By Vassilis K. Fouskas, a professor of International Politics and Economics at the University of East London, and cross-posted from Open Democracy
This article tackles three issues: the impact of Brexit on Britain as a whole, both politically and economically; the impact of Brexit on the European project; and the impact of Brexit on British SMEs. This allows us to have a measured approach to British voters opting to leave the single market on the 23 June referendum.
The impact of Brexit on Britain and globalization: the role of the City of London
The European Union accounts for almost half of Britain’s exports and imports. This corresponds to 15% of the country’s GDP. EU membership is beneficial to the UK economy, because the EU is a customs union and this lowers trade barriers. This makes goods and services cheaper to British consumers.
The downside of this is that Britain cannot negotiate, on its own, separate trade agreements with non-EU members. Brexit would allow this to happen, because Britain will recover full economic sovereignty. Brexit may also open the way for protectionist, import-substitution policies and a re-launch of the welfare state.
Britain, as an EU member, receives the highest proportion of inward foreign direct investment (FDI) and portfolio investment. Of all countries in the world only the USA has a higher stock of FDI. This is mainly happening because of the particular role of the City of London in the structure of the European and global markets, namely the role of the City as a trading platform of financial and global services: in particular, as the Financial Times have pointed out, the City has become the biggest centre for trading the Euro. The City manages one trillion euros of assets in cross-border funds and it dominates the global foreign exchange market, whose daily turnover is about £4 trillion.
Foreign investment banks, Over The Counter (OCT) operations, insurance, shadow banking activity, lawyers, accountants serve the single European market. Some 38,000 people, which is 11% of the City’s employees, come from Europe itself.
Overwhelmingly, therefore, the City supports Britain’s EU membership, except for a small tribe, and to this belong some hedge funds and brokers whose market is global and who want to break free of any type of EU regulation. This small tribe supports the Leave campaign of UKIP and Boris Johnson. Overall, the City represents the most crucial link in the global chain of financialisation and Britain has to remain in the EU so that the link is not broken.
Brexit will have one clear benefit. Leaving the EU would result in an immediate cost saving, as the country would no longer contribute to the EU budget, and this is some £13 billion a year. However, it also receives £4.5 billion worth of spending and that is about 7% of what the Government spends on the NHS each year.
There are some political aspects too. Brexit would impact on the Scottish issue. And Brexit may also upset Britain’s relationship with the USA and, as a consequence, disturb Britain’s position within NATO. Moreover, a new transatlantic trade agreement is in the making and Brexit would complicate matters, as Britain would have to re-negotiate both with the EU and the USA, separate treaties.
The impact of Brexit on the European project
Many people avoid talking about it. Many journalists and even academics are keen to say that Brexit would impact negatively on the British economy, but they fail to consider what is probably going to happen to the EU should Brexit occur. I would argue that Brexit would be far more disastrous for the EU than Grexit for the Euro-zone. And if Brexit is successful, then we should wave “good bye” to the EU, along perhaps with the project of globalisation/ financialisation.
It is well known that Germany dominates both the EU and the Euro-zone. It has the strongest economy and pursues an export-led strategy based on a model of low wages and low inflation. This creates imbalances and asymmetries within the Euro-zone dividing Europe into debtor and creditor nations. In this respect, Germany keeps recycling its surpluses in the Euro-zone, imposing regimes of extreme austerity on the periphery, such as Portugal, Spain, Greece and even Italy (see chart). France has also problems dealing with an over-competitive Germany.
But that’s not good. Whoever says this is a great picture, he or she does not understand economics. This is a picture that leads to the disintegration rather than integration of the European project. It pushes the nations of Europe into protectionism and a return to national currencies. What is going to happen to the EU and its states if Britain leaves?
The countries with the highest exposure to British capital will suffer most. These countries are the Netherlands, Belgium, Ireland, Luxembourg, Cyprus, Portugal and Greece. France and Poland are also exposed to Brexit in specific areas. Germany will suffer too. Poland, in particular, is most exposed through migration and the EU budget.
Just to give some facts: Dutch firms have direct investments worth £180 billion in the UK, earning over £9billion in 2013, which is equivalent to 1.5% of Dutch GDP. Germany has a trade surplus with the UK of over £28 billion. German manufacturers alone export £50 billion to the UK, or 2.4% of GDP. Just imagine what is going to happen to German industry if a new Britain, outside the EU, pursues an import-substitution, protectionist policy. This means that all Japanese and German producers will have to abandon their British factories, with Britain re-building its own car industry and steadily adopting a new industrial policy, moving away from financialisation/globalisation.
A new industrial society will be created and services will cease to be the backbone of the economy. There are almost 750,000 Poles living in the UK. This is the single biggest group of foreign nationals. Their remittances sent back to Poland amount to over £1.1 billion each year. This is a significant boost for the Polish economy.
Brexit and the British SMEs
SMEs account for over 99% of British businesses and over 60% of all private sector employment in the UK. The EU has a considerable remit over Employment Law. European treaties grant the European Parliament and the Council of Ministers the power to make social policy which supersedes national law. Excessive regulation, health and safety requirements and various forms of taxation make some SME leaders highly Eurosceptic. They want Britain to regain power over trade deals, although some 83% of British SMEs do not export at all. Britain has the largest portion of SMEs that export to the USA, some 43%, followed by Italy at 33% and the Netherlands 31%. Some 1/5 of exports of British SMEs go to China. Africa is not a significant destination (although this is not the case with France and Belgium, for example). The EU absorbs the majority of exports of those British SMEs that export. SMEs also benefit from some EU directives, such as the “late payment directive”.
The EU has some special programmes for SME financing (e.g. COSME), which would no longer be available if the UK leaves the EU. But the bulk of finance to SMEs is provided by local retail banks, such as the British Business Bank, and leaving the EU would not have a major impact on the availability of finance for SMEs. Yet, leaving the EU may have a longer term impact given the current account deficit of Britain, which is 5% of its GDP. That means that Britain depends on foreign investors. And if Britain is outside the EU, foreign investors may ask for a risk premium, which would be passed on as higher interest rates to SMEs. However, this negative aspect could be avoided if a courageous policy of import-substitution is adopted.
The referendum of June 23 is a political, not an economic issue. The Government has to reach out to Labour Party voters in order to win. The Labour Party says it wants to remain in the EU in order to influence and reform it in a progressive, social-democratic direction. The Government says that it has already reformed the EU according to Britain’s national interest and the principles of a free market economy and that’s the reason why Britain should stay in.
The Leave campaign has two main components. The Right-wing, which is dominated by the former mayor of London, Boris Johnson and the leader of the UKIP, Nigel Farage. There is also a left-wing Leave campaign, “Lexit”, which is inspired by the legacy of Tony Benn.
In the referendum of June 23 the British people will vote for what is best for them and the country. Therefore, the result should be respected and followed through by all political forces across the UK. The result should unite and not divide the country. Yet, if Brexit occurs, this may well herald the beginning of the end of globalisation/financialisation and the beginning of a new era in global politics.
This was the Keynote speech at the Thames Gateway Business Awards 2016 Ceremony organised by Archant.