WEEKLY COMMENT 13-10-2016
By Barry Edwards
€20bn Brexit Bill
The big Brexit discussion this week has been about the cost of leaving the EU which is estimated to be around €20bn but could be much higher if all commitments and guarantees are taken into account. As usual, this is another aspect of leaving the EU that was never mentioned prior to the referendum and it will clearly have an enormous impact on the agreement that will decide the terms of the UK’s departure from the EU. In fact, it appears that instead of saving the current net cost of the contributions made into the EU budget it will probably exceed that amount for several years after the actual separation.
We have to accept that the facts promoted in the debate prior to the vote were incorrect and the reality of this event is far more complicated and uncertain than originally thought. At the moment nobody is suggesting that the result can be changed and we must accept the decision of the electorate; however, would the electorate have voted the way they did if all the real facts now being revealed were made known? In my opinion the result would have been slightly in favour of remain as was originally expected. It is too late now but the failure of the politicians to explain the reality will surely be recorded in the history books as a big blunder.
As we have discussed previously in this weekly comment, Brexit has become a world event and its effect will change how the EU evolves assuming it actually survives. Whatever happens, the balance of power around the world is likely to be swayed one or the other depending on the outcome. Be that as it may, the detail of Britain’s exit will have to be carefully analysed and executed to make sure all parties do not suffer from economic consequences that could have long-term negative effects.
Since the future of the EU is also in question both parties have the responsibility to manage the separation to minimise any financial burden on their citizens. From the rhetoric of the politicians this is not obviously the prime objective since there is much talk about how damaging the financial cost could be for the UK. We are beginning to hear from large European companies about the damage tariffs could have on their businesses. The northern half of the EU worries about supplying manufactured products and the southerners have grave concerns about food products which will be more difficult to negotiate as the regulations on both sides will suppress trading across new borders.
It has become clear that the free movement of people is not politically acceptable which automatically means the UK cannot be a member of the single market but it could be part of the customs union like Turkey is currently. However, most politicians are ruling this out as it does impose restrictions on trade deals with other countries and causes problems with the World Trade Organisation (WTO). Therefore the agreement has to be some kind of free trade agreement (FTA) and the current FTA’s with Norway, Switzerland (which include free movement of people at the moment) and the proposed Canadian deal will not work since they do not include services which are a vital part of the UK economy.
This means that there is no format to work from making it much harder for the negotiators to use examples elsewhere forcing them into new ground to formulate a suitable agreement. This brings us back to the Brexit bill which will be of constant concern for the UK team. Knowing you have to get the best deal possible with the financial commitments hampers the negotiation for the best terms for financial services, the main economic concern for the UK.
The annual revenue generated by financial services by the UK from activities in the EU is €21.4bn. This is a substantial sum and it would grow if we were not leaving especially since the new legislation in The Capital Markets Union (CMU) will improve fund raising for companies throughout the EU for which the UK is the centre of activity.
It is not surprising the city is eager to be part of this but there is little talk of how this can be achieved since it gives away the negotiating stance. This is the heart of the problem and the government is trying to reveal as little as possible about what the UK requires from the EU until the negotiations start. Therefore, it appears we are not going to know an awful lot about the true demands that the UK will make for a few years yet.
The discussion on this matter will undoubtedly be conducted by the think tanks and commentators on economics and this weekly comment will also have ideas about what the terms should be. Unless the public read these articles, which may be published in the media in some form, they will get very frustrated with the politicians as they pontificate on the subject without saying very much. That is something we are going to have to get used to until the talks get underway in earnest.
That’s all for this week, more observations next week.