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Brexit: The Countdown Has Begun

The window to agree on an exit deal between Britain and the EU is closing.

The United Kingdom is due to leave the European Union on March 29, 2019, but because of the necessary ratification procedures of an agreement, the plan was to reach a deal by the EU summit starting October 18. Although this deadline has been extended to mid-November, there is still worry that no deal would be reached as the negotiating partners still have complex issues to agree on.

There are significant differences between potential Brexit scenarios: A “soft” Brexit would have a far less extensive economic impact than a “hard” Brexit. In the beginning of negotiations, the main question was whether the UK remains a member of the EU’s single market or not. In this soft Brexit scenario, the economic side effects on both the UK and European Union would be minimized. By maintaining access to the single market, the UK would continue to be obliged by the “four freedoms” (free movement of goods, services, capital and persons within the EU), EU standards and the European Court of Justice. In exchange, Britain would be able to enjoy economic benefits of trade and close economic cooperation with the EU.

However, as a non-EU member, the political implications of the withdrawal would mean that the UK no longer has a say in the political machinery of the block, including formal representation with decision-making power in EU institutions. In practice, this means no voting rights or influence over EU laws the UK would still have to abide by. Therefore, such high political costs, together with the maintenance of the free flow of people, makes the soft option less attractive despite the potential economic benefits. Some optimists keep the option for a soft Brexit open, but is it still a realistic scenario given the past two years of negotiations?

The supporters of a hard Brexit consider such costs from a soft Brexit too high, and they demand a clean break, including the withdrawal from the single market and the customs union. Therefore, a hard Brexit has not only been on the table as a viable option since the beginning of the referendum, but it was confirmed by leaders, including Prime Minister Theresa May herself, that the UK intends to leave the single market. If Britain withdraws from the single market, the economic costs are expected to be high, but could be somewhat softened by a potential transition period. Such a period would give additional time for the negotiating partners to not only reach agreement on key issues, but to work out deals on trade between the UK and members of the EU. There is disagreement on whether the transition period would help or not, given the rather slow pace of negotiations in the past years.

The European Union is the UK’s largest and most important trading partner. In 2017, the EU accounted for 43% of UK exports, or £274 billion ($360 billion) out of £616 billion ($811 billion) total. Therefore, if no deal is reached on post-Brexit trade relations, the EU’s economic losses would account for 0.7 % of its overall GDP, while costs for the UK would be significantly higher; over a 10-year period, 5% of the UK’s GDP would be reduced. Therefore, without the single market membership and under WTO rules, the export-import costs will significantly increase with additional layers of red tape, affecting not only manufacturers and traders, but the economy as a whole. Thus, there is a shock to prepare for if such a scenario becomes reality.

 

The economic impacts do not only affect the trading of physical products, but also services — a sector on which the UK relies highly. As the single market’s largest provider of financial services, in 2014 alone the UK exported £20 billion worth of services to customers in the EU. Therefore, London, as the leading financial center of Europe, is at high risk. Without single market membership, financial services firms would lose their passporting rights. The passporting system enables such firms authorized in an EU or European Economic Area state to trade freely with each other. According to the Financial Conduct Authority, 5,500 UK companies rely on such rights, with a combined revenue of £9 billion. Thus, the loss would be significant.

What are financial services firms likely to do and how can they navigate such a high-risk situation? They can relocate or partially move branches, departments, services and even entire operations to the EU. The Financial Times estimates that about 4,600 banks would be relocated from London, while the accounting firm Ernst & Young estimates some 10,500 job relocations from the City of London on the first day of Brexit. Since the referendum, out of the 222 largest financial services firms with significant operations in the UK, 24% have confirmed at least one relocation destination, and 34% are considering or have already confirmed relocations to Europe, according to the EY Brexit Tracker. Firms including JP Morgan and Bank of America are among the major financial services providers that have already confirmed relocations of hundreds, and in many cases thousands, of jobs to an EU country. Relocation plans target for example, Dublin, Amsterdam, Paris, Berlin or Frankfurt.

While some are already preparing, others are still waiting to see what kind of deal will be reached. However, at this stage, the deadline is dangerously close. The fact is that the EU reacted negatively to British proposals at the recent EU meeting in Salzburg, labeling many as cherry-picking, while the UK has not provided a viable alternative acceptable to the EU yet. A no-deal scenario is becoming a real possibility with serious potential consequences.

*[GLOBSEC’s annual Tatra Summit, addressing social, economic and political challenges facing Europe, will take place on October 5-6, 2018.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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