition to EMU membership by 2019 (the ECB’s main policy rate at this point stood at -0.4% versus 1.5% in the UK). There were widespread fears that this would give the economy an undesired boost which would push GDP growth above  3% – way in excess of the estimated trend of 2¼% – and in turn push wage growth above 4%.

Against this backdrop, domestic political opposition to the government’s plans mounted. The Great Integration Bill made its torturous passage through parliament, with backbench MPs trying – and failing – to thwart its progress. Negotiations with the EU also became more tricky as the UK began to ask for more concessions with regard to the EMU fiscal targets whilst calls for a permanent UK representative on the ECB Governing Council met with resistance. By March 2018, it was evident that EMU entry in 2019 was an unrealistic option and a transition period was agreed in principle that would postpone entry until end-2020. The government White Paper of summer 2018, which detailed the logistics of swapping the euro for the pound, was a brave effort but the timetable was far too tight to be realistic and the ECB objected to the five-year transition plan in which sterling and the euro would continue to operate as legal tender in the UK.

As of now, the process is deadlocked with parliament split on the issue of further EU integration. It is evident that the wounds caused by the EU referendum have not healed, whilst the government’s plan to join the single currency is increasingly regarded as unrealistic. As one prominent government minister remarked just ahead of the parliamentary recess, “Clarke’s plan will never fly and he only remains as PM due to a lack of alternative candidates. You know, I sometimes wish Remain had never won the referendum. The Leavers would never have produced an omnishambles of this magnitude.”