LONDON A week after the UK’s vote to leave the European Union, things don’t seem quite as bad as they first looked.
Global stock markets have rebounded after they fell off a cliff after the shocking results emerged. Even the FTSE 100 has bounced back after two days of record losses, hitting its highest level since August. The pound stabilised after hitting a 31-year low against the dollar.
That might be a false sense of security.
Economists and business leaders are generally in broad agreement that the volatility suffered by stock markets will not go away anytime soon. Beyond those markets, the long road ofwithdrawingfrom the EU and then writing new tradedeals is likely to have serious repercussions on the British economy.
Britain now risks a very unvirtuous circle in which a slowing economy and growing trade and immigration barriers cause companies to leave, spurring even more economic pain.
“Brexit makes the UK a less attractive environment to invest in, particularly for companies that rely on the UK’s access to the single market,” said LSE economist Thomas Sampson. “Some companies are likely to relocate some of their activities to continental Europe, though probably not every company that threatens it is going to do it.”
As the country wakes up to a new post-Brexit scenario, several companies are thinking about moving their headquarters from the UK in a move that would radically demean the status of the City of London as Europe’s financial capital.
Airlines in particular have been vocal about the possible need to relocate from Britain due to their reliance on consistent regulation and free-flowing trade.
Recent reports indicate that EasyJet is already in talks with EU member states’ aviation regulators about relocating its legal headquarters from Britain.
Telecoms giant Vodafone also warned it could move from the country should Britain fail to retain access to EU’s free “movement of people, capital and goods.”
Other companies such as Foxtons and Ryanair also expressed alarm at the prospect of Britain leaving the European single market.
“EasyJet and RyanAir successes are due to consistency across European regulation on free trade”
Economists agree there’s a real danger of businesses moving out of the UK and that it could seriously impact the country’s economy.
A mass exodus is not likely on the short term, though on the longer term “companies will start to explore a new model,” according to Christos Tsinopoulos of Durham University Business School. “They’ll find it easier to lock themselves to a more efficient supply chain for buyers in continental Europe,” he said.
Why the single market is important
Depending on the sectors, Dublin, Frankfurt and Paris are the smaller European centres that could benefit from a mass company relocation from the UK.
Though companies are trying to delay decisions as long as possible, economists agree that it’s sensible for them to start making contingency plans.
But why are they in a rush to flee Britain if it exits the single market?
It’s partly due to the fact that the single market has standardised, consistent rules across the EU, making it easier for companies to thrive throughout.
“EasyJet and RyanAir success is due to consistency across European regulation on free trade,” saidTsinopoulos.
There’s widespread concern that if the UK leaves the single market, it would be harder for Britain-based businesses to trade with the rest of the EU.
Passporting yes, passporting no
At a corporate level, the key question revolves around whether City of London-based financial service groups will be able to continue to be able to “passport” their services and operate freely into the EU.
“I would be very surprised if it was possible for the UK to stay part of the single market without accepting labour mobility.”
Shockwaves were sent across the Square Mile afterFranois Villeroy de Galhau, a member of the governing council of the European Central Bank (ECB) firmly stated that the City could no longer expect to rely on a “EU passport” if the UK leaves the single market.
If tomorrow Britain is not part of the single market, the City cannot keep this European passport, Villeroy told France Inter radio.
A real conundrum
Is that a real possibility?Economists think so.
“Contenders to become prime minister have indicated that placing a limit on migration is a redline for them,”Sampson said, referring to the Tory leadership hopeful Michael Gove and Theresa May.
In his candidacy speech, Gove, a passionate Leave campaigner, has pledged to bring immigration down with an Australia-inspired point-based system. Theresa May, who is the longest serving Home Office secretary since the Victorian era, said the rights of EU migrants to remain in the UK “will be in play in the talks” with the European Union.
However, EU leaders have made it clear that if you want to be part of the single market, you have to accept free movement of people.
“Trade deals are beneficials but I have concerns that they’re not going to be enough to upset the cost of Brexit”
European Council President Donald Tusk said the UK could not pick and choose. French and German leaders also made it clear that freedom of movement was non-negotiable.
“If you impose restrictions, you have to leave the single market. It’s unlikely that if you leave the single market you could keep passporting rights. There are currently no countries in the EU that have no freedom of movement,” Sampson said.
“I would be very surprised if it was possible for the UK to stay part of the single market without accepting mobility. It’s a trade-off: if you want to restrict labour mobility the cost is losing some parts of the single market,” he added. “It’s unclear what the final deal might look like.”
One thing economists and European leaders agree upon is the need for Britain to strike a deal with the EU very soon. Markets don’t like uncertainty and volatility.
There’s a catch though: As mentioned, any deal will inevitably lead to a trade-off.
“I dont think that you can strike a better deal than the one we have at the moment,” saidTsinopoulos. “The best deal would be to go back to the basics of what we already have.”
“That’s a real conundrum for the next prime minister.”
Free to strike trade deals
Immigration was a sticking point for the Leave campaign that argued Britain was at “breaking point”and would be better off without the EU’s freedom of movement, which is one of the cornerstones of EU.
Withdrawing from the single market would allow Britain to strike a bilateral deal with China or the U.S. without the leash of EU regulation, according to those who voted to leave. But is that really the case?
“Certainly trade deals are beneficial, but I have concerns that’s not going to be enough to upset the cost of Brexit,” said Sampson.
“The UK has no capacity for negotiating trade. It’s all done at EU level. It takes time and money to build a department at the UK government that knows how to negotiate a deal,” he said.
Secondly, one of the main factors of trade is geography. “The EU is the closest region to the UK, so it makes sense for us to trade with them,” Sampson said. “Even if you increase trade with China and India, that would not be able to reach same levels with Europe.”
Finally, the single market is not only about reducing tariffs, it’s about harmonisation of regulation standards. That is a feature not found in other, shallower deals.
“If I produce a good in the UK, I’m free to sell it everywhere in the Union without needing to prove that I meet the required standards. That doesn’t happen if I try to sell it in the U.S., for example.
“Dealing with China does not mean that British banks are going to move there,” Sampson said.
Food for thought for the next prime minister who and this we can predict for sure will not have an easy task to tackle.
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