Deloitte Conference 24 June 2016

EU referendum:
Outcome and implications

Mark FitzPatrick, Ian Stewart, Rick Cudworth, Sally Jones, Christiane Cunningham |
24th June 2016
Who got the result right?
Remain
Leave
Opinion polls:
trend*
52%
48%
Opinion polls:
last**
55%
45%
SpreadEX***
55.5%
44.5%
48%
52%
Outcome
*Average of last 6 opinion polls taken between 16th and 22nd

June by What UK Thinks. Data presented in rounded, whole
number format
**Populus on line poll & before polling opened. Data presented
in rounded, whole number format
***Spread betting, mid-point of range, as at 1400 23rd June
2016 Deloitte Touche Tohmatsu.
1. Economics: negative growth shock

Short-term
Major negative for liquid UK assets, equities,
Business confidence, M&A, capex, FDI, hiring down. Focus on cash and cost
control
HMT: UK GDP flat in next 2 years. Consensus: GDP of 1.4% 16, 0.7% 17 vs
2.2% trend
Medium term
Hinges on speed/success of negotiations: long and fractious => prolonged
disruption
Long term
Function of post-exit trade and UKs ability to exploit freedoms outside EU
Uncertainty hits sterling, equities

Market reaction to leave vote at 9.30am 24th June
Overnight
change:
23rd/24th June
Intraday change:
last year
High
Low
FTSE 100
-4.9%
3.6%
-4.7%
DAX
-6.8%
5.0%
-4.7%
/$ exchange rate
-18c
4c
-2c
/ exchange rate
-7c
2c
-3c
Heightened uncertainty => lower appetite for risk

Deloitte CFO Survey: risk appetite and levels of uncertainty
Latest
reading,
Mar 16
Latest
reading,
Mar 16
Economists forecast knock to UK GDP in 16 and 17

UK real GDP profile (YoY%), actual and consensus forecasts
6
Remain GDP
Leave GDP
0
Feb-06
Jan-07
Dec-07
Nov-08
Oct-09
Sep-10
Aug-11
Jul-12
Jun-13
May-14
Apr-15
Mar-16
Feb-17
-2
-4
-6
-8
Consensus Economics forecasts, % chg yoy, actual, forecast
Remain
2015
2.3
2016
1.9
2017
2.1
2018-26 avg.
2.1
Leave
2015
2.3
2016
1.4
2017
0.7
2018-26 avg.
2.1
Poll question 1
In the medium term e.g. over the next three years, how do you think your
organisation will perform compared to the position if the UK had voted to Remain?
(Please select only one answer.)
Profits significantly higher (5+%)
Profits slightly higher (1-5%)

Negligible change
Profits slightly lower (1-5%)
Profits significantly lower (5+%)
Don't know / not applicable
UK ranks as highly competitive

Global competitiveness rankings
Heritage Foundation
World Bank
World Economic
Forum
#1
Hong Kong
Singapore
Switzerland
#2
Singapore
New Zealand
Singapore
#3
New Zealand
Denmark
United States
#4
Switzerland
South Korea
Germany
#5
Australia
Hong Kong
Netherlands
United
Kingdom
10
10
Sweden
26
Poland
39
25
41
Spain
43
33
33
France
75
27
22
Italy
86
45
43
138
60
81
Greece
Business Index and Heritage Foundation Index of Economic Freedom

*Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business,
stronger protections of property rights and lower corruption.
2. UK politics and policy

Huge political and administrative challenge
1. Whos in charge: PM, Cabinet, Parliament, Leave campaign?
Current favourites to succeed PM: Boris Johnson (4/5), Theresa May
(9/4), Michael Gove (9/2), Andrea Leadson (12/1), Priti Patel (16/1)
2. UK Government/authorities seek to counter negative shock/uncertainty:
Strong free market, open for business signals to markets
Tax cuts?
Suspend fiscal, inflation targets?
Liquidity to banking sector, quantitative easing?
More ECB QE?
3. UK appoints lead negotiator, departmental Task Force, Cabinet Committee
4. Tests capacity, absorbs energies of civil service which is smaller than in 75
year
5. Home nations: Scottish referendum? Northern Ireland repercussions?
3. Mechanics
Uncharted territory
1. No precedent or template for exit of a major EU member state
2. Article 50 starts two year negotiation period
3. PM Cameron has said Article 50 would be invoked immediately; Leave wants
initial discussions with EU first
4. Leave plan to legislate opt out of ECJ, EU migration, EU Communities Act 72
5. Parliament: c71% MPs Remain, c23% Leave, 6% undecided
6. Leave aims for deal by May 2020
7. Qualified majority (20/27 member states) needed on post-exit trade
agreement
8. During negotiations: existing regulations remain; UK has no vote on EU

