Keep an open mind on how UK handles the Brexit trilemma

UNCERTAINTIES about the UK's political, legal and economic relations with the European Union (EU) will be resolved only gradually in the coming months. We can investigate the post-referendum outlook in the form of a trilemma - a triangular relationship where a combination of only two elements is permissible. The triangle consists of three corners: promises made to the electorate; rules governing the EU and European Economic Area (EEA); and UK single market participation. One of these will have to be broken.

The June 23 "Brexit" mandate centred heavily on controlling immigration, followed by desires to repatriate sovereign decision-making, strike trade deals and cancel (or greatly lower) the cost of EU membership. Under EU/EEA rules, fulfilling all these promises would require a complete exit from the economic architecture of today's Europe. The UK would lose the core benefits of inclusion in the single market, important to sustain foreign investment across many sectors, as well as preserve its status as Europe's financial centre.

The latter two are particularly acute in the context of the UK's large current account deficit. Uncertainty will almost certainly slow or delay investments. This will remain a highly relevant factor, even though the current account deficit is likely to fall owing to a weaker sterling and lower imports. In the long term, the UK could construct alternative legal arrangements that uphold its economic allure, but this would take years of protracted political and technical negotiations; it is not a medium-term option.