Marcus Lippold
Marcus Lippold

To be clear, I have seldom felt so bad about having been right. For all of those who saw Brexit as a real threat and not just a distant possibility it has still been a surreal experience to watch the events unfolding in the UK over  the weeks before and after the UK’s vote to leave the EU. The Labour party is imploding while the Conservatives are desperately scrambling to save the remaining pieces of a Tory government. In Scotland, the SNP is considering first steps to break away from Britain.

Not only did Prime Minister David Cameron announce his resignation the day after the vote, but the entire Leave campaign leadership stepped down as well after it became abundantly clear that they did not have the inkling of a plan or strategy as to what to do next. The lies and selective truths have been exposed for what they are, but this is of little consolation after the fact. The individuals who created this mess have conveniently headed for the bunker, leaving it to others to now sort it out, culminating in complete political meltdown.

What didn’t help during the campaign is that the only really pro-Europe party, the Lib Dems, had been catapulted into oblivion at the last election. They would have been the only party to make a passionate and consistent case for the EU and entice more of the younger generation to come out and cast their vote for Remain.

Squandering the country’s success and security

The legacy of the vicious and xenophobic campaign by the Leave camp, and the often impassive, lukewarm endorsement of the EU by the Remain camp, has left deep fault lines. It did not only pitch Scotland, London and Northern Ireland against Middle England, the old against the young, first-round immigrants against newly arrived immigrants, but also created rifts within families. It has also left a foreign/ expat community that settled in Britain as their country of personal choice wondering if this is still the country where they want to live in the long term.  Effectively, London was the only region in England that voted to remain, with all of England voting to leave by a 7% margin (without Scotland and Wales).

The campaign’s profoundly negative legacy will take a long time to heal, especially as it has created expectations amongst the Leave voters that immigration will be dealt with swiftly. However, almost from Day One after the vote, the Leave campaigners have massively back-tracked on their main promises (both of curbing immigration and of using Britain’s EU budget contribution to fund the NHS).

For the EU and Britain the outcome is a true lose/ lose scenario. For its international partners, Britain has potentially become a less trusted partner, looking at how the political leadership has squandered the country’s economic success and security by being willing to take such a huge gamble without any apparent strategy or back-up plan.

Where does this leave the UK?

With the UK now trying to go it alone, the next step to be taken in order to leave the EU is invoking Article 50 of the Lisbon Treaty.  The Article 50 procedure aims to newly define the leaving country’s relationship with the remaining EU block of countries (like participation/ access to the EU internal market).  The leaving country needs to officially notify the European Council (heads of EU governments) of this intention. Once duly notified, this process is then allowed to take up to two years. Any items not successfully negotiated with the block of 27 countries would then have to be negotiated with every single country separately. E.g. Greenland’s (by comparison an economic light weight) exit procedure took three years (EU members were ok to negotiate for three years, thus surpassing the two-year deadline).

Theoretically, the leaving country could stop the procedure midway and stay part of the EU. However, this is highly unlikely in this case because the British government is under huge pressure from voters to execute on the referendum results. On the EU side, currently all EU government officials want the UK to start exit procedures as soon as possible to reduce the period of uncertainty.

The UK government has been busy searching for a new leader, with the Home Secretary, Theresa May, now identified to replace David Cameron this week. The new Cabinet has just been announced, however it seems that any official notification for triggering Art. 50 will likely not happen before early 2017.

So what happens in this interim period, i.e. in the period before and then the two years after Art. 50 has officially been invoked?

It is quite revealing to look at developments on the markets right after the referendum vote. The share price of real estate agent Foxton’s dropped by 20 percent. HSBC as a non-EU bank that uses the EU ‘pass porting rights’ to provide services to the continent, dropped by 17 percent. Banks in Singapore stopped approving loans for London real estate purchases, and several real estate funds prevented their clients from pulling out of their investments.

Warning signals

The banking sector and London real estate, together with the significant UK current account deficit of 7% of UK GDP that foreigners have been funding over the past couple of years, present a major downside to the UK economy in these days of Brexit. Central London still has numerous building projects for luxury flats which are only partially complete, and I wonder if there is still sufficient demand (at least at the advertised prices).

