Your Thoughts: UK to Leave Single Market
Last week the news was flush with panic that following Theresa May’s infamous Brexit speech, the UK will soon be leaving the EU’s single market, meaning the end of tariff free trade throughout the European continent, as has been for the last few decades.
According to the BBC, Theresa May stated that the UK “cannot possibly” remain within the European single market, as that would mean “not leaving the EU at all.” But does that truly mean the end of free trade with European nations, or is the meaning of this misconstrued amongst opinion?
Finance Monthly has therefore reached out to a number of experts, and in this week’s Your Thoughts feature, asked their opinion on this matter, how it may affect the public, what kind of deal could be made, and what it would mean for the future of the UK’s economy.
Anand Selvarajan, Regional Leader for Europe, RSM International:
The UK government’s decision to take single market access off the negotiating table is only the beginning of the debate for businesses with ambitions to work across Europe.
Ahead of any other concern, the number one priority for European businesses who work in the UK, is continued market access*. Whether this is through the common market as we know it, a customs union or something entirely new, businesses on both sides want to reach a practical trade deal between the UK and Europe.
A complex relationship between the UK and Europe on tax, trade or regulation will only stifle British and European businesses and threaten economic growth. If the UK chooses to erect a wall of bureaucracy between itself and Europe, everybody will share the cost.
Simon Evenett, Professor of International Trade, University of St. Gallen:
Facing the reality of exit from the Single Market, the UK wants a bold trade deal with the rest of the EU. Why should Brussels agree to negotiate a trade deal in parallel to divorce talks? Self-interest is Whitehall’s first answer–but if the EU were really interested in getting the most from foreign markets it would have reformed itself years ago. Talk of avoiding a cliff edge just creates a massive game of chicken as the deadline for talks approaches in 2019. Economic threats won’t scare Brussels.
The second carrot Mrs May dangled is security collaboration. But would the UK really deny critical information to a European neighbour about an impending terrorist attack if no trade deal emerged? Hardly. Before tough talks about substance begin, what price is the UK prepared to pay to get the negotiating agenda it wants? Be prepared for a harsh tutorial in the realities of trade talks.
Joan Hoey, Europe Analyst, Economist Intelligence Unit:
In a trenchant rejoinder to her critics, who have accused her of vacillation and indecision, the prime minister set out a very clear set of priorities for her government as it prepares to negotiate the UK’s departure from the EU. Taking control of the narrative on Brexit, Mrs May spelled out four principles that would guide the government in the negotiations and 12 objectives that it would seek to achieve.
Most importantly, she made clear that the UK will leave the single market, as the referendum result implied all along. Mrs May’s red lines on immigration and ending the jurisdiction of the European Court of Justice mean that the UK must, and will, leave the single market. Less clear is the future shape of the UK’s trading relations with the EU: this is inevitable. It is impossible for the government to eradicate uncertainty about Brexit because the final shape of the UK’s trading relations with the EU will be the subject of negotiation.
Mrs May stated she would like the UK to have tariff-free access to EU markets, but full customs union would prevent the UK from negotiating trade deals with others. This makes it likely that the UK will also have to leave the customs union, but may negotiate some kind of partial or associate agreement. If the UK leaves the customs union, the issue will be whether to negotiate a free-trade agreement (FTA) and, if so, how comprehensive would it be. Whatever arrangement is finally agreed, UK-EU trade ties are likely to remain intertwined.
The prime minister adopted a determinedly upbeat tone towards the EU, insisting that the UK wants to remain on the best possible terms with its continental neighbours after it leaves the union. In our view, the chances of a wholly amicable divorce from the EU are slim, but a completely hostile one could be avoided, as both sides also have an incentive to stay on good terms given the economic, political and security challenges facing the entire region in coming years.
The prime minister emphasised the upside of Brexit—not only in the sense that it opens up new global trading opportunities, but also because in the cause of improving competitiveness it will force policymakers to address some of the UK’s structural deficiencies, in particular poor productivity growth, insufficient innovation and poor infrastructure. If the UK ends up leaving both the single market and the customs union, as now seems very likely, it would be forced to address these issues more urgently.
Alan Shipman, Lecturer in Economics, The Open University:
In her 17th January speech, the prime minister pledged to abandon the UK’s European single market membership and negotiate for “the greatest possible access to it.” She rightly recognised this as the only way the UK can escape its present obligations of allowing free inward movement from the EU, transposing EU directives and “complying with the EU’s rules and regulations.
