August 22, 2016
Almost two months after the British public voted by a referendum margin of 52 percent to 48 percent to leave the European Union, the sky has not yet fallen on London. It may indeed be another two or three years before that might happen.
Initial hard economic data about the behavior of the post Brexit vote British economy remains spotty at best. The pound has weakened significantly against other major currencies. There have been as yet no announcements of any moves by major financial institutions to leave the City of London for Paris or Frankfurt. Any hypothetical exodus is unlikely to happen, or even be seriously contemplated, until the pattern of Brexit negotiations between the British government and the European Union are well advanced. They haven’t even started yet. Serious, practical moves to start taking Britain out of the EU look unlikely until at least 2019.
However, political and economic developments within the United Kingdom since the June 23 Brexit vote are deeply disturbing for longer-term prospects.
First, it is clear that Britain will be outside, not inside the giant, remaining 27-nation Single European Market. The country will also lose her insider’s seat in Brussels that she has enjoyed for the past 43 years to contest policies felt not to be in the British national interest.
Second, international markets have already passed their initial judgment on the Brexit decision: The pound sterling has dropped in the nearly two months since the Brexit vote in relation to the dollar from about 1.56 to about 1.29, significantly below the normal range.
In response to this development and to likely future consequences of Brexit, the Bank of England is embarked on a policy of monetary ease to stimulate domestic investment and consumption to offset the anticipated slowdown in investments in property, good and services made in the UK by European and US companies. But it remains to be seen how effective this will be. Paris and Berlin both look poised to inherit London’s old role as the wealthy social as well as main financial center of the EU.
Tough negotiations ahead
Third, the very fact of Brexit, compounded by the antipathy towards the EU of the main negotiators that new Prime Minister Theresa May has appointed, make it very probable that European Commission negotiators in Brussels will not be in a mood to be magnanimous or generous towards Britain.
On the contrary, Britain is likely to be treated as an object lesson to deter the national populations in countries like France, Spain or Greece from also voting to leave the Union.
The future of the City
Fourth, up to 80 percent of annual British foreign earnings per year come from the operations of the City of London but the City owes its continuing global leadership role, especially since the Big Bang deregulation of the mid-1980s, precisely to its insider location within the EU.
It seems extremely likely that many if not most major international financial institutions with large operations in London will move to a continental European location. Frankfurt and Paris have most often been n mentioned. However, Rotterdam and Milan in some cases may provide more favorable financial environments.
In any case the blow to London and to the wider British economy will be enormous.
No more North Sea oil
Fifth, North Sea oil revenues are plunging to their lowest levels in four decades as the fields become exhausted. Even if advanced technology can allow to drill deeper and locate additional reserves, which does not currently appear likely, if Scotland votes to leave the United Kingdom in order to stay in the EU, most if not all of the remaining North Sea oil revenues will go with her.
What is the post Brexit plan?
Sixth, it now appears clear that the leading “Brexiteers” – the loudest advocates to leave the EU such as Conservative Party figures Boris Johnson, Liam Fox, David Davis and Nigel Farage, former leader of the UK Independence Party (UKIP), had no serious economic plan to propose if Brexit was approved, as it has been.
And although the British Treasury was clearly opposed to a “Leave” decision, and warned against it in many pre-referendum publications, no serious contingency planning appears to have bene done in advance.
This was certainly the devastating conclusion of Irish government officials who did carry out a serious study in advance of the costs that a Brexit vote would inflict on their economy, which is tightly integrated with both the EU and the UK. Ireland will seek to retain as close an association with Britain as it can while remaining within the EU. What happens to Britain matters a great deal to Dublin.
This lack of any serious planning, or even serious thought, about what British economic and industrial policy should be in the event of a Brexit bodes ominously for the UK’s economic future – and even for its continued survival as a unified state, given the clear majority votes that were cast on June 23 in Northern Ireland and Scotland in favor of remaining within the EU.
Far from getting financially ahead because of no more UK payments to Europe, as the Brexiteers promised in their exaggerated pre vote claims, the costs to the Exchequer of retaining even limited access to the single market are likely to be costly in the extreme.
Pay the EU for doing business with Britain?
Retired Brown University assistant professor of economics Bernard Friedman suggests that Britain may have to pay an annual “fee” to the EU to participate in trade agreements similar to what they have now to avoid increased tariffs being placed on scotch whiskey, North Sea oil, airplane parts, and all the other exports to the continent.
The British will certainly insist on the right to close or at least regulate their own borders to the migration of labor. This is already an issue of great concern to Poland and other Central European nations with large migrant labor communities in Britain. They do not want those remittances to be lost or greatly reduced.
Also coming major changes in British taxation policy could lead to companies shifting assets abroad with further deleterious effects on UK economic growth.
Who is in charge?
Finally, what makes this development far more ominous is that in the Conservative Party leadership that has emerged since the Brexit vote only one of the four senior ministers has any kind of business background at all. And all the three new government ministers charged with negotiating the severance from Europe and establishing new external ties with it have miserable relations with both the Brussels political establishment and senior government leaders and diplomats in all the major Western European Nations.