How those sectors will perform in an extended period of uncertainty is not clear, likely not very well though. Hedge fund managers seem to be the only economic actors that are positive nowadays, able to speculate on the daily market volatility, but then again they will not be the ones to provide the required long-term foreign investment. Much more interesting to watch will be what Nissan will do with its Sunderland production plant, located in a region where residents and workers have overwhelmingly voted to leave the EU.

On top of all this, Sterling has tumbled roughly 20% since mid- last year vs. other major currencies. If  the financial crises of 2008/2009 is any guide for the future however, a weaker pound will likely not benefit the UK economy much (even though exporters might profit a bit). More likely is a downturn due to weaker consumer demand as energy, imported goods and services etc. will become more expensive. Household consumption over the last few years has been the main driver of GDP growth in the UK.

Lots of competition from other European cities

In these days of Brexit it is also interesting to look at the UK’s resilience, or rather a certain myth about the UK’s/ London’s inherent global competitiveness. Anyone who has bothered to analyse the country’s business sectors, be they manufacturing, retail banking, retail shopping, health care etc. comes away quite unimpressed. There is almost no sector that is inherently more competitive compared to what you get in other European countries on the continent.

What the UK’s advantages boil down to are mostly two main factors: the ability of people in the UK to speak English, and a certain trading/ deal making approach that the UK has had for centuries. These two elements have allowed the UK to attract large numbers of talented/ well-educated/ highly motivated foreigners to settle and work in this country. For the most part, they make a great contribution to the country’s economy and cultural diversity.

However, since London started its amazing development in the early 1980s, these two traits have become easier to replicate. Over the last 30 years, other countries in Europe and beyond, and certainly several cities, have become much more international and much better at allowing business to be conducted in English. They have also become much better at trading.

Cities like Barcelona, Budapest, Warsaw, Amsterdam, Berlin, Prague, Milan, Luxemburg etc. have made huge strides in that respect. Budapest, Prague and Warsaw are hosting big international Shared Service Centers where staff speak English, Berlin is attracting internet start-ups now etc.…and these cities are not at all bad to live in and significantly cheaper than London.

Look at the English national football team

So should London or Manchester loose some of that foreign talent during the extended time of uncertainty or beyond it, it will be difficult to bring it back afterwards, and in several cases may prove impossible. After all, banking, insurance and trading activities are ultimately a virtual business with virtual products and not that difficult to move abroad. It would certainly be easier than relocating a manufacturing business.

On the manufacturing/ building side on the other hand, over the years, in many areas local companies have been focussing more on rent-seeking than innovation: Looking at the building/ housing sector e.g. local companies often collect a ‘deal/ contract fee’ up front, whereas the real work is then being contracted out and being done by Polish, Romanian, Bulgarian, Portuguese workers/ experts etc.

It is slowly dawning on some people that the country might not be unlike the champions league in football with its hugely competitive international teams, ….but strip out all the foreigners and you are left with the English national team, an altogether different affair. So the question of immigration and how to best handle it will remain crucial for the country’s competitiveness.

Will Westminster replace the EU’s regional aid?

It is also becoming more apparent that even though the government does not (yet) have a plan regarding its future relations with the EU, there is certainly a focus on London, which is so central to the UK economy. The new mayor of London is already asking for extended powers, and Westminster at least seems willing to contemplate this.

The UK or at least London will do whatever it takes to keep its business and to avoid economic decline. If that means lowering corporation tax from 20% to 15 % as outlined by the (now previous) Chancellor or transform London into a tax haven, so be it.

What will happen with the rest of the country is not so clear. Likely the more depressed areas where many of the Leave support came from will be even harder hit in the future as EU regional aid money into these regions will start to dry up and will not necessarily be replaced by the same support from Westminster.

It will be interesting to see how Westminster plans to negotiate Article 50, because it might be more in its interest to negotiate with a splintered EU bloc of 27 in order to get certain maximum concessions.

Politically the UK probably needs to fight harder to be heard globally from outside the EU. Ironically, it will have to become more involved at the Brussels level than before, just to find out what is going on without being at the table and part of the decision process anymore.

