Brexit scenarios: 2 ways forward

Deze week een gastblog van een Lendahand investeerder uit het Verenigd Koninkrijk: John Chown, een gelouterde monetair econoom. What next? We will initiate discussions both with Brussels and with our fellow members and will probably not press the button on Article 50 until the end of the year. Under the terms of that Article we will continue to be full members, with all its benefits obligations and duties until a new agreement is ratified or at the end of two years.

Geschreven door John Chown op 2016-08-08Terug naar overzicht

A majority of the British people having voted for Brexit, Theresa May’s new Government has said clearly that it will follow the will of the people and go ahead with the project, even though there is a majority in Parliament for “remain”. The new Cabinet includes a good share of “leavers”: David Davis has been appointed to take charge of the exercise with Boris Johnson as Foreign Secretary. This could all go well but, politics being politics, much could go wrong not only here, but also in the Eurozone, which in its present inflexible form is under strain. We would then need to have a “Plan B”.

What next? We will initiate discussions both with Brussels and with our fellow members and will probably not press the button on Article 50 until the end of the year. Under the terms of that Article we will continue to be full members, with all its benefits obligations and duties until a new agreement is ratified or at the end of two years.

The present EU stance is that such an agreement will not give us full access to the EU market without conceding freedom of movement, the latter being a major issue here. Another one for us is of course financial services. It is probably unrealistic to expect to have access to the long but unfulfilled promise for a free market in services while retaining independence for the City.

There are two ways forward. We may `leave’ fully, becoming a genuinely free market in finance like New York or Singapore but without passporting rights into the EU. Alternatively, post various elections, the EU may move towards a much closer union round the Eurozone, with the UK and several other present members remaining in a loose association: “Eurolite”.

Whatever happens, people and businesses will need to make informed decisions about where they will be living, investing or carry on business beyond that time-frame. Theresa May has not, yet, made it clear that present EU citizens living and working in the UK would not automatically be expelled but she is under pressure so to do, not least by UKIP (Independence Party) people!

How much will this damage the economy? So far currency and securities markets have reacted much more favourably than one might have expected, but a reliable early indicator has given a strong indication of the worst downturn in activity since the start of the financial crisis. If the pound remains cheap, this will be good for competitiveness and would make UK assets for foreign investment which would help in facing the EU external tariff. However, the price of imports and internationally traded goods will rise, squeezing real wages, a complex issue.

A big problem is trade policy. Unless we have a loose trade association, we would have to negotiate hundreds of new trade agreements. At worst, though, we would have to access the EU via the 4% external tariff which can probably be dealt with by a weaker exchange rate. We would generally have a free trade attitude to our relationships with other countries.

What will be the impact on UK investment climate? We will be taking positive measures to deal with this although it may well not be sufficient to overcome the uncertainty associated with the prospective loss of easy access to the market.

There shouldn’t be any real problem for European companies with subsidiaries in the UK. We surely will have a positive attitude towards the including allowing them to raise capital here. They may have some problems recruiting EU nationals, which alas is a serious issue for the hard-core “leavers”. I hope, though, that we will revert to liberal immigration policies. It will be more difficult for non-EU parents who invested here as gateway into the EU, and there could be problems with EIS (Enterprise Investment Scheme).

A clear priority of the government is to make the UK a favourable business location for foreign and domestic business investment. (We won’t stop Dutch companies investing here.) We also hope to build on the role of the City of London as a major financial centre. Our present tax code has many attractive “headline” features but suffering from “the law of unintended consequences”. My friends and I hope that the new Treasury team will prove receptive to our detailed suggestions for reform both of our tax system and of our over-complicated regulatory and tax systems -which is not entirely the fault of “Brussels”.

John Chown is a monetary economist who made his career and reputation in international tax, and his public policy and professional activities cover both subjects. More information: http://www.johnchown.co.uk/