BREXIT: WHAT DOES IT MEAN
Posted By : ChamanSalhanCEO On 2017-02-05 10:30:00
David Davis MP defined Brexit’s meaning as the simple withdrawal of the UK from the European Union, but what does that mean in reality?  Does it in fact mean removal from the Single market and arrival of trading barriers or does it mean a Norwegian or Swiss style model?  Alternatively, does it mean Norwegian Plus namely a special type of arrangement which does not exist with any of the European Union Members?  In truth, nobody knows what Brexit really means until the negotiations commence and are finalised.  Set out below are some of the factors that may influence the final agreement and truly define what Brexit means.
 
Hard Brexit

Theresa May at the Conservative Party Conference in Birmingham in September 2016 stated that Brexit meant a Hard Brexit.  Many commentators took this to mean that it would be a move away from the Single market.  Concerned as to what this could mean, a cross party group of MP’s concluded that the terms of any negotiations should not be kept secret but should be discussed and debated in parliament so that parliament could determine whether the terms properly reflected the will of the people.  Having initially suggested that there would not be an ongoing commentary in relation to the negotiations, Theresa May accepted that there would be the need for debate in parliament and that the same would occur.  This was taken by many commentators to mean Brexit would be a soft Brexit not Hard Brexit.  Whether it is soft or hard will in reality be determined by other member states who unfortunately, have their own problems. 
 
The Swiss problem

The Swiss currently have access to the single market via a number of trade deals with member states.  They however had to embrace the free movement of individuals as part and parcel of those deals. 
 
In 2014 the Swiss decided to hold a Referendum on whether the free movement of individuals which provided unfettered immigration, should in fact continue.  The Swiss vote resulted in a decision to limit free access and control immigration.  The upshot of this decision is unlikely to be felt until February 2017 which is the date given by the Swiss to impose restrictions on the free movement of individuals.  As such it is unknown how Switzerland will seek to implement this and more importantly it is unknown how the EU will seek to respond.  The decision by the UK to try to rely upon a Swiss model has severe limitations, given that the Swiss model itself may in fact fundamentally change.  If the EU are tough with Switzerland, they will be tough with the UK. 
 
The German problem

In early September 2016, Angela Merkel found that her political party finished third in local elections, falling behind a party that was anti-immigration.  The attitude to the German people which was reflected in that vote demonstrated a hardening against Angela Merkel’s open border policy, following a spate of high profile incidents involving migrants, including the Hamburg New Year’s sexual assaults and the axe attack on a train by a disgruntled asylum seeker.
 
A further problem is failing EU member states.  General consensus in Germany appears to suggest that German tax payers are growing increasingly disillusioned with their government's support of countries such as Greece whereby their tax revenues are being used to bolster countries who have relaxed tax laws and where people simply evade proper payment.  They want an EU that benefits them.
 
The next problem is loss of EU revenue.  As soon as the UK leaves the EU, the second largest European economy will suddenly fail to make contributions to the overall pot used by member States.  That shortfall will have to be met by other States which means that there will be an increased burden upon the German people who face the prospect of having to pay more money.
 
The dilemma for Germany is however, that their largest overseas market for Germany in the EU is the UK and as such German exporters will want to be able to export to the UK without having trade barriers, as this will have an impact upon them. 
 
Germany also has to consider the view of the other member States who have their own concerns and will want a strict line to be adopted against the UK.  As such Germany itself has a very careful negotiating position in that in one sense it will want to have unfettered access for its goods and services in the UK but on the other hand will want to try and ensure that other countries do not leave the EU thereby bringing the whole project into disarray and increasing the burden currently borne by German tax payers.
 
The French problem

A Presidential Election is looming in Spring 2017 in France.  Francois Hollande will want to send a strong message out to French voters that any country seeking to leave the EU will be punished and will have to suffer penalties.  Following comments by Theresa May, that Brexit will be a hard Brexit, President Hollande stated that Britain will have to pay a price for leaving.  His comments were interpreted by the international markets to mean that Britain would not have free access of the Single market and as a result saw a currency crash, on Sterling. 
 
The French stance is borne out by a number of internal issues within France itself.  In particular, Mrs Marine Le Pen, the National Front Leader, has become increasingly popular and has been heralding the Brexit vote as being the beginning of the end of the EU.  She has been calling for a “Frexit” whereby the French should be allowed to exit as well.  This is being strongly contested by President Hollande.  However, given that one in four voters in France support Mrs Le Pen’s Party, it appears that troubled waters lie ahead. 
 
