Economic consequences of 'brexit': short-term … and dependent on negotiations with the EU

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  • Analysts consulted for 20 minutes agree that the cost to the UK of leaving the EU exceeds the potential benefits.
  • They disagree, however, that it is the “disaster” posed by official bodies and agree that the worst effects will be suffered in the short term.
  • The commercial impact would depend on the negotiation with the EU: adhering to the EFTA would avoid imposing tariffs and impeding free movement.
  • The ‘brexit’ wins in the referendum of the United Kingdom | Panic in the markets
  • SURVEY: If there were a referendum in Spain about your stay in the EU, what would you vote for?
 

It’s not about the heart, it’s not about the story. The campaign for the permanence of the United Kingdom in the EU was radically pragmatic and focused on the potential economic disaster that Brexit would imply and the abandonment of the largest commercial block in the world: 500 million people who generate a Gross Domestic Product (GDP) of 14 billion euros and 16% of world trade.

Despite Brexit, in the long term the United Kingdom would remain a privileged trading partner with the EU Prime Minister David Cameron reviewed in each act the misfortunes that would affect his country: tax increases, cuts, depreciation of the pound, tariffs, flight from companies, more inflation … a list that like a rattle, constant, repeated the leaders of the Remain (stay) in the days leading up to the referendum with most multinational companies and organizations such as the IMF, OECD and the G7. Leave supporters believe that leaving the EU would economically liberate the country, one of the EU’s biggest budget contributors.

All the analysts consulted for 20 minutes agreed, however, that the cost of the exit outweighs the potential benefits and that the optimum is that it remains in the EU so as not to unnecessarily risk the stability of the country. But they disagree that it is the “disaster” that the official organisms pose. And they agree that the worst effects will only be experienced in the short term and that they will depend on the commercial model that is negotiated.

 

“In the long term, the United Kingdom will continue to be a privileged trading partner with the EU,” predicts Javier Flores , director of the analysis department at Asinver. “The alarming news is normalized over time, the United Kingdom is not just another country and investments there will not change much if trade conditions do not change,” adds Guillermo García-Plata, secretary of Acocex.

The 9 economic fears that Brexit could materialize

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1. Volatility in financial markets . “It’s the main effect in the short term,” says Javier Flores, of Asinver . “Investors lack references and show their uncertainty with lurches because they do not know what to expect.” The United Kingdom faces the risk of investors withdrawing from the islands to go to safer markets. In fact it is what happens now, even before the vote: in the last 12 months up to 48,000 million deposited in British funds have gone into a transaction of readjustment of portfolios by the funds to avoid losses to their customers. And this, according to David Cameron, not only affects investors, but also “undermines pensions” for the losses that private retirement funds can suffer.

2. New commercial scenario . The future commercial of the United Kingdom will depend on the model of relationship that it establishes with the EU after the Brexit . It could be partial; that is, that the British enter the European Free Trade Association in which Norway, Switzerland or Iceland are already. “It is clearly the one that would most benefit the United Kingdom because it would give them economic stability, although it would have to continue to contribute economically to the European project and allow the free movement of people and goods,” argues Salvador Llaudes , a researcher at the Elcano Royal Institute. A scenario defended by Justice Minister Michael Gove (supporter of Brexit ) but denied by supporters of the Leave , who claim “more sovereignty to trade and control the borders.”

3. Tariffs with the EU . “Leaving the EU would increase tariffs on exports and imports,” says WTO Director General Roberto Azevedo. The cost of living for the British, in this way, will rise because while only 6.6% of EU exports go to the islands, up to 51.4% of British sales go to the mainland. Imposing a barrier, would have a clear loser. “The United Kingdom would lose with these tariffs the advantage that it would have to have cheaper products due to a depreciation of its currency,” explains Guillermo Rivas-Plata. “The imposition of taxes would make their products less interesting that can be bought without them to other countries and also deliveries would be delayed because the merchandise should go through customs inspection.”

4. Depreciation of the pound . It is the mother of all fears. The price of a currency is influenced by the growth of a country, its trade flows and its monetary policy. And if these factors recede, the United Kingdom would be forced to depreciate the pound to recover competitiveness. “It could go down abruptly ,” Bank of England Governor Mark Carney recently warned. This new depreciation – the market has been anticipating it until it has been devalued by 6% – would be like a meteorite that falls in the British economy but expands waves in other countries. 

5. Recession in the United Kingdom . A shot in the foot, according to the British Government, which qualifies it as a “self-made recession”. The calculations of its economists estimate that it would fall by 3.6% and up to 6% if it also leaves the common market and is governed only by global trade rules. In addition, they warn that 820,000 jobs will be lost and according to the OECD, each British family will lose about 3,000 euros each year.

6. Flight of companies . “The exit scenario does not benefit the investors in the UK at all, if the companies that chose the City to operate in Europe remain outside of that market, they still consider leaving”, explains Salvador Llaudes , about a country that houses the most important financial market worldwide. Two of them, JP Morgan and HSBC, have already announced that they would move a good part of their staff to the mainland. An icon of the British automotive industry, Rolls Royce, has paralyzed its investments until the outcome of the referendum. And according to a study by Ipsos Mori, up to 78% of international companies believe that Brexit would harm their businesses. The IMF has no doubts: it considers that the City would be “eroded” and the manager BlackRock gives figures: 110,000 jobs would be lost in this financial hub.

