Since the British have decided to exit the European Union, many questions have been arising in relation to the consequences on their economy and to possible future solutions concerning the relationship between the UK and the EU. One thing is for sure, the UK is really leaving the bloc. On Wednesday, 30th of March, UK’s PM Theresa May triggered Article 50 of the Treaty of Lisbon and thus officially started a two year process of withdrawal from the club, of which it has been a member for 44 years. In the next two years UK and EU officials will negotiate in order to settle all current liabilities and other mutual responsibilities.
INDUSTRY ON SHAKY GROUND
The European market buys 45% of Britain’s exports. Therefore, it is safe to presume that Brexit will have negative consequences on British industry which might be especially hard on car production and airline business. Since more than half of the vehicles produced in the UK finds its customers in the EU, leaving the single market will definitively make them less price competitive. If in line with WTO tariffs, exports of UK cars would become much more expensive than they are now, affecting considerably their market competitiveness, as it is estimated that the prices would rise by almost 2400 pounds. One way to fight this negative scenario would be by overhauling the supply chain through leaning mainly on local suppliers of car parts, thus avoiding at least some import costs. But another scenario seems more likely, particularly in view of the fact that the majority of capital in this sector comes from outside the UK. For foreign enterprises cost efficiency is definitely a priority over making business on UK territory, and from this perspective moving production to the EU might be much more reasonable for car-plants owners.
The situation of the airline business is a bit more complicated. Leaving the EU but not attaining a new agreement with the European Common Aviation Area, UK based airlines would be unable to offer intra-European flights. At present, moving or opening branches in the EU seems to be harder than in other sectors, because of the regulation prescribing that the majority of the airline’s capital must be owned by EU citizens. British investors would have to divest shares in such companies. But that is not the only problem that the British airline business is facing. The announced separation has already caused the drop in the value of the UK based EasyJet’s shares. For them, a EU based operating airline with capital owned by EU citizens appears to be the only option.
FINANCIAL GIANTS ON THE RUN
It’s no secret that London is the financial capital of the world. Now, investment banks and other financial institutions will have to find new ways to provide their services to the EU financial markets. As we write a number of financial institutions, such as Goldman Sachs and Lloyd’s, are already looking for options to open their offices in the EU, Brussels, Dublin, Malta and Luxembourg being the favorite destinations. Although it is hard to imagine for London to lose its primary position on these markets, and though the UK government is looking for special unilateral agreements with countries like the US, Australia, and Canada to secure London’s place as a financial fulcrum in the world of the future, the situation will most probably cause a leakage of power from the UK, with Frankfurt, Paris and Dublin hoping to get the most out of it.
AN EVER WEAKER POUND?
To get a broader overview we also might want to look at the GBP/USD exchange rate as a good indicator of the Brexit situation. Remember, on the 23th of June last year, the day the referendum was held, “the cable” still closed at 1.5006. On the next day, when the unforeseen result was unveiled to a public which included shell-shocked traders, it slumped to 1.3675, exhibiting a 31 year low with a 10% one-day drop in the value. Such a depreciation could be compared only with two other big events in the recent past: the collapse of Lehman Brothers in 2008 and the exit of GBP from European Exchange Rate Mechanism (ERM) in 1992. The pound hasn’t really recovered yet, and has been showing a slight downward tendency that since last October has been revolving around 1.24 dollar per pound, as if waiting for clearer market directions and looking for a firm ground to step on. With little information about the outcome of the negotiations with the EU, amongst other things, and not including market speculations like going into the “short squeeze”, it is most probable that it will stay in its 20s for a while.
NOT SO FRIENDLY BREAK-UP
At the moment, prospects are not rosy for either Britain or the EU. The bloc has its own internal problems, as it is desperately trying to overcome the EU of dual speed-lanes, to secure its currency a stable future and to form a core of Countries that will firmly dedicate themselves to the cause. From this perspective Brexit, as an example of withdrawal from the club, should hurt in one way or another. The EU officials seem to opt for the hard-line and have already stated that there will be no trade deal with the UK before the process of separation is considered finished, which also means reaching an agreement on the total of the liabilities, which according to Brussels amount to 60 billion euros, and setting up a financial plan for their consolidation. Of course the soft-line would enable the UK economy to exit more smoothly, with smaller negative impact and enough space to maneuver safely out of troubles. The truth is that there is little room for a win-win outcome in this particular set-up. Nevertheless, as history has already taught us many times, the future is always open for surprises.