The Consequences of Brexit on the rest of the EU

In a recent report by the Global Counsel, data from a variety of economic and political sources was examined to give an impartial analysis on how a Brexit could potentially affect UK businesses. Uniquely, the report also provides an analysis on how a Brexit could impact other member states within the EU.

Considering the UK is the 2nd largest economy within the EU (behind only Germany) and is considered a key member of the EU, a vote to leave will undoubtedly have an impact on other member states. In order to assess this impact, the report examined ten key channels:

  • Trade within Europe.
  • Foreign direct investment.
  • Liberalisation and regulation.
  • Industrial policy.
  • Immigration.
  • Financial services.
  • Trade policy.
  • International influence.
  • Budget.
  • Uncertainty.

While the full report can be found here, some of the key findings are:

Setting a precedence to other member states

If the UK decides to leave the EU and manages to successfully re-negotiate trade agreements, then other EU member states who aren’t completely aligned with the EU’s economic policy may also decide to leave.

Key candidates for following in the UK’s footsteps would be Ireland, Cyprus and the Netherlands. All have strong financial ties with the UK across a number of trade agreements and investments, while also adopting similar views in terms of policy. While the ultimate outcome is unclear at this stage, setting a “successful” precedent could severely damage the EU’s reputation and its influence around the world.

Germany & France

Germany regards the UK’s influence in policy debate as an important counterbalance to France and a number of other countries throughout Southern Europe.

The German Finance Minister, Wolfgang Schäuble, argued that a UK Brexit would make the whole of Europe “less stable and more volatile”, adding that Britain would be shut out of the single market if it left the EU.

While some believe that France may welcome the absence of the UK in policy debate, there have also been a number of warnings that the Franco-British treaty regarding immigration is likely to be reconsidered following a Brexit.

Since 2003 British passport officers have worked together with French police to prevent illegal migrants or asylum-seekers from reaching British soil.  The French minister of the economy, Emmanuel Macron, said the treaty would inevitably be “threatened” if Britain decided to leave the EU. If the UK left, the “migrants will no longer be in Calais”.

Immigration: Impact on the UK

The immigration of skilled workers – made possible by the free movement within the EU – enables UK firms to recruit specialist skills that are increasingly important for many businesses.

Depending on the terms of an exit, the UK could still sign up to the free movement of labour, or, they could choose to align EU immigration with the non-EU points system. If the latter were chosen, then the quotas for the Tier 1 Entrepreneur Visa and the Tier 2 skilled/graduate visa would need to be significantly increased in order to meet demand.

Immigration: Impact on the EU

The restriction of free movement to the UK could be countered by businesses that have their operations based in the UK by transferring skilled workers to alternative locations. There is no limit to inter-company transfers under Tier 2 visa (for salaries above £40k) and to a certain extent, companies could minimise the negative effect of the UK’s stricter immigration policies.
Countries like Poland who have a high proportion of immigrants in the UK, could feel the effects more profoundly, and it’s also unclear at this stage what the knock on effect will be for other countries. There could be an indirect impact on Germany, for example, which could experience a rise in immigration from those who have been restricted from the UK.

Likely Brexit Models

The ultimate impact of a Brexit will largely depend on any ongoing relationship with the EU. There are five possible scenarios that set out a potential relationship between the UK and the EU, however at this stage two are considered to be the most likely.

FTA Based Approach

  • The UK is free to agree Free Trade Agreements (FTA’s) separately from the EU, agreeing to common standards and regulation.
  • The UK doesn’t have to contribute to the EU budget.
  • Tariff barriers are unlikely.

Bilateral accord

  • The UK and the EU agree a set of bilateral accords that govern UK access to the single market in specific sectors.
  • There is however concern in Brussels that cherry picking may limit the sectors.
  • The UK becomes a follower of EU regulation in the sectors covered, but negotiates FTAs separately.

Trade within Europe: Impact for the UK

It’s predicted that the regulatory autonomy gained by the UK as a result of a Brexit will increase the cost of trade within the EU. In both bilateral accord and FTA approaches, the UK would negotiate the regulatory requirements for specific sectors and would in all likelihood be faced with two possibilities, adopt the EU’s regulations, or businesses would have to adhere to two sets of regulatory requirements. This would be both costly for businesses and ultimately for consumers who would bear the brunt of increased business costs.

Trade within Europe: Impact for the EU

While the UK accounts for only one sixth of the EU economy, half of all UK exports are made to countries within the European Union. There is a strong demand for UK products and services across the EU and the rising cost of trade could have a negative economic impact at a macro level for certain countries.

Business Headquarters & Investment: Impact on the UK

At present, approximately half of all non-EU European headquarters are located in the UK. It’s predicted that the UK may become a less attractive destination due to the favourable tax treatment available to member states through the Parent-Subsidiary Directive.

Following a Brexit, the UK may have to negotiate new double taxation agreements with member states, a process that would take a considerable amount of time that could ultimately lead to a reduction of overseas investment in the UK.

Business Headquarters & Investment: Impact on the EU

If business headquarters decide to relocate from the UK, other countries will have the opportunity to attract multinational European headquarters away from the UK, but the success of this approach will likely depend on the business environment in each individual European country.

While much remains uncertain and no one truly knows the full impact of a potential Brexit, the impact will be significant for both the UK and for other member states.