Business Europe World

Brexit: How will it playout

Soft Brexit or Hard Brexit ? Hard to say, depends on the size of the divorce bill maybe, the document which states the outstanding liabilities United Kingdom owes towards European Union (EU). Britain is set to officially exit the EU on 29th March, 2019. The EU is a single market in which no tariffs are imposed on imports and exports between member states and all members trade freely on the condition of four main principles: free movement of goods, services, capital and people. According to a study by the think-tank Open Europe, the worst-case “Brexit” scenario will lead to UK economy losing 2.2% of its total GDP by 2030. However, it also adds that the GDP could rise by 1.6 per cent if the UK were able to negotiate a free trade deal with Europe, for example, being a part of the European Economic Area.

Leaving the EU would mean seeking membership of the European Free Trade Area (EFTA), as both the members of EU and EFTA are entitled to deal in the “single market” as a part of EEA. UK was a co-founder of EFTA in 1960, but terminated its membership upon joining the EU. EFTA currently includes the 28 EU member states plus Norway, Iceland, Liechtenstein and Switzerland. The EEA Agreement does not cover Common Agriculture and Fisheries Policies, Customs Union, Common Trade Policy, Common Foreign and Security Policy, direct and indirect taxation, and Police and Judicial Co-operation in Criminal Matters. Thus, extending EFTA members liberty to set their own policies in these areas but as a part of EEA are still to contribute to the EU Budget in exchange for access to the internal market. This will help them establish trade on their own terms but UK will have to come up with strong direct relationships with other countries and not the ones using UK only as a gateway to the EU business activity, for starters the US Banks. Paris and Frankfurt are the hot favorites for serving as the hub for financial services in Europe. Already many banks and financial firms have started forming EU bases outside UK to not get affected by the decision. For example, car manufacturers could scale down or even discontinue production in the UK if tax-free export of vehicles to Europe’s not established.

The decision was a close clash between the people in favor and not in favor of the referendum. Both the sides having fears which with time have turned into reality. Currently, 45% of the UK’s exports are to the EU, while 50% of imports are from the EU. The weakening pound sterling helped push exports up but also resulted in more expensive imports. Furthermore, if the UK doesn’t get a seat at the EEA table, they’ll be reduced to trade under the limits set by the World Trade Organization which will be at costlier tariffs and limits.

The UK perspective also backs their claims of sovereignty. The UK Government is of the notion that an open door policy among the EU countries exposes their country to risk of terrorism and not bound by EU laws, stricter checks and procedures will lead to a safer Britain. Only time shall tell if it works out that way. Though this autonomy also results them into losing the EU backing against global trade and/or political influence given the other emerging super powers in the world like Russia.

All these probable situations are yet to be seen coming true. While the negotiations are still in place, the autonomy from EU laws to more “UK-based” laws, has its pros and cons and only the coming year shall break the story.

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