The first full round of Brexit negotiations started on Monday July the 17th in Brussels. It brought together EU’s chief negotiator, Michel Barnier and the British Secretary of State for Exiting the EU David Davis. While Barnier has a very trenchant mandate from the EU leaders, Davis is the representative of a government which seems it is close to implosion. Ministers are reportedly at odds about Britain’s stance on Brexit and the PM’s position is seriously weaker after snap elections, after her party lost the majority in Parliament. While the political scene remains chaotic, businesses are still in doubt about what’s next. As time passes, the pressure increases. For those who want to secure their access to the single market by relocating to the remaining EU countries, timing is key. Moving their headquarters would need consistent paperwork and approvals which could take months to obtain. For now, they are just drafting plans, discussing scenarios, and maybe looking for office space. But next summer, at the latest, they will have to start with the legal procedures if they’re serious about moving. That is when we will be able to better quantify the impact that Brexit has had on the UK.
The EU member states follow closely these developments and hope to seize the opportunities that arise. There are no policy shifts that they’re making – but there’s economic diplomacy going on.
-> The financial and automotive sectors have both been core problems to the British government ever since the last year’s referendum, in which 48% of Britons voted to leave the EU. Both sectors have thrived in the UK due to the open access to the entire European market. If Britain leaves the EU single market without any favorable deal for these sector’s big players, they will have to move their base to mainland Europe, in order to avoid supplementary costs that may result from the negotiations between the UK and the EU. Of course, relocation is a very complicated and costly business on its own, therefore, both financial actors and automakers are lobbying consistently in London and Brussels in order to obtain the best possible deal. But, they are also preparing for the worst case scenario.
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Banks. Another few important financial institutions have announced their intention to relocate a part of their business. Goldman Sachs is set to double the staff in it Frankfurt hub. Sumitomo Mitsui and Morgan Stanley are also checking on the German city. JP Morgan is reported to be looking for office spaces in Dublin and Amsterdam. Ireland already brags with the fact that dozens of banks and companies from London are coming to Dublin already. Many countries offer “sweeteners” to banks and other companies. The latest example is France, which hopes Paris would take a big share of London’s financial businesses. Prime Minister Edouard Philippe announced a plan to make France more appealing which includes cutting income tax for high earning bankers and widening a current very low tax on financial transactions (3%). Moreover, the French government plans to open three more international schools by 2022, where bankers’ children could study in different languages. France’s Finance Minister, Bruno Le Maire has promised to create a special court to handle cases related to contracts governed by the English law, where proceeding will be in English and experienced professionals will be hired regardless where they come from.
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Investment firms. Thousands of jobs and billion euro businesses could be relocated in the EU. The European Security and Markets Authority has published new guidelines for mutual funds based in the EU which states that it won’t tolerate “letterbox entities”, which have only formal EU bases but are run from abroad. Therefore, investment firms will have to move thousands of jobs in the EU. As the United Kingdom is set to leave the union, investment firms based there will also be required to relocate, if they want to activate within the EU borders. About 1,1 trillion euros of EU mutual funds assets are now located in Britain, PriceWaterhouseCooper estimates.
-> The uncertainty surrounding Brexit is pure paradise for lawyers, consultants and accountants. All Britain’s legislation is changing. Prime Minister Theresa May has already introduced to Parliament the Repeal Bill which will repeal the 1972 European Communities Act through which the UK joined the European Union and incorporated the EU legislation into its own. To avoid a legislative vacuum, all EU rules will be copied intro domestic UK laws. Afterwards, the Parliament will take the mission to amend, repeal or improve. This process is likely to take years, as thousands of laws will be reviewed. Not to mention that, transforming the EU legislation into domestic legislation might create bizarre situations in which the texts refer to EU institutions and procedures that won’t apply for the UK anymore. Meanwhile, business will be moving, there will be people buying, selling, making contracts, asking permits or having economic disputes across borders. Therefore, they will need skilled lawyers and consultants to guide them through the red tape jungle, where absurd situations are likely to appear.
-> The Brexit shock and the uncertainty surrounding (along with Donald Trump unexpected win in the US elections) might prove to be an antidote to populism and extremism in European politics. Both forces had an unprecedented expansion over the last few years, fueled by what was seen as a failure of traditional political parties to meet economic and social challenges. But as Brexit supporters slowly fail to deliver what they promised (for example the huge investments in NHS or the total blocking of migration) and the true consequences of their decisions become evident (for example, the lack of funding for health accompanied by the loss of the European Medicines Agency, the shortage of EU workers in key sectors) people start to realize that populism and extremism are not the answer. What does this have to do with economy? A lot. As they try to rise to the expectations, populist forces who gain power bring about many changes, creating at least uncertainty and instability. It is the exact opposite of what businesses would need: predictability to plan ahead. It also affects the labor market, creating concerns related to the stability of jobs and income. Moreover, this realisation may help avoid other situations such as the current one. On a continent where lack of interest in politics was growing, people started discussing politics again, increasing civil participation in the political life. A good proof is the unexpected and unprecedented participation of the young people in the UK snap elections, which weakened May’s stance both domestically and at the European level. Another proof is an analysis carried out by the Financial Times about people’s (bot UK and non-UK citizens) preferences on dating sites. Apparently, irrespective of their wealth, people seeking love online increasingly see political orientations different from their own as being a deal breaker. As both the Netherlands and France avoided the extremist option in their latest elections, the Brexit chaos might have saved the EU from breaking.
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