matters
9. Two year period can be extended by unanimous agreement; if no
agreement/extended negotiation UK begins to trade with EU as a nonmember, probably under WTO rules
10.Fractious or harmonious divorce?

Fractious versus harmonious divorce
Key determinant of speed, success of negotiations

Harmonious
Fractious
Uncertainty and risk damage all
Deter other secessionists
Tariffs damage all:
Single UK aim? UK MPs favour

Remain
27 EU voices to be heard
Trade deals take time: Canada six

years, Mexico four years, Korea four
years
EU is UKs largest single

trading partner (44% of UK
exports);
UK is EUs largest single

trading partner (16% of all
EU exports)
EU has history of pragmatism:

no bailout rules, euro area
entry criteria
Britain lacks the skills to go solo on

trade deals: former trade
negotiator
EU has other concerns =>

needs Brexit resolution?
Extending two year negotiations

requires unanimity
EU has other concerns =>

Brexit not a priority?
Possible alternatives to EU membership

No single template for life outside the EU
EEA
EFTA
EU member
(Single
(Free Trade
Market only) Agreement)
Customs
Union
MFN
Duty-free
Swiss
Turkey
Australia
Monaco,
Singapore
28 European
member
nations
Norway,
Liechtenstein,
Iceland
Free movement of goods, services,

and capital
Yes
Yes
Yes
No
No
No
Free movement of people
Yes
Yes
Yes
No
No
No
Free to negotiate trade deals and

set tariff levels with non-EU
countries
No
Yes
Yes
No
Yes
In principle,
but slower
Very limited
No
No
No
No
Yes
Yes
Yes, but
some optouts
Some
No
No
Fiscal contributions
Yes
Yes
(83% of full
rate)
Yes
(52% of full
rate)
No
No
No
Common Agricultural Policy (CAP)
Yes
No
No
No
No
No
Influence
Yes
EU laws and
regulation
Compliance
4. Impact on the EU
A crisis for the EU too
Biggest political blow to EU in 65 years
On top of migration and euro crises
Headwind for nascent EU recovery

Those closest to UK - Ireland, Netherlands, Norway, Switzerland - most
exposed
Emboldens Eurosceptic parties in EU: pressure for referendums elsewhere
Electoral test: elections ahead in Spain, Netherlands, France, Germany by

autumn 2017
Loss of UK => more protectionist EU?
The future of the EU

Challenges
Response
1.
Brexit, further secessions
Step-up integration?
2.
Slow growth
Multi-speed Europe?
3.
Migration, borders
4.
Fixing the euro
Muddle through?
High point of UK integration, growth in 90s and 00s

EU GDP growth (%YoY): Actual and forecast
Schengen
Enlargement:
95
Poland,
Single
Single
currency Hungary etc.
market
04
99
92
Euro crisis
12
Forecasts
3
2
1
Rapid growth,
rapid integration
(avg. GDP 2.4%)
Slower growth,
slower integration
(avg. GDP 1.5%)
0
-1
-2
-3
-4
-5
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Euroscepticism not only a UK phenomenon
Populist parties on the rise

Support for populist parties of left and right
Austria
Freedom Party
49.70%
Italy
Five Star
28%
France
Front National
28%
Netherlands
Freedom Party
28%
Spain
Podemos
24%
Germany
Alternative for Deutschland (AfD)
15%
0%
10%
20%
30%
40%
50%
60%
Latest poll dates: Austria (May 16), Italy (May 16), France (Dec 15), Netherlands (Jan 16),
Spain (Jun 16), Germany (May 16)
Coming up: big test of European public

Significant European elections
26th Jun 2016: Spanish general election
Autumn 2016: Hungarian referendum on EU-wide migrant quotas

Oct 2016: Italian referendum on Renzis constitutional reforms
Mar 2017: Dutch general election
Apr/May 2017: French presidential election
Autumn 2017: German federal election
Brexit => less free trade, more market-sceptic?