New Prime Minister Theresa May has never held any major office of state charged with foreign policy, finance or other economic affairs. She was a cautious, competent though lackluster Home Secretary (the British equivalent of an Interior Minister in continental Europe). She publicly favored remaining in the EU, but did so in a timid manner that served her well in uniting a badly-divided Conservative Party once Prime Minister David Cameron had to resign after the unexpected victory of the “Leave” side.
The same argument could arguably be made for many previous British prime ministers, but almost all of them, including legendary Prime Minister Margaret Thatcher from 1979 to 1990 and the just-departed Cameron (2010-2016) had long periods as leaders of the opposition to acquire the necessary detailed knowledge and experience on major issues. They all had time to plan to be prime minister. May had none at all – let alone time to produce a strategy to allow economically isolated Britain to continue to prosper in the world outside the EU.
A quarrelsome team in charge of Brexit
Instead, May’s first actions guaranteed a deepening of the rupture between London and Brussels at the very time she should have been working to restore an atmosphere of constructive and pragmatic good will. She appointed former Mayor of London Boris Johnson as her first Foreign Secretary. She then immediately undercut Johnson by appointing the two other leading Conservative Party champions of Brexit, former Defense Secretary Liam Fox as International Trade Secretary and Member of Parliament David Davis as Secretary for Brexit.
As a short-term, narrow tactical move to preserve May as prime minister and Conservative Party leader, these appointments could be considered shrewd, even Machiavellian. She ensured that her three most potentially dangerous political opponents were saddled with the mess they had created, and were forced to try and make the best of it.
May also ensured that each of those three ambitious and thin-skinned men would be in conflict with each other. And this has already proved to be the case. Fox has infuriated Johnson by calling on Britain’s venerable Foreign Office to be broken up to strengthen his own hand in the coming negotiations.
However, this squabbling and the political and personal records of the three politicians engaged in it can only have dire effects on negotiations with the European Commission. Johnson in particular was notorious for having personally insulted leading figures in the governments of France, Germany, and other countries, often in popular newspaper columns.
Davis and Fox are passionate Thatcherites. They all believe that the job of government should be to reduce its role in any economy as much as possible and “set enterprise free.” However, in a country which has precious few remaining high tech and major industrial assets – and which has depended on both its own government and the European Commission to subsidize and attract such international investment, such an 18th century Adam Smith, David Ricardo simplistic approach looks as out of date as bleeding dying people in order to cure them.
Turn to America?
Two months after Brexit, there is no sign of these “three musketeers” of Brexit being even able to work together in government in a civil manner, let alone any sign that they are capable of envisaging any serious economic strategy for Britain to find its own way in the world.
Fox and Davis have a romantic belief that Britain can prosper by turning its back on Europe and associating far more closely with the United States. Their supporters have even floated the idea that Britain could join NAFTA, the North American Free Trade Agreement.
However, the clear priority for US President Barack Obama and his most likely successor Hillary Clinton is to complete negotiations on both the 12-nation Trans Pacific Partnership and the equally huge Transatlantic Trade and Investment Partnership (TTIP) with the EU. As President Obama already said with shocking frankness earlier this year, a going-it-alone Britain outside the EU would have to “wait its turn” at the end of the queue to make the best trading arrangements it can with the behemoth trading blocks that it is not a member of.
Higher growth outside the EU?
Brexiteer “true believers” argue that being free of the allegedly repressive rules and regulations of the EU will allow the British economy to rapidly become more competitive than its Continental rivals. They ignore the harsh historical reality that in the 28 years from the end of World War II to Britain joining the European Economic Community (EEC), the pre cursor of the EU, in 1973, the country’s economic growth and prosperity fell humiliatingly behind that of West Germany, France and Italy.
It was only during its decades within the EU that Britain’s relative competitive performance against those nations improved.
In conclusion, the British people in the coming years may come to bitterly regret their Brexit decision, but even if they do, they will not be able to reverse it.
Martin Sieff is a Global Policy Institute Fellow. He is a national columnist for the Post-Examiner online newspapers in Los Angeles and Baltimore. He has received three Pulitzer Prize nominations for international reporting. Mr. Sieff served as Managing Editor, International Affairs, Chief news Analyst, Defense Industry Editor, and Chief Political Correspondent at United Press International (UPI) from 1999 to 2009. He was Chief Foreign Correspondent for The Washington Times as its Soviet and East European correspondent covering the collapse of communism from 1986 to 1992, and then its State Department correspondent from 1992 to 1999. He is the former Chief Global Analyst at The Globalist. and former senior correspondent for the Asia Pacific Defense Forum. He is a regular contributor to The Arab Weekly in Doha and to the China Daily.
He is the author of many books including: The Politically Incorrect Guide to the Middle East (2008); Shifting Superpowers: The New and Emerging Relationship between the United States, China and India (2010); That Should Still Be US: How Thomas Friedman’s Flat World Myths are Keeping Us on Our Knees (2012). Mr. Sieff received his BA and MA in Modern History from Oxford University, and did his graduate studies on the Middle East at the London School of Economics.