The political and financial market aftershocks of the Brexit vote will eventually subside.

Regrets and recriminations will abate and the long, joyless process of negotiating a reset of the relationship between Britain and the European Union will get under way.

The two sides have no precedent to guide them and the EU will be keen to ensure the outcome does not deliver a precedent other member states might be tempted to follow. Euroscepticism, after all, is hardly confined to Britain.

It is clear that there will be some degree of impairment to British access to the European single market and there will be some curtailing of freedom of movement of people. The extent of those two changes is likely to be positively correlated.


It is astonishing that the UK, which already runs a substantial current account deficit, should run risks not only with the half of its trade that occurs with the rest of EU but also its trade with another 60 countries which are governed by agreements the EU has negotiated.

What should mitigate rhinofacial spitefulness on the European side, however, is the fact that trade and investment flow both ways.

The United Kingdom is the second largest economy in Europe and, depending on how you measure it, either the fifth or sixth largest in the world.

The trade balance runs in the EU's favour (Germany's most of all) and substantially so, to the tune of around 3 per cent of UK gross domestic product.

It is absurd to be reduce the motives of 17 million people in voting Leave to a single factor.

The relative importance of (a) xenophobic angst about migration, (b) rejection of a liberal international economic order which leaves more and more people behind, or (c) distaste at democratic deficit and regulatory over-reach in the European Union superstructure cannot be untangled at this stage, especially not from the other side of the planet.

But it is clear that migration was an issue.

The net immigration gain to the United Kingdom last year was about 330,000 people, with a slight majority coming from outside the EU.

Watch - The Economy Hub - How does NZ's immigration compare with the UK?

New Zealand’s per capita immigration rate is running nearly three times as high as in Brexit Britain. Is our economy becoming dependent on new arrivals? And is it time to take a look at policies?

As an aside, if it had been at the same rate per capita as New Zealand experienced, the annual net gain would have been about three times larger at nearly 1 million.

Although EU (non-British) nationals comprise 6.7 per cent of the UK's working population, they accounted for more than half of the employment growth last year, according to the UK Office for National Statistics. That is probably not a trend you would want to become embedded.

Market access and freedom of movement are not the only issues the negotiations will have to address.

Brexit will have serious implications for financial services from the City of London to what it has hitherto been able to consider its European hinterland.

It also raises questions about competition law, intellectual property, climate policy, the digital economy. The list goes on.

But the British have made their bed and must lie in it. How narrow and uncomfortable a cot it turns out to be will depend on the European side.

When looking around for an alternative model, they could do worse than consider Closer Economic Relations (CER) between New Zealand and Australia.

The suite of agreements comprising CER enable a high level of economic integration between the two sides of the Tasman and have processes designed to deepen that further into a single economic market.

Few barriers remain to the free movement of goods, services and capital between the two countries.

There is mobility of labour between the two sides of the Tasman. New Zealanders are free to live and work in Australia. About two-thirds of a million have crossed the ditch.

But there is no Anzac equivalent of EU citizenship. There is no right not to be discriminated against on grounds of nationality when it comes to accessing welfare benefits, disability insurance and student loans. Resented as this may be, it is the price we pay for the mutual benefits of CER.

CER demonstrates, in other words, that it is possible to have the benefits of economic integration while politically managing nativist prejudices, in Australia's case about "Kiwi bludgers".

Once the British Government triggers Article 50 of the Lisbon Treaty there will be two years to negotiate the terms of Brexit.

Uncertainty about the outcome will inevitably have a chilling effect on investment and hiring. It is likely to tip the UK into a recession next year that it did not need to have. It is highly debatable that the loss of income will ever be clawed back.

Those who responded to slogans about regaining control of borders probably did not envisage the possibility of having to clear customs and immigration when travelling between England and Scotland, or think through the implications for Ireland.

Meanwhile France, Germany and Italy, to name but three, all have political parties every bit a nasty as UKIP, the anti-European UK Independent Party.

A key uncertainty is just how nervous Europe's leaders are that Brexit could start a trend.

If they are wise, and if they as confident as they profess to be about durability and historical inevitability of the European Project, they will take comfort from the fact that pro-European sentiment is much stronger among younger Britons than older ones. They will take the long view and seek to minimise the damage.

Brexit leaves the EU at a crossroads.

It might take it as an opportunity to double down, to press ahead with ever closer union, at least to the extent needed to stabilise monetary union.

Alternatively it might see the Brexit vote as a warning that the process has already gone too far and it needs to rein in Brussels and retreat to a less ambitious pre-Maastricht, common market model.

The best outcome might be a combination of the two.