Even with a new leadership team in place it will likely take quite a while for the UK government to decide which approach/ direction to adopt outside of the EU. Even now there are still significant efforts being spent by MP’s and political movements to reverse/ not accept the referendum results. However with 72% voter participation the referendum is democratically highly legitimized (though not legally binding) and it would be difficult to imagine that this could be ignored.

Where does this leave the EU 27?

As Britain ponders what to do next, the EU27 bloc should figure out its own vision and strategy of where it wants to be for instance in 2030. It also needs to look at whether the basis for cooperation needs to be changed and if yes, how. Only a newly aligned and mutually supportive EU27 will be able to conduct an exit procedure that is beneficial for the bloc itself as well as for Britain.

Unfortunately, there is no room to give Britain any special deal beyond what is already established with countries like Norway and Switzerland or other third countries. The same likely applies to the USA, too. Washington will want to avoid any further destabilisation of the EU27 bloc as any special deal granted to the UK could thus encourage others to pursue their own deals as well. Already the infighting of the EU Institutions between Council and EU Commission as to who should lead the Brexit negotiations is a bad sign. The EU Parliament for now supports the EU Commission to take the lead.

Once Article 50 gets invoked, the negotiations may still take a nasty turn, as the UK might try to split the EU27 block in order to get its own best deal. Such a strategy would likely backfire as there is now a perceived need for the UK to show it is still a serious partner on the world stage. Also, any strategy from the UK side to use the unclear legal status of foreigners in the UK as a bargaining chip to get concessions from the EU27 would likely not work. The UK has by far the most to lose, so the EU27 is not likely to succumb to any pressure here.

Last reflections

For the EU project to work, national governments need to be more honest regarding their limitations and their failures. And the EU institutions and especially the EU Commission need to speak out more and promote common projects and defend itself where necessary, rather than leaving cheap shots from national governments unanswered. Unfortunately, few EU Commissioners speak out in the general EU interest.

That Wales e.g. over the decades has become an industrial wasteland with too few well-paying jobs has more to do with Westminster’s lack of vision than the EU’s failings. When Brussels was recently blamed for EU state aid rules that were preventing the UK government from subsidising the Tata steel plant in Wales and thus the jobs under pressure from cheap Chinese steel imports, a high ranking EU official set the record straight by pointing out that it was the UK that blocked higher import tariffs on certain Chinese products (e.g. for steel) at EU level.

State aid rules, he added, had been drawn up together with the UK to improve the EU internal market and make it a more level playing field.  This quickly stopped the Brussels-bashing discussion in the UK. But interventions like this one need to happen more often.

The limits to immigration

On immigration, Westminster should have owned up to its own responsibility. 50% of immigration comes from non-EU countries which puts it under the control of the UK government. Also, when Poland and the other Central and Eastern European countries joined the EU in 2005, it was especially the UK government that did not want a grace period to limit the free movement of labour. Most other countries only allowed Central and Eastern Europeans to freely come in and work after several years.

The fact is that many governments and regions in Europe are struggling with the globalisation of markets and the automation of traditional jobs. There are no easy answers. On the economic side, the EU is trying to improve the situation by creating more competition, bigger and better regulated markets and coming up with common best practises. On the security front, it is trying to improve cooperation and intelligence sharing. None of this is perfect, but it is certainly better than every country trying to re-invent the wheel for itself.

Maybe the most interesting finding from the Brexit discussion for Europe has been that even in the most liberal and welcoming society, there are limitations as to how many immigrants society is willing to absorb. This holds true even if immigrants are highly professional, motivated, well- educated and actively contributing to society and the economy.

As a conclusion, immigration can likely not be the only answer to compensate for Europe’s rapidly declining population. The solution will need to lie somewhere between the automation and robotics drive of Japan and simply opening the borders. Europe needs to come up with its own, tailor-made immigration system that will be best suited to its needs and limitations. These challenges had best be addressed today already and not pushed back into the distant future in order to maintain Europe’s competitiveness and edge.

Marcus Lippold works with Saudi Petroleum Overseas Ltd in London. He is a personal member of United Europe.