Cameron Heads to Last Supper in Brussels Amid Impasse in London

Mervyn King: Markets Reacting to U.K. Political Turmoil
  • Two-day EU summit to consider first steps after U.K. vote
  • British influence in bloc has waned even before talks start

U.K. Prime Minister David Cameron is set to face his fellow European Union leaders for the first time since triggering a political earthquake that’s shaken the bloc’s foundations. Back in London, the race to succeed him is heating up.

QuickTake Britain and the EU

Cameron will endure an awkward dinner with his EU cohorts Tuesday after his effort to calm the U.K.’s divided public and soothe investors failed to stop the pound and the country’s biggest banks from getting clobbered. The premier has already announced he will quit after last week’s vote, leaving him little leverage at the table. His government has signaled it prefers a gradual exit from the EU while the region’s three largest economies are keen to set a timetable to contain the economic damage.

“We don’t know how long he is going to be prime minister for, when a new government could begin to negotiate terms,” said Mark Leonard, director of the European Council on Foreign Relations. “The rest of the EU feel they bent over backwards to accommodate Cameron over the last months and he launched this reckless referendum and lost it so the other EU states are in no mood to do him any favors.”

The EU gathering unfurls against a backdrop of market turmoil, with shares in Barclays Plc and Royal Bank of Scotland Group Plc crashing to their lowest level since the financial crisis. Reeling from the referendum outcome, EU leaders are split on how hard to come down on the U.K. In the meantime, Britons have lost any influence they had in the 28-nation bloc while remaining bound by its rules and membership fees for at least two years.

More than $4 trillion have been erased from global equity values in the aftermath of the June 23 plebiscite as the pound extended its record selloff.

The rot continued in U.K assets on Monday with S&P Global Ratings cutting the nation’s top credit grade by two levels and midcap stocks recording their worst two-day drop since 1987. EasyJet Plc plummeted 23 percent after a warning that a drop in travel demand and weaker pound will hurt earnings in the summer. Estate agent Foxtons Group Plc fell 24 percent after complaining of prolonged uncertainty in London’s residential market and forecasting revenue would be lower this year than last.

Political Impasse

For now, the U.K. is stuck in a political impasse. Cameron’s Conservative Party said Monday a new leader should be in place by Sept. 2. Some in the EU are holding out hope that if the U.K. waits a long time to activate the exit trigger, the decision to leave might even be reversed, one European diplomat said.

A YouGov poll of Conservative voters for the Times gave Home Secretary Theresa May 31 percent support compared with 24 percent for former London Mayor Boris Johnson, a leading backer of the leave vote.

Chancellor of the Exchequer George Osborne, who was criticized by the pro-Brexit camp for scaremongering over the economy, will not be a candidate. The onetime favorite to succeed Cameron wrote in the Times that "I am not the person to provide the unity my party needs."

“The EU institutions and all other member states must for the moment remain the spectators of a dramatic development in which they have a huge amount at stake,” Nicolas Veron, senior fellow at the Peterson Institute in Washington and the Brussels-based Bruegel research institute, said in a blog posting.

Last Supper?

In Brussels, Cameron will be pressed to give some indication on how he expects the U.K. to trigger Article 50 of the Lisbon Treaty -- the mechanism for leaving the EU -- and what he thinks Britain’s relationship with the bloc will look like after the divorce, according to diplomats in Brussels. But the outgoing prime minister has said those details would be up to his successor to hash out.

“He’s likely to talk about a number of factors that he thinks were issues in the campaign, and in the debate,” said Helen Bower, Cameron’s spokeswoman. “He will reiterate that Article 50 is a matter for the next prime minister.”

Regardless, his handling of the so-called Brexit saga will be picked over between courses. While some leaders were impressed with Cameron’s EU stance over the past few months, and are wary of being trapped into hasty decisions, others are fed up and feel let down after he promised victory, diplomats with knowledge of the talks said Monday.

Empty Chair

On the second day of the summit, Cameron’s chair will be empty, a striking symbol for the U.K.’s loss of power virtually overnight. Its appointee to the European Commission, Jonathan Hill, resigned on Saturday and the country is about to be stripped of a six-month stint managing EU business due next year. At least one British member of the European Parliament has relinquished sponsorship of a key piece of legislation.

After digesting the shocking news, the EU has calibrated its response to a U.K. departure. The knee-jerk reaction of some had been that the U.K. should trigger Article 50 as early as this week. German Chancellor Angela Merkel is among those calling for a more thoughtful approach, with two EU diplomats saying the alliance could potentially wait until the end of the year.

Waiting Game

“We can’t afford an extended waiting game because that would be bad for the economy of both sides of the EU -- the 27 members and Britain,” Merkel said. “But I have a certain level of understanding if Britain takes some time to analyze things first.”

Merkel said the U.K. would need to give its official declaration to exit the bloc before formal negotiations on the terms of its future relationship can begin. In a joint statement with her French and Italian counterparts, she urged the EU summit to “set in motion a process based on a concrete timetable and precise commitments.”

Speaking from London, U.S. Secretary of State John Kerry called on EU leaders not to take revenge on Britain and to handle the transition with care.

“While there is some uncertainty in the air, leaders have the ability and responsibility to restore certainty, to make wise choices in the days ahead and that means choices that are, in every way possible, not aimed at retribution, not aimed at anger, but ways that bring people together,” he said.

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