Brexit – Promising the World

The United Kingdom is going its own way and leaving the European Union. On thefirst sight, this is not surprising for the world’s formerly largest empire and formerly strongest super power. However, the times since the British global empire have changed dramatically and besides a worldwide web of financial centers, the United Kingdom will be barely able to assert its influence on other countries and country blocks such as the EU-27.

The most alluring promise of Brexit, tapping into one of humanities most universal desires, was to regain agency over one’s own affairs or to put it differently to – take back control. This will be likely possible for a wealthy minority of Brits. Ironically, the people that have voted largely to remain in the European Union in the big, wealthy cities such as London will be best suited to indeed reclaim some levels of control. Depending on the negotiated deal during the upcoming transition period until December 2020, the UK will be able to exert its national interest in trade, migration and the regulation of its economy. The level of autonomy in these areas will have large tradeoffs. For example, lets say the UK decides, as its Prime Minister declared, that it wants to have a free trade style agreement with the EU and leave the Single market and customs union. The tradeoff for exporting businesses will be an increase in the cost of doing business, border checks, tariffs and so one with the EU27 that will price out most British exporters and give their market share to our European companies. We see this already happening as hundreds of companies move partly or entirely away from the UK to the EU in order to mitigate this potential loss in market share.

On the other hand, for industries such as financial services, Brexit will likely be a saving lifebelt against looming EU financial regulation and discloser requirements. Brussels’ increasingly aggressive attempts to curb tax evasion and money laundering with proposed measures such as country by country reporting or proposals for a financial transaction tax to curb high frequency trading, would not be of any danger to the new Singapore on Thames. Indeed if these and other measures become a future reality in the EU, the most likely scenario is that European financial companies whose very business model involves these activities, would move to the UK.

Equally, UK independent trade policy will be a double edged sword. Yes, doing one’s own trade agreements allows you to focus exclusively on national interest. What does the UK care about the geographic indicators of French cheese or Italian wine? But here lies the big fallacy of British leaders. For a nation to negotiate the most favorable trade deal for its companies and people the most important factor by far is the size of its market. To make it concrete, a negotiating partner that cares only about a narrow set of provisions and requirements but is 1/7 of the size of the EU will have an immensely difficult time to conclude a successful trade deal. If your market and economy is smaller than the next half dozen trading blocks, you will not be able to dictate rules and global standards; you will be taking rules from the big players. As Barack Obama pointed out before the Brexit vote, if the UK leaves the EU and wants to conclude a separate trade agreement with the US, they will be “at the back of the line”. The only way to not become irrelevant in international trade would be for the UK to remain in the single market and the customs union, but this would mean, essentially to follow the EUs rules and regulations without having a direct say in them and is thus quite unlikely.

Science and education, yet another competitive advantage of the UK will suffer immensely. The analysis by the Royal Society shows a 35% drop in scientists coming to the UK via EU schemes. Funding and EU cooperation will equally be hit hard once the current budged lines run dry. The UK boosts some of the best universities in the world, but without the best current and future scientists and the funding and cooperation in European projects, this status might change rather quickly. Moreover, the best universities in the world, if unaffordable for the most brilliant students, will not stay the best for long. Given that innovation and human capital are key drivers of economic growth, the consequences for the UKs economy will not be improved by Brexit in this regard.

Migration has been thought of as the most visible reason for Brexit. UKIP or its ugly brother, the Brexit Party, has never made a secret out of the main motivation of Brexit – Birtain for the Brits. Given that several million UK residents live and work in the EU and likewise several million EU citizens live and work in the UK, an agreement that would guarantee the status of both groups seems likely to be negotiated in the transition period. That would mean that migration patterns would also not change dramatically for the next years, putting in doubt this very potent speaking point for Brexit in the first place. Besides, migration from Common Wealth countries will continue regardless. In the long run we should, however, see a drop in Europeans moving to the UK.

The UKs relationship with the European Union since its joining has been that of an eccentric uncle who is part of the family, but who insists on special treatment whenever possible. UKs numerous exemptions and rebates are a testament to this. The EU can be rather happy that all these special rules that Britain could painstakingly negotiate for itself over the decades will become null and void. Our common European vision of “Ever closer Union” will now be possible without its strongest opponent being a constant blocking force. We Europeans will lose one of our most productive, innovative and globally connected Members, we will lose our beloved British colleagues in the European Parliament, but we will remain one of the largest trading blocks in the world with a common vision of the future that can stand up to current and emerging super powers. Whether the United Kingdom will remain united and able to resists the pressures of these super powers by itself will remain to be seen.