This is a heavy economic price to pay for the right to limit immigration from the EU, given that the UK has historically benefited economically from free flow of labour (inward during the long boom of 1994-2007, outward during earlier downturns). It is hard to show that recent EU immigration has done economic damage, even to lowest-paid households.
Although the prime minister couldn’t quite admit it (perhaps because of earlier pledges to Nissan) it will be near-impossible to leave the single market and deliver the promised bilateral trade deals without also leaving the EU customs union. So even if post-Brexit tariffs on UK imports and exports remain low, there could be a cumulative cost penalty for UK-based firms that have extended supply chains across the EU. Former trade partners will be still keener to re-impose non-tariff barriers (NTBs) on the many UK products they could substitute with their own. NTB removal was central to the Thatcher-inspired single market programme, whose payoffs are still rising in the service sectors most important to the UK.
Many were induced to vote for Brexit by politicians’ blaming the EU and immigration for hardships that owed more to their own policy choices. It is equally misleading to sell ‘hard’ Brexit by portraying the EU as a 44-year shackle on UK enterprise and political initiative. As an EU member, the UK closed its longstanding productivity gap, improving living standards and the environment, before its under-regulated financial sector crashed in 2008. Dropping labour and consumer protections and redistributive taxes, to redirect trade towards lower-cost countries, is not what most Brexiters voted for.
Alicia Kearns, Director, Global Influence:
There is a vision and we will be leaving. Membership of the single market holds these four pillars inviolable: free movement of goods, services, capital and people. The restriction on unfettered free movement of people was a key, but not sole, force behind the Leave vote and the Government was never likely to retain this since it would result in a Brexit outcome that pleased no-one.
This leads to the question of where the UK will find itself, a Customs Union looks increasingly unlikely since it prevents the formation of bilateral trade deals. Additionally, the Customs Union and indeed the Single Market represent a protectionist bloc, run ostensibly for the ‘greater good’ of its participants. But this only serves to redistribute wealth from consumers to corporates, vocal interest groups with strong lobbying influence. When this serves to limit trade with the rest of the world, and the benefits that come with it – one must wonder who are the primary beneficiaries of these controls in an organisation otherwise so enamoured with a frictionless economy. Theresa May’s play is to arrange trade deals with the rest of the world, aligned to what we as a country feel is absolutely crucial – in the hope this will offset any detriment caused by the protectionist and administrative hurdle faced by British trade with the Single Market.
Whilst time will tell how successful this move is, the challenge is to communicate this effectively. We need a vision narrative for Brexit. An individual narrative for allies old and new. What we can offer, and what they will gain; bespoke to each audience. We cannot rely on standalone speeches at pre-ordained times, we need an ongoing conversation with the British people and partners abroad. At home we must set our flag in the sand and rally to it; the narrative challenge will remain protecting our national interests first whilst keeping the UK public on side – and that means the Prime Minister not revealing her hand as no poker player would. Because let’s be clear, diplomacy is the ultimate poker game of self-preservation and influence. But that does not call for timidity, quite the opposite – as businesses, communities and individuals we each have a responsibility to hold ourselves accountable for the success of Brexit. We must step up to the mark and play our role in creating an even greater Britain. The Prime Minister has rallied the country; unity with integrity. Now it is our responsibility to stand by her.
Ismail Erturk, Senior Lecturer in Banking, Alliance Manchester Business School:
Leaving the single market in the short-term is very likely to increase costs in British businesses, which may wipe out any benefits from sterling’s depreciation. Over the medium- to long-term, if the trade negotiations after leaving the single market do not go smoothly, uncertainty is likely to reduce capital expenditure, hurting growth and employment in the UK. Increased costs in the shorter-term will involve spending money to navigate the new red tape in trading internationally outside the single market.
Some emerging economies are notoriously costly to do business with, as the legal structures and business cultures are very different from the EU. With currency, inflation and trade risks to manage, we’ll likely see an increase in the cost of hedging or remaining unhedged against such risks. For importers, these are likely to be passed on to the consumer prices in the UK, while profit margins for exporters will be reduced. Plus, businesses will also need to add in increased sales and marketing costs to remain competitive outside the single market framework and to find alternative markets – there are many obstacles which are likely to hurt profit margins.
Over the medium-term there will be real uncertainty due to trade negotiations outside the single market, which is very likely to reduce capital expenditure. If this reduction happens, it’s likely to hurt economic growth and employment in the UK. Since the 2008 financial crisis, productivity in the UK has deteriorated and this will have had an impact on the UK businesses’ competitiveness in international markets outside the single market.
