On 23 June 2016, 51.9% of the British electorate voted in a referendum for leaving the European Union. The consequences of this vote for Brexit, short for ‘British exit’, are not yet fully clear. Many open questions remain, like, for example:
- When will the British government invoke article 50 of the EU treaty on withdrawing from the Union?
- Will the British government do it at all?
- Will there be a second referendum on staying or leaving?
- Will Scotland have a referendum on leaving the UK and remaining in the EU?
- Provided the UK will withdraw from the EU, what terms will be negotiated for the EU-UK relationship after the two-year negotiation period?
While these questions have not been clarified to date, one thing is clear: the Brexit vote has already increased volatility and uncertainty in the market. And this will have an impact on the business strategy of every company in the UK, the EU, and beyond.
There are four economic areas that are directly affected by a Brexit: exchange rates, trade, direct investment, and employment.
Exchange rates
The exchange rate of pound sterling to US dollar went down 8.1% on the day after the Brexit vote. At the same time the pound lost 5.1% to the euro, while the euro lost 2.8% to the US dollar.
In the short term, central banks all over the world will do their best to stabilize exchange rates. However, in the mid- to longer term, market forces may be expected to put continued pressure on pound sterling and euro.
Export-oriented business may get short-term benefits from this. However, the longer-term effects of more volatile exchange rates and increased import costs may outweigh any export benefits.
Trade
It is difficult to predict how trade would develop after Brexit, as this depends on the results of the negotiations between the UK and the EU-27. Depending on what agreement is reached, trade would not necessarily have to suffer. However, the negotiation period of two years would create significant uncertainty and might have a negative effect on trade relationships between the UK and the EU-27. Especially export-oriented companies that had close ties with the UK could suffer. This would particularly affect the car industry.
Direct investment
The Brexit is likely to have to effects on direct investment: re-allocation from the UK to the EU-27, and overall reduction due to uncertainty over the future economic relationship between Britain and the EU. Especially companies in the finance sector are expected to re-allocate offices from London’s financial center and move them to Frankfurt or Paris. Investments in new industrial plants and offices are likely to be either postponed in the transition period, or they will be shifted to suitable EU-27 Member States.
Employment
Employees of branch offices of continental firms in the UK as well as EU-27 citizens working in the UK are facing significant uncertainty in regard to their future career in Britain. The British Leave campaign particularly focused on curbing immigration from EU-27 countries. While this may have been largely campaign rhetoric, the uncertainty remains. The moving of branch offices to continental Europe alone could lead to loss of jobs in the UK and the creation of new jobs in some regions of the EU-27.
Companies that are active on the British market will be forced to make decisions about their non-UK staff within the next two years. In the best case, from an economic perspective, the negotiations will result in the UK joining the European Economic Area (EEA). This would include free movement of persons, goods, services and capital between the UK and the internal market of the European Union (EU). However, it is not clear, if such an agreement would be politically feasible in the UK, as particularly the free movement of persons was one of the features of the EU that the Leave proponents rejected.
Conclusion
The implications of the Brexit for companies in Europe will be to a varying degree significant. Independently how close the business ties with the UK are, companies should better take Brexit and its effects into account for their business strategies. It seems that most companies in the EU have failed to do so by now.
A survey by British law firm Pinsent Masons, which was conducted in May 2016, revealed that only about a quarter of the interviewed firms had a plan for dealing with Brexit.
Pinsent Masons had asked senior decision makers at over 1,000 businesses across the UK, France and Germany. Only 26% of firms had a tangible plan in place for dealing with the risks arising from the Brexit vote. Just over half (53%) of respondents added that there had been no board level discussion about the potential commercial impacts of the referendum.
If your company is among those who have not considered the implications of Brexit on business strategy and operations, I would strongly recommend that you do. Contact me, if you have questions on how to perform an analysis of the Brexit impact on your business and review your corporate strategy in view of the changing European context.
Comments are closed.