Balance of power shifts in EU
Source: Open Europe

EU referendum: outcome and implications

Conclusions
1. Major shock to UK growthbut diminishes over time
2. UK has strengths: institutions, resilience and competitiveness
3. Epic political, administrative challenge for the UK and the EU
4. EU rules remain during 2+ year negotiations
5. Leave want end to free movement => distant relationship with EU

6. Brexit adds to EU crisis of institutions, growth, public support in Europe
More questions than answers
1. UK: who leads and how?

2. What does the UK want?
3. Fractious or harmonious divorce?
4. Dutch, French, German elections?
5. Multi speed Europe, Federal Europe?

Poll question 2
What is the most pressing action required of your organisation in the immediate
term e.g. over the next month? (Please select only one answer.)
Managing our currency exposure to Sterling volatility
Managing our cash flow and debt finance position
Reassuring our key stakeholders regarding our business's ability to cope with
short term economic shocks
Identifying our most critical issues so we can form a plan for lobbying
government
Don't know/ not applicable
Navigating through uncertainty and change

Three steps to survive and thrive
NAVIGATING UNCERTAINTY
Brexit Lab
Strategic Choices
Monitor and Act
Establish Task-force
and Management
Office
Define choices and

build a strategic
response plan
Monitor economic,
political and business
data sources
Identify impacts - risks

and opportunities
Define decision
points (triggers) so
that actions are
timely and
proportionate to the
situation as it unfolds
Take action if or when

triggers are met
Identify and take any

immediate actions
deemed necessary
Prepare clear and
consistent
communications

A Brexit Lab format will help you more quickly understand what you need to do
and when
Bring the right people
together from across the
organisation from the outset
Use well-designed but simple
scenarios to help cut through
the fog of uncertainty
Use wargaming techniques
to accelerate thinking, develop
more robust perspectives and
build consensus more quickly

The outcomes from the Brexit Lab will enable you to create a strategic response
plan. This plan will outline clear actions and their associated trigger events
Understand the choices and options now available to you

Consider what you want to influence and your key priorities in
policy or negotiations
Make informed decisions on where you want to play and how
Develop your strategic response plan
Effectively monitor data sources to minimise strategic drift
A timeline to maximise opportunities, minimise risks

Expected 2 year negotiation period
Future arrangements are realised
New relationships with countries outside of EU develop

2016
Govt. likely to invoke
Article 50
2018 / 2019
Negotiation deadline
(under Article 50)
Possible
ongoing
negotiations
(if agreed by all
EU Member States)
Brexit
Lab
3
2
Monitor and Act
Strategic
Choices
Within
3-6 months
Start
now
Take immediate
actions where
appropriate
Period of increasing certainty in relation to Brexit

Be prepared markets, consumers, competitors and
suppliers behaviours will change rapidly
Our strategic
response plan
So what might it mean for trade?
The UK hasnt negotiated a trade agreement for 40+ years

EU member
EEA
EFTA
(Single
(Free Trade
Market only) Agreement)
Customs
Union
MFN
Duty-free
Swiss
Turkey
Australia
Monaco,
Singapore
28 European
member
nations
Norway,
Liechtenstein,
Iceland
Free movement of goods, services,

and capital
Yes
Yes
Yes
No
No
No
Free movement of people
Yes
Yes
Yes
No
No
No
Free to negotiate trade deals and

set tariff levels with non-EU
countries
No
Yes
Yes
No
Yes
In principle,
but slower
Influence
Yes
Very limited
No
No
No
No
Compliance
Yes
Yes
Yes, but
some optouts
Some
No
No
Fiscal contributions
Yes
Yes
(83% of full
rate)
Yes
(52% of full
rate)
No
No
No
Common Agricultural Policy (CAP)
Yes
No
No
No
No
No
EU laws and
regulation
Indirect taxes will be more impacted than direct taxes