All these short-term and medium-term risks necessitate financial support from the UK banks, but the banks have not fully recovered from the effects of the 2008 crisis – look at RBS, which is still in bad shape. Therefore, businesses are not likely to get the financial support to expansion and capital expenditure from the UK banks over the medium-term, hurting their competitiveness internationally. Of course, there will be opportunities too for newcomers in the UK to develop business models outside the single market, and for existing businesses there will be opportunities to enter into joint ventures and other forms of business collaborations without the restrictions of the single market regulations. However, the costs mentioned above, I believe, are likely to be much higher than the benefits of the opportunities.
Philippe Gelis, CEO and Co-Founder, Kantox:
We saw the pound surge as Theresa May outlined her plan to leave the EU. Whilst the decision to have a clear break with the EU, and subsequently lose single-market access, may not have been received positively by some, there is now at least, a clearer plan set out.
The impressive advance on the pound could have been exaggerated also by the current dollar weakness. However, what’s more important is how sterling performs moving forward. The plan by May is by no means concrete, and there is still a great deal of uncertainty regarding the economic impact of the UK’s exit – it’s likely that such uncertainty will keep investors away from the pound until the outcome of Brexit begins to materialise.
Only when negotiations develop in the second half of the year, (assuming everything goes smoothly), will we see a sustained recovery of the pound. Until this time, it’s likely that we’ll see the pound drop in value, with some experts predicting that this could reach parity with the euro. Yet, while we can predict an overall decline, there will be shifts and turns along the way, meaning the nature of the downward trend will not continue in a straight line. Businesses exposed to sterling should be ready to react in whatever way the currency moves. In moments of turbulence, it is vital for companies to safeguard their margins as best they can.
To do so, businesses should be looking at FX solutions that offer the ability to cover entire currency risk in an effective and timely manner – currencies cannot be treated in silo, but rather as a whole. It will also be important to analyse currency needs and exposure so that no matter the performance of sterling, or how complicated your FX needs might be, a comprehensive plan is in place to protect margins based on real numbers.
Lastly, businesses should look to simplify currency management – the pound is not the only currency that has the potential of shifting unexpectedly. This is why using an FX management tool that allows to efficiently handle multiple currencies will ensure that no sudden swings take the business off guard.
Catherine Hendrick and Adam Borowski, Synechron Business Consulting:
Volatility has been the only recognisable trend in Financial Markets since the shock Brexit outcome of the EU referendum. And whilst the UK Government has moved to ease the uncertainty amongst investors, it has at the same time dashed any hopes that a Brexit deal would maintain the UK’s membership to the Single Market. Or has it?
The UK’s Financial Services sector is envied across the world. It’s long-established financial infrastructure and legislative framework has provided the foundation for Banks and Corporates to thrive. Globalisation strengthened London’s position has a global financial hub through its unique competitive advantage of being located in a time zone convenient for business with both the US and Asian markets. This position was bolstered with the creation of the European Single Market and Passporting Regime, which shaped London as the golden gateway into Europe for Financial Services – it was simply the cherry on top.
The fundamental principle of the Passporting Regime is to minimise the regulatory, operational and legal burden on firms offering cross-border services within the Single Market. It creates the freedom for firms established in member states to provide and receive services. What makes it so lucrative is its openness, particularly to international firms – its why many American Banks choose London as a gateway for business in Europe. So why would the UK Government appear to disregard these benefits and leave the Single Market?
Game Theorists could classify the situation between the UK and the EU as a cooperative game, where the aim is to promote a joint agenda and work towards the same purpose. However, a mutually beneficial outcome, such as a free trade agreement can be a complicated outcome to achieve due to conflicting priorities. The UK wants to reclaim its sovereign power over immigration and its judicial system, whilst the EU wants to adhere to the freedom of movement principle whilst at the same time, deterring potential leavers.
The type of deal that will be achieved largely depends on who has the bargaining power. By default, this lies with the EU as the UK will lose out on 27 export markets whereas the EU will lose just one. Theresa May’s 12 Point Plan for Brexit was her first move in the game. It was an attempt to strengthen the UK’s bargaining power in order to maximise the UK’s interests during negotiations. On the surface it may appear that the UK has turned its back on the Single Market and is headed for a ‘Hard’ Brexit, in reality Theresa May’s stance may be the only way to achieve the best of both worlds; sovereignty and prosperity.
We would also love to hear Your Thoughts on this, so feel free to comment below and tell us what you think!