7. Rise of rates … and real estate risk . If the risk of Brexit drives investors away, the British public debt would begin to have trouble finding buyers. The answer to attract it would be to raise the reward given by the State to whom to buy their bonds: that is, raise interest rates. “The markets of public debt do not cease to be a competition between countries and if the investor observes risk, he will ask for a greater interest “, explains Javier Flores. The higher rates would imply a growth in the risk premium and a distrust of the country that, according to this analyst, would be transferred to the rating of its companies, which would cost them more to finance themselves. David Cameron also warns that a rate hike would make the mortgages of its citizens more expensive, with the possible risk of default. “The United Kingdom is the world’s leading destination for real estate investment and its puncture would be one of the serious consequences of Brexit … and would drag other capitals of the world,” says Flores. The British Government already warns that the Brexit would drop 18% the value of real estate.

8. Less budget (and less weight) for the EU . Since joining the community economic club in the 1970s, the United Kingdom is one of the economies that contribute the most money to the project. Its funds represent 6% of payments to the EU (almost 7,000 million) and it is the second country that receives the most funds (almost 3,000 million). Obviously, his departure would decrease the EU budget, unless he opted for a model like the one in Norway, which despite not belonging to the EU does contribute money to the community project. A difficult system to sell to the population if it ends up voting for the Brexit , which precisely arises from the protests of a large part of the population for the aid dedicated to foreigners in their country. In addition, the EU, the largest trade bloc in the world, would lose weight if its 14 trillion euros of annual GDP are ‘erased’ by the 3.6 that the United Kingdom contributes.

9. Tax cuts and increases . It is one of the fears that Cameron raises among its citizens. That the supposed savings by leaving the EU, is not compensated by the services that are now financed from Brussels or by the increase in debt payments if interest on public debt increases. That, not counting the British check , the reimbursement that Margaret Thatcher negotiated in favor of her country in the 80s. As last week the Economy Minister, George Osborne, said the recessive consequences of Brexit would force to square 39,000 million euros to through an “emergency budget” that would imply cuts (especially in Health, Education, Transportation and Defense) and a two-point increase in income tax. Up to 57 members of the conservative party reject these measures and accuse Osborne of a “flagrant attempt” to scare the “markets.” The supporters of Leave also say that with the money sent to Brussels – according to them, 20,000 million – hospitals and schools would be financed.

10. Possible drag to a global economic crisis . With a GDP of more than 3.6 trillion euros, any breakdown of the UK’s commercial status quo can cause turbulence in the global economy. For now, the US Federal Reserve has postponed any rate hike until the outcome of the referendum is known, because an increase at this time would be detrimental if the global economy were to enter recession. “The Brexit would subtract some points from the global economy due to a depression in investor sentiment,” says Javier Flores, “above all it would affect the EU economy, which has been recovering in recent years,” the researcher adds. Royal Elcano Institute.

… and the five trawls that would have in the Spanish economy

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1. The tourism sector, the main victim . “23% of our customers are British. They are our most important after the Spanish market, so the Brexit obviously would affect us , ” he told 20minutes Antonio Aranda, head of the Association of Hoteliers of the Costa del Sol, which fears a slowdown of British tourism, the mainstay of this sector in Spain. Last year, one in four foreigners who passed through our country – 15.5 of the 68 million visits – had a UK passport. And they raised their spending by 10% to 14,057 million: 20.9% of the total. Cameron puts figure to the increase that a depreciation of the pound would have on its tourists: 295 euros. In addition, the 300,000 Britons (many of them retired) residing in Spain would have less interest in continuing in our country if their pounds are worth less and, when they are no longer EU citizens, they can not access Spanish social and health services.

2. Exhibition of Spanish companies … especially banking . The main destination of Spanish investment is the United Kingdom -the companies of our country have investments there for 48,000 million- but Brexit could damage its leadership position . The British exit from the EU would hinder trade transactions and lower their profits if the pound depreciates . The balance sheets of companies such as Iberdrola – its second largest market is the British – or the construction companies with projects on the islands, would be affected. But the most damaged would be the bank that, according to the International Bank of Payments, has credit rights there for 478,000 million, only behind the American and German. Two entities would be more affected than the rest: Sabadell (owner of the TSB) and Santander , which receives 30% of its global benefit from the United Kingdom. The president of the entity, Ana Patricia Botín, has explained however that the entity will continue to operate there no matter what happens in the referendum.

3. Impact on the trade balance with the United Kingdom . The islands are the fourth largest destination (7.3%) of Spanish products. We sold for a value of 18,231 million and bought for 12,584 million. The balance therefore is a trade surplus. But that could change if the pound depreciated. Our products would be more expensive for the British and theirs would become more affordable for us. “It is indisputable that the balance could be reversed with the United Kingdom, but it would not seriously affect the total balance of Spain and less if it is agreed with the EU not to establish customs rates,” explains Guillermo Rivas-Plata . “The Spanish seller who now works with the UK market and chains [such as Primark] already established in our country, would have to reformulate their margins because the imposition of tariffs would have a new cost in their prices”.

4. Complications for the Spanish colony in the United Kingdom . The colony in the United Kingdom accounts for 14% of our expatriates. It is the most numerous. But it could be stopped if the Brexit is consumed and the islands become a labor market as foreign as, for example, the United States. “The qualified young Spaniards who are looking for their first work experience there would look for other European markets without obstacles to labor,” says Salvador Llaudes. And how would it affect those who are already? “It would complicate their lives”, says this researcher from the Elcano Institute; “They could stop having easy access to health and other public services.”

5. More contributions to Brussels . The exit of the United Kingdom would imply a hole in the community budget that would force to rethink the contributions of the Member States. But it will not be an immediate effect. Negotiations on the new relationship between the British and Europeans will be prolonged at least until 2019 and it would be necessary to see if the Norwegian model is chosen, which would mean for the EU to continue receiving British funds. “If the Leave were complete, Spain would probably have to put more money,” says Salvador Llaudes. A contribution that the Circle of Entrepreneurs raises to 906 million euros more per year.

 
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