President Hollande will also have a separate eye on the function of the city of London with a view to seeing whether the French capital Paris, can become the new European Financial Centre.  The French have been on a charm offensive to try to encourage financial institutions and banks to move from London to France.  Given that France will want to be the main beneficiary of London’s demise, they have a personal interest in wanting to try to ensure that the pain suffered by the UK is as hard as it can possibly be.  In fact, by imposing trade barriers, it may result in the work conducted by the city of London, being transferred to Paris.  Also by restricting access of the clearing of Euro denominated transactions, currently transacted in London, they may end up benefitting. 
 
The Italian problem

Matteo Renzi, the Italian PM, is under pressure to ensure Italy does not exceed the budgetary deficits levels agreed with Brussels in order to steer Italy’s economy away from recession.  Add to this problem, the fact that Italian banks hold substantial bad loans which are tinkering on the cliff edge (as depicted by the Economist front cover in July 2016) and one can see why Mr Renzi is keen to follow the agreed line with France and Germany in exchange for some latitude to his own internal problems.  It was therefore not surprising that days after the Brexit vote, Mr Renzi, Mr Hollande and Miss Merkel all called for a joint declaration that the UK finalise its Brexit plans as quickly as possible. 
 
The Greek problem

The Greek debt has not gone away and continues to be a thorn in the side of the EU’s financial recovery from the 2008 financial crisis.  Even though attention has shifted from the Greece to Brexit, the reality is that the Greek Government’s inability to pay its debts and the possibility that it may also seek to follow suit in leaving the EU, is a matter which the main negotiating partners with the UK, will have firmly in mind.   If Brexit is easy Greece may be incentivised to follow suit.
 
 
USA stance

At the G7 meeting in September 2016, Mr Barack Obama made it clear that even though the US had a special relationship with the UK, it did not mean that they would jump the queue on trade negotiations.  The US are clearly focused on trade deals in three areas, namely: with the EU; a North American Trade Deal; and a deal in the South China Sea involving the Asean country.  Accordingly, if the UK are unable to negotiate with the EU countries, to allow its goods to have direct access, it will have a direct impact upon its ability to supply goods in America. 
 
Further, the USA is also aware that most European cities do not have the financial infrastructure in place to be able to provide complex financial transactions.  London’s demise may therefore be a godsend to New York.   
 
Canadian position

Canada had been working on a trade deal with the EU, however, all that collapsed (since resolved) after one state in Belgium refused to ratify the agreement causing the deal to fall apart.  If one small state in Belgium could collapse such a deal then it does not bode well to the UK getting an EU wide agreement. 
 
In practice it means the UK will have to reach separate agreements with each of the 27 member states, unless a global deal can be agreed.
 
Japan’s stance

At the G7 meeting in September 2016, Japan sent an open memorandum to the UK making it clear that if the UK government failed to obtain access to the single market, Japanese business would look at relocating their businesses away from the UK and into the EU itself.  This was quite interesting as it was followed by an announcement by Nissan, that any planned investment for its Sutherland Manufacturing Centre had been put on hold pending the resolution of the Brexit negotiations. Since then the UK government have sought industry by industry concessions from the EU so as to stop a drain from becoming a flood.
 
The EU negotiator

The EU choice for Chief Brexit negotiator is Mr Michael Barnier, the former French Foreign Minister, who many regard as a foe of the city of London.  Formerly the EU Single Market Commissioner from 2009 to 2014, his intervention instincts, though Gaullist in style, at times made him the enemy of the UK Treasury.  During this time, he issued 40 proposals on the financial service sector which sought to re-write the rules on banking, financial markets and insurance.  It also must be remembered that he sought to impose a cap on banker’s bonuses.
 
Many see Mr Barnier's appointment as a potential negative step, which will ultimately inhibit the agreement reached.   
 
The Scottish problem

Having lost the Scottish Independent Referendum, the SNP see the Brexit negotiations as a game changer.  The vast majority of Scots voted to remain in the EU.  If Brexit does not deliver protection for Scottish interest, calls for a second Scottish Referendum would be hard to suppress. 
 
Conclusion

It will be clear from this short synopsis that the main players in Brexit negotiations have competing interests and objectives.  How the competing interests will play out, is yet to be seen.  What is clear is that no one truly knows what Brexit really means until the final “deal” is done.  It could be that the UK has unfettered access to the Single market, but it is unclear at what costs that will occur.  If the UK government however continues to maintain that its primary intention is to control its borders and regain its laws, then it is likely that access to the Single market will be severely limited.  If on the other hand, the key is to ensure single market access, then the policy of controlling immigration and the UK laws will have to be foregone.  The reality is no one really knows what Brexit means and only time will tell.
 
In the world of uncertainty only one thing is certain, namely that uncertainty will remain for a considerable amount of time yet. 





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