The Take

Brexit Negotiations19/10/16

QUTEFS Publications Officer and first year finance student, Joel Jensen, gives an update on the UK leaving the EU, and the potential impact this will have on the broader European economy.

Ever since the United Kingdom surprisingly voted to leave the European Union, the citizens of Britain, as well as governments and investors from other nations, have been cautiously awaiting the next steps in the process. The implications of Britain leaving the EU are varied and widely debated, however they are highly contingent on the nature of the deal struck between Britain and the EU, which will be a lengthy process whereby each entity attempts to maintain economic advantage as well as their respective political goals and precedents.

Until recently, there has been some uncertainty as to the timeline of Britain’s exit, however this was put to rest as current British Prime Minister, Theresa May, has announced that she would trigger Article 50 of the Treaty of the European Union by March 2017. This would initiate the formal notice for an exit process. This gives Britain exactly two years from then to negotiate the terms of their exit, as well as strike new agreements covering the complex issues of trade, immigration, security and foreign policy.

Many parties believe that by agreeing to trigger Article 50 before gaining some assurance from the EU of the end result should no deal be reached, Britain has placed itself at a significant disadvantage. In the event that no reasonable deal can be struck within the two-year period, Britain’s existing agreement will expire and they will revert to trading with the EU and the rest of the world as per the World Trade Organizations rules. This could mean the emergence of a range of trade barriers and tariffs where none previously existed; a costly outcome that could potentially reduce Britain’s economic output by as much as 4%.

The real challenge for Britain will be negotiating a deal that both benefits their economy and is accepted by the majority of the population. This would mean attempting to maintain access to the EU’s single market, while also exercising significantly more control over immigration, which was a key issue to many Brexit voters. Unfortunately, the EU has already insisted that in order for Britain to maintain access to its single market, they will have to allow the freedom of movement for all European citizens. A deal without single market access and the absence of a new free trade agreement would likely be detrimental to Britain’s economy as it would only serve to make them less competitive in the global economy and detract international investors. Larger businesses may see merit in shifting operations elsewhere.

Many who supported leaving the EU argued that Britain would have more leverage in trade negotiations as the EU exports more to the UK than the UK exports to the EU. However, this may be flawed logic, as the UK’s exports to the EU represent 44% of total exports while exports to the UK only make up approximately 10% of the EU’s total. Regardless, given the state of the European economy as a whole, neither country is at a great advantage and the impact of the leave on their growth could have significant deflationary effects across the continent.

Britain’s exit negotiations will be made more difficult, as the EU will be looking to set a precedent that there is significant disadvantage to leaving the Union. This would be an effort to ensure that nationalist parties in other EU countries are deterred from attempting to unravel the European development that has been built over the last 60 years.

Fortunately for Britain there is a precedent, in the case of Norway, to remain outside the EU while maintaining their single market access. However, this involves allowing freedom of movement of all European citizens as well as making significant financial contributions to the EU, which is not only opposed by the majority of British citizens but is also not dissimilar to their situation prior to leaving, without the added benefit of possessing voting rights on EU matters.

Currently there are a number of outcomes including reaching no deal, thus reverting to WTO rules, or a deal similar to that of Norway, or something in between and not yet seen. Presently, however, due to the time constraint Britain faces, as well as the EU’s political agenda and the desire of many European nations to ensure their citizens right to live and work in Britain, it would appear that the EU have more leverage in the coming negotiations. Depending on the end result, we may find that Britain is able to carry on business as usual with the EU, albeit in a slightly different capacity.

Until next week, this has been our Take.