21 October 2016
Britain still has a lot of bargaining power in the post-Brexit  negotiations with the EU. Photo: Bloomberg
Britain still has a lot of bargaining power in the post-Brexit negotiations with the EU. Photo: Bloomberg

The question for remaining EU members: to stay or not to stay

Global markets have largely absorbed the Brexit shocks over the past week, led by the London benchmark FTSE 100, which bounced 10 percent to a fresh year-to-date high last Friday. Eurex Exchange’s EURO STOXX 50 has also recovered half of its lost ground after bearing the brunt of the vote result.

But the sterling’s exchange rate is nowhere near an inflection point, especially against the greenback. Still, this can spur Britain’s exports and domestic consumption, buffering the impact in the post-Brexit era.

All these are the typical, spontaneous self-adjustments of a free economy, which, when the shock waves strike, can be hit head-on initially yet it can heal itself quicker than you think.

Those who are still bearish about the British economy may have unconsciously succumbed to the mob mentality.

UK has real bargaining power in post-Brexit talks

Many say Britain may no longer be great again and the sun is setting for “the empire on which the sun never sets”. I can only say these views are of the predisposed type.

One fact to note is that Brexiters are not necessarily against globalization; those proud Brits wanted to leave the European Union because the latter is becoming a “superstate” that is undermining their own nation’s independence.

The EU’s social and financial policy integration has gained pace following the global financial tsunami in 2008, putting not a few Brits on tenterhooks.

Even David Cameron reached consensuses with EU leaders that “the UK, in the light of the specific situation, is not committed to further political integration into the EU” and “the references to ever closer union do not apply to the UK”, as specified in the conclusions of the European Council meeting on UK and EU relations this February.

But that failed to soothe leavers’ nerves since these consensuses, as seen in many EU documents like that about debt-to-GDP ratio, may not be worth the paper they are printed on.

And believe it or not, London may soon ink a free trade pact with Washington as the outgoing administration of US President Barack Obama is anxious to push its tardy Transatlantic Trade and Investment Partnership initiative, which has been hitting roadblocks on continental Europe.

Surely the UK and the US have similar economic philosophies.

London will also have to negotiate with the EU once it loses access to the single market, and to fend off additional barriers on trade, especially the retaliatory ones, it has some useful bargain chips.

One of those is the UK’s steadily rising trade deficit with the EU, which hit 24 billion pounds (US$31.8 billion) in the first quarter and is tipped to reach 100 billion pounds for the full year.

The remaining 27 EU members hence have a lot of incentives to maintain strong trade ties with the UK.

The EU is also receiving annually some 13 billion pounds in net subsidy from the UK, enough to fund Her Majesty’s Government’s Home Office for an entire year, and, if the money is diverted into the nation’s hospitals and clinics, then the total annual expenditure for medical and public healthcare sectors can increase by 10 percent.

The UK is also home to 6.6 million foreign workers, 16.7 percent of the nation’s entire labor force, thanks to its migrant workers policy, the most liberal in the EU.

The most likely outcome of the negotiations can be that London is allowed room for maneuver in exchange for its border and immigration controls, the crux of the Brexit vote, but both sides are likely to maintain the status quo in trade as no one wants any paradigm shift.

‘Ever closer union’ or a parting of ways

The domino effect of Brexit may rattle the “ever closer union” as a Pew Research Center survey this spring found that among the 10 largest EU member nations, resentment against the EU’s overreach, or “Euroskepticism”, is also on the rise in the Netherlands, Germany, Spain, France and Greece.

A median of just 51 percent across 10 major EU countries surveyed have a favorable view of the union. A median of 42 percent want more power returned to their national capitals.

The likelihood cannot be ruled out that these nations will follow Britain’s path to a parting of ways with the Brussels-based institution.

The single-currency and single-market economy has been thriving, and yet the EU represents a fundamentally flawed path to globalization, when a single currency has disabled member nations to adopt pertinent monetary policies to tackle their own, respective problems.

When Iceland, not an EU member, resolutely depreciated its króna by 35 percent against the euro from January to September 2008, amid a financial crisis triggered by the default of its three major private lenders, the Spanish government found it could do little when a similar crash hit the nation in the same year, since its monetary policy is determined by the European Central Bank in Frankfurt.

Subsequent inflows of foreign capital, and the success of the International Monetary Fund’s Stand-By Arrangement in Iceland, helped the nation weather the storm, but Spain, the worst hit in the European sovereign debt crisis, relied on the 100 billion euro (US$111.3 billion) bailout package of the European Stability Mechanism from other EU members and the turmoil didn’t end until last year.

The EU may collapse should there be one more crisis of the same magnitude as the Spanish one, particularly after Brexit, when no member country is prepared to foot the bill again for other’s woes.

In economics, the two pillars of an optimum currency area are the free movement of workers and the central bank’s role as the lender of last resort.

And the prerequisite for both is the integration of sovereignty, which is, nonetheless, almost like a mission impossible to EU members.

This article appeared in the Hong Kong Economic Journal on July 4.

Translation by Frank Chen

[Chinese version 中文版]

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British Prime Minister David Cameron speaks to journalists as he arrives for a meeting with EU leaders in Brussels on June 28. Photo: Bloomberg

Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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