Brexit concerns: The way forward
written by R Kannan January 3,
2019 8:33 am
When the Brexit referendum was put
to vote in UK, the general expectation was that it would remain in the EU. In
the June 23, 2016 referendum, 17.4 million voters, 52 per cent, backed Brexit
,while 16.1 million, 48 per cent, backed staying in the union. The difference
was only 4% of voters, 1.3 million. Since the time available for Brexit was 21
months from the date of referendum, the UK government was hopeful that before
the period gets over, they would be able to strike a deal for post Brexit
scenario with EU and other members countries and the Brexit process would be
smooth, less painful and could be achieved in a least effort with least cost.
After the result of referendum was out, it created ripples in UK. Looking at
the thin margin, many felt that , Brexit would be bad for the UK Economy. There
were also talks that second referendum should be conducted, since the margin
was thin and for a event which would have significant impact for all the
stakeholders, it was better to reconfirm the mood of people again before going
ahead with such a big economic reform. By end of December 2018, the post Brexit
deal is yet to be reached. This has created a lot of uncertainty in the minds
of all the stakeholders and will have significant short term impact on the UK
economy. Closer to the implementation date, it emerges that there are many
issues relating to immigration, trade barriers, cost of doing business,
logistics, hospitality, business competitiveness and the need to add many new
departments and functions in various government departments with huge financial
outlays. Further, it has created a turbulence in terms of future of businesses,
employees and the economic growth. Brexit decision is a unilateral decision.
The ECJ, in its recent statement,
opined that since UK decided to exit EU on its own, till the post Brexit
agreements are in place and the date of Brexit arrives, UK still has the
discretion to withdraw from Brexit. Of course, UK has to go through the
governance procedures, indicating that it could go through the process of
parliamentary vote or any other procedure including a new referendum which
would allow UK to withdraw from its proposal to exit EU. As the dead line
nears, the expert predictions also indicate that the Probability of UK
remaining in the EU has increased. There is an increased concern and wish that
UK withdraws from the process of Brexit. Considering the fact that UKs trade
with Europe amounts to 49% of its total trade, Brexit is likely to increase the
cost of trade in terms of additional procedures, transport delays, additional
levies and reducing the ease of doing business. Today many countries are
focussing on liberalising the trade and set a goal to move towards higher rank
in ease of doing business.
In 2009, the ease of doing business
rank of UK was at 5 and it slided to 9 by the year 2018. If Brexit is brought
in effect, UKs rank is likely to slide down further. Brexit will increase the
trade barriers. To reduce the impact of the barriers, the efforts should be to
remove tariffs and eliminate non-tariff barriers to trade. The assumption
behind Brexit is that this would happen, which will not be true when it comes
to the implementation. When various expert studies predicted the loss of
economic output, one of the main reasons highlighted in those studies was the
presence of new trade barriers.
Brexit will reduce FDI. Of the total
FDI in UK, in Jan 2018, 42.6% of the investments were from EU and from the
companies which have strong ties with the UK. After the Brexit, the cross
border trade will reduce, thereby reducing the attractiveness of investments by
EU companies in UK. Brexit will have impact on availability of skilled
employees. As of now, there are one million Britons living in EU and 3.5
million citizens living in UK. EU has made a provision for UK nationals to
remain in EU and have introduced a scheme for them to stay in EU. But it is
unclear what will happen to 3.5 million from EU who are living in UK. Even UK
nationals have started registering for citizenship in other countries to avoid
the uncertainty. After the Brexit, it is not clear how the dynamics will work
out. If EU citizens leave the country, it will create a big gap in skills
required. This will also impact the productivity of the economy. The
relationship of UK with other EU countries will undergo a big change.
At the same time, UK will have
opportunities to consider other partners to expand its trade, especially from
Asia, the countries like; India, China, Malaysia, Vietnam, and Thailand. The
predictions by various experts on the post Brexit Scenario, project that there
could be an economic output gain of 7% to Economic output loss of 18%. Reduce
the ease of doing business and reinstating the barriers to trade is bound to
reduce the economic output for both UK and EU. According to various experts, to
assess , whether the Brexit is good or bad, there is a need to make the
assumptions made for going for the Brexit vote transparent to every one.
While putting to vote, the action
plans identified for how the migration would be handled has to be discussed in
detail. The post Brexit predictions by UK government includes, the incremental
growth , which will accrue to the UK economy through non – Brexit policy related
actions. While looking at the post Brexit scenario, the effect of non Brexit
policy related actions on economic growth should be separated, so as to
understand the real effect of Brexit on the future of UK economic growth. In
this world of VUCA, Brexit can have a negative effect on the UK and European
economies. Whereas the scope for achieving a very high economic growth through
Brexit is very limited. Further, most of the European economies are growing at
the rate of 1 to 2 % and introducing a new uncertainty will debilitate Europe
when there are other factors like trade wars and withdrawal of Stimulus by US
and Europe.
In the light of this, the following
options could be looked at in resolving this issue. The government can take
measures including , putting the proposal to vote in the parliament, conducting
a second referendum or adopt any other procedure as per the UK legislation, which
allows the withdrawal of the proposal to made to EU. This will help to maintain
the status quo, removing all the uncertainties for both UK and the EU. Till
now, no deal has been arrived at and there is an immediate need to decide on
the way forward from March 2019. To reduce the impact of no deal, which is
likely to be very costly for the UK economy, in the event of deciding to
proceed with Brexit,the following options could be looked at. Send a proposal
to EU to extend the time period of Brexit by another six months to one year, go
with the Brexit and allow the present arrangements to continue for six months
to one year, enter into agreements with each individual member country of EU,
where the agreement is similar to, mirror image of the one signed by UK to be
part of the EU. By considering the above options, UK should be able to come out
of the short term uncertainty and will have time to look at all the options
which will ensure the continued competitiveness of UK economy and its long-term
stable future.
R Kanan is the Head of Corporate Performance
Monitoring and Research, Hinduja Group. (Views are personal).