Expressly governed by EU Treaties
Customs Duty
Almost
entirely
governed by
EU law
Domestic law
will be needed
Trade with EU
becomes
import/export
VAT
Excise Duty
Not currently
fully
harmonised
Trade with
EU no longer
intra-EU
Capital duty
Fully
harmonised
Changes to
rates and
reliefs?
Invoicing and
reporting
The UK will
no longer be
bound by the
Capital Duty
Directive
Other indirect taxes largely or entirely unaffected

Direct taxes
Solely a national competence
Relevant EU Law
Direct taxes are not expressly dealt

with by EU Treaties
Treaty Freedoms - Would EEA membership would mean

previous UK infringement
compliance with the Treaty freedoms
changes be reversed?
Directives would no longer apply
Some reliefs could be withdrawn
What would change?
Domestic law remains on Multilaterial Convention on Mutual
Administrative Assistance in Tax
the statute books
Matters
Other tax consideration

Things to think about
Harmful tax
practices
State Aid
Dispute
resolution
Pensions
IT systems
changes
TAX
IMPLICATIONS
OF
COMMERICAL
ISSUES
Deferred tax
assets
Current
litigation and
claims
Company law
Accounting law
Further information
Visit www.deloitte.co.uk for further information
Continue the discussion

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Questions and answers
Contact information
Mark FitzPatrick
Ian Stewart
Telephone: +44 20 7303 5167

Email: mfitzpatrick@deloitte.co.uk
Telephone: +44 20 7007 9386

Email: istewart@deloitte.co.uk
Rick Cudworth
Sally Jones
Telephone: +44 20 7303 4760

Email: rcudworth@deloitte.co.uk
Telephone: +44 20 7007 9761

Email: saljones@deloitte.co.uk
Christiane Cunningham
Telephone: +32 2 800 7021

Email: chcunningham@deloitte.com
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EU referendum:

Outcome and implications

Who got the result right?

*Average of last 6 opinion polls taken between 16th and 22nd

2016 Deloitte Touche Tohmatsu.

1. Economics: negative growth shock

Function of post-exit trade and UKs ability to exploit freedoms outside EU

2016 Deloitte Touche Tohmatsu.

Uncertainty hits sterling, equities

2016 Deloitte Touche Tohmatsu.

Heightened uncertainty => lower appetite for risk

2016 Deloitte Touche Tohmatsu.

Economists forecast knock to UK GDP in 16 and 17

Consensus Economics forecasts, % chg yoy, actual, forecast

Profits slightly higher (1-5%)

Don't know / not applicable

2016 Deloitte Touche Tohmatsu.

UK ranks as highly competitive

Business Index and Heritage Foundation Index of Economic Freedom

2016 Deloitte Touche Tohmatsu.

2. UK politics and policy

2016 Deloitte Touche Tohmatsu.

8. During negotiations: existing regulations remain; UK has no vote on EU

10.Fractious or harmonious divorce?

Fractious versus harmonious divorce

Key determinant of speed, success of negotiations

Uncertainty and risk damage all

Deter other secessionists

Tariffs damage all:

Single UK aim? UK MPs favour

Trade deals take time: Canada six

EU is UKs largest single

UK is EUs largest single

EU has history of pragmatism:

Britain lacks the skills to go solo on

EU has other concerns =>

Extending two year negotiations

EU has other concerns =>

Possible alternatives to EU membership

Free movement of goods, services,

Free movement of people

Free to negotiate trade deals and

Common Agricultural Policy (CAP)

2016 Deloitte Touche Tohmatsu.

Headwind for nascent EU recovery

Electoral test: elections ahead in Spain, Netherlands, France, Germany by

2016 Deloitte Touche Tohmatsu.

The future of the EU

Brexit, further secessions

Fixing the euro

2016 Deloitte Touche Tohmatsu.

High point of UK integration, growth in 90s and 00s

Euroscepticism not only a UK phenomenon

2016 Deloitte Touche Tohmatsu.

Populist parties on the rise

Coming up: big test of European public

Autumn 2016: Hungarian referendum on EU-wide migrant quotas

Autumn 2017: German federal election

2016 Deloitte Touche Tohmatsu.

Brexit => less free trade, more market-sceptic?

Source: Open Europe

EU referendum: outcome and implications

5. Leave want end to free movement => distant relationship with EU

1. UK: who leads and how?