Reconsidering Brexit

October 7, 2016

 

In the time since the United Kingdom decided in a slight majority that they no longer wished to be part of the European Union, financial and political unrest have continued to surround the decision. English politicians like Boris Johnson and Nigel Farage, who fervently pushed for the Leave side of the referendum, slyly backed away from taking leader positions in heading the new, fully independent, UK. Prime Minister David Cameron promptly announced his decision to step down, as he found himself unfit to lead an independent Britain after pushing for the Stay side. After some crude remarks from her opponents, Theresa May has emerged as the next Prime Minister. In the short term, aside from the frustration of younger citizens, who largely voted to stay in the EU, there has been a certain degree of raw acceptance of the outcome. Looking ahead reveals several challenges the UK will continue to face in the months and years ahead. 

 

Due to the necessary and relatively short amount of time required to negotiate thousands of new trade contracts and comprehend what a EU without the UK would look like, there has been some complacency throughout the global community regarding Brexit. In the marketplace the initial panic has slightly subsided, and investors who hedged on US based companies saw their initial losses disappear, as those stocks have rallied over the past month. Yet, there should still be some justified concern over what will become of London, a city still considered as the central marketplace of Europe. As new trade deals are written, Paris or Berlin could emerge as the European Union’s financial center. Before the Brexit vote, many of the world’s largest international firms like HSBC and Goldman Sachs threatened that an exit would result in their removal of staff from London to elsewhere in Europe. In short waves this has been true, the music and transportation conglomerate Virgin cancelled a deal that would add as many as 3,000 jobs to the British economy, and the Central Bank of Ireland has already prepared for a significant transfer of financiers from the UK to Ireland. Yet, it is hard to imagine that London will lose its status and crumble; the companies it serves are daily drivers of the global economy. Financial powerhouse Morgan Stanley has denied plans to move 2,000 jobs from London to Dublin, but politicians should remain aware and stay ahead of these plans. Parliament should not take London’s status for granted, and must begin working on incentives to prevent a diaspora from weakening the city’s economic impact. 

 

Britain should be concerned about two additional weaknesses as it strives to head out on its own: its position as a service economy and its dependence on low-skilled foreign labor. The UK’s workforce is nearly 85 percent skilled labor, and many firms around the world rely on this workforce for technical support in their daily operations. Yet, there are many jobs within the UK that will only be taken on by low skilled laborers that enter the country via Schengen, a policy that the UK will no longer be a part of. With this policy change, the potential for illegal immigration to become one of the most contentious topics in the UK in the next few years is imminent. Individuals from less well off European countries will continue to desire the relatively better paying and pound denominated jobs available in UK. Additionally, much like the US, there is little chance that even by reducing the number of low-skilled immigrant workers there will not be an influx of native workers filling the empty positions. About 16.7 percent of those employed in England are migrants and these migrants also represent 16 percent of the UK’s unskilled labor force.  Yet, studies have shown that these migrants do not necessarily displace UK natives who generally do not seek the same positions foreign workers apply for. Therefore, it appears that much like the tactics employed in the US, British politicians tapped into the fears of the minority disapproving instead of relying on economic fact. 

 

At present, one third of all EU14 workers in the UK are unskilled, and if these individuals are sent back to their home countries the economic fallout could be extremely detrimental. Farms and factories depending on said laborers could find themselves at an immediate loss without realistic means of finding replacement labor. Secondly, because England is a net importing country politicians and companies negotiating new trade deals must remain wary of how political fallout could negatively impact all UK citizens. If other nations perceive the UK’s actions as being largely harmful to their trade and geopolitical strategies, they will not negotiate in their favor. This could, for example, result in food products from France, commodities from East Asia, and services from the U.S. significantly inflating in cost. The UK as at an intense crossroads and only careful and humble negotiation skills will result in a positive outcome for the fifth largest global importer.

 

What English politicians, starting with Theresa May, must do is ensure intense macroeconomic stability. They must accept their exit decision whole-heartedly and rally as a nation to prove they are capable of thriving independently. The government needs to assume a nearly academic tone to stringently critique its geopolitical strategy and follow a path that suits their constituents and global onlookers whose investment decisions are equally as important. The central bank must continue stress-testing institutions and encourage them to work along with other budding financial hubs to ensure a smooth transition during this exit period. The government must reach out to the now disenchanted youth to try to understand their resentment and find a middle ground for those who did not support an exit. Lastly, the UK must continue to strengthen their position in the global sphere if they are going to succeed independently; their economy and government provide too many globally demanded resources to fall short in the present transition. 
 

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