The Brexit dilemma
More than three months have now passed since the British public voted to leave the European Union but there’s been no clear indication so far of how – or when – the British government intends to effect the political and economic split. In order for the process of Brexit to begin, Article 50 of the Lisbon Treaty must be invoked but because that will set the clock ticking on a strict two-year timetable for negotiations, no-one seems in much of a hurry to push the button.
There’s much that is still unclear – and it’s this uncertainty that’s vexing not only the British public but also the businesses that have a lot riding on whether or not Brexit will allow them to continue to have access to the single market. Britain sells almost half of its exports via the common market, and any change to this process is likely to be expensive.
A ‘soft’ Brexit would minimise the economic impact on the UK but is likely to come at the expense of limiting the number of migrants – an area of concern for many who voted to leave the EU. On the other hand, the ‘hard’ Brexit favoured by some leading Conservative eurosceptics could have disastrous consequences for businesses, most notably for the City of London.
Passporting rights are at stake
The head of Germany’s central bank recently warned that London’s position as a financial centre would come into question if the UK left the single market. In this scenario, it’s likely that banks would automatically be stripped of their ability to conduct business across the EU, which would open the door for other European financial capitals to annexe business from London.
In an interview with the Guardian, Bundesbank president Jens Weidmann pointed out that banks’ passporting arrangements are ‘tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area’ (EEA).
Passporting rights allow firms to use London as a hub for serving clients from across the EU, without having to negotiate licences in separate countries. Because of this, international banks with affiliates in the UK actually account for a large share of international banking activity in London. Bullish Brexiters like Foreign Secretary Boris Johnson have reassured banks that the UK will retain passporting rights even if it leaves the EEA, but Weidmann negative this assumption, saying that business would reconsider relocating their headquarters.
UK-based businesses feeling the pressure
According to a survey of 100 business leaders from large companies by accountancy firm KPMG, more than three-quarters of chief executive officers are considering moving either their headquarters or some part of their operations outside of Britain following the referendum. The CBI and PricewaterhouseCoopers have also reported a deterioration of confidence in the financial services sector in the three months to September.
The surveys suggest Prime Minister Theresa May faces a challenge to retain businesses and jobs when Brexit negotiations finally get underway, and that talk of a hard Brexit is already causing companies to consider – or even accelerate – their own exit strategies.
‘CEOs are reacting to the prevailing uncertainty with contingency planning,’ commented Simon Collins, KPMG’s UK chairman.