The UK future after BREXIT

I should start by saying that I am neither a political expert, nor did I study PPE at Oxford and that the views expressed here are my own. I simply spent a morning with google, finding out some information that helped me make sense of where the UK may now be going and why. I have attempted to source my information where I could, if anything on here is not sourced correctly please take my apologies, I wanted to use facts to help me understand where the UK stands.

As a starting point I believe it important to understand the relationship countries have within the ‘EU’. Below is a diagram of the makeup of the European Union (EU) and its complimenting treaties as of June 23rd 2016. As of this date the UK is:

  • A part of the Council of Europe, which unlike the EU cannot make binding laws but, which can enforce select international agreements reached by European states through the European Court of Human Rights, which enforces the European Convention on Human Rights
  • A part of the EU Customs Union which ensures a common external tariff for all member countries on goods entering the union
  • A part of the European Economic Agreement (EEA) which guarantees member states four tariff and restriction free freedoms: Capital, Goods, Services, and People. This is the free market treaty and allows EU Citizens to move to and work in the UK without restriction
  • A part of the EU which can make binding laws for constituent countries after being passed by the European Parliament and the European Commission

The UK is neither a part of the Schengen Area, which requires freedom of movement for EU citizens without border checks, nor the Eurozone, for countries whose currency is the Euro.

Found on LinkedIn — Source unknown but image checked for accuracy

On June the 23rd the UK voted to leave the EU. As I see it, there were three key issues that the UK public were using as the basis for making that decision. First was a political governance issue combined with a financial transfer issue of funds away from the UK to the EU. Second was an immigration issue around the freedom of movement of European citizens into the UK. Third, was a tariffs issue, whereby the UK did not directly negotiate its own import/export tariffs with nations, but this was done centrally by the EU Customs Union.

Ironically, voting to leave the EU, due to the aforementioned treaty arrangements, does not itself influence UK tariffs or the free movement of EU citizens in/out of the UK
Political issues making up the Leave vs Remain platforms

Political Control and Governance Issue: There were arguments that the UK had lost its control and sovereignty over the laws that it passed. In addition, it was argued that the EU was an unelected body governing UK laws. This was evidenced by the European Supreme Court’s ability to overrule rulings and laws made in the UK. The legislative function of the EU is made up of the European Commission, the European Parliament and the Council of Europe. The European Commission has 28 members whose Commissioners, one from each member state, are appointed by each member’s democratically elected government. The European Parliament is directly elected by each member state’s citizens. The European Commission is then elected by the European Parliament.

For a law to come into being, the European Commission presents a new law to the European Parliament and Commission, who both have to agree to it for it to be passed into law. All three bodies are democratically elected by member states, including the UK.

In addition membership in the EU requires the UK to make payments to support the EU. “In 2015 the UK government paid £13 billion to the EU budget, and EU spending on the UK was £4.5 billion. So the UK’s ‘net contribution’ was estimated at about £8.5 billion” (source Full Fact). The total tax taking for the UK government for 2015/16 was £533 billion (source HMRC) which means the EU payment is 1.59% of tax revenues. If we equate this to a UK citizen earning a pre-tax salary of £30,000 per year, this is the equivalent of a monthly post-tax spend of £31.23.

Immigration issue: Currently there are arguments that the net migration to the UK is unsustainable. A solution to this issue would be for the UK to retake control of its borders and require all citizens of all countries to go through an immigration process. Thereby the UK would be able to control and reduce the levels of net migration (those entering less those leaving) into the UK. To do this the UK would need to remove itself from the EEA not the EU. This however, would also remove the right for British Citizens to move to and live in 27 other countries without visa requirements, and remove access for UK business to the European free market — the worlds second largest economy even without the UK.

2015 Year Edning December Migration Statistics; Source Migration Watch

Trade Tariffs: The EEA is the economic trading treaty that allows the UK to trade with Europe without paying tariffs for imported or exported goods from/to the UK. This treaty is based upon the four freedoms: capital, goods, services and people. The reference examples of countries not being a part for the EU but being in the EEA are Norway, Lichtenstein, Switzerland and Iceland. However, all four, even Switzerland have freedom of movement of people, to the point they all four subscribe to the Schengen Area. This means EU citizens can move between these countries without any border checks. In addition, all four pay contributing amounts to the EU, even though they are not in the EU. This is because the EEA is regulated and controlled by the EU. These four countries have their own treaty of the European Free Trade Association through which they negotiate trade tariffs with non-EEA countries.

Whats Next:

Moving forward, I see two potential scenarios for the UK. First the UK removes itself from the EU and the EU Customs Union, but remains within the EEA. This would allow the UK to participate tariff-free in the European Market while negotiating UK specific separate tariffs with non-EU international countries. It may also remove the requirement for the UK to pay the EU an annual payment, but this precedent is not set by the four countries already in this situation. Finally, not all EU laws would apply to the UK. However, this arrangement would still require the UK to allow the four freedoms of the EEA including the freedom of people. With the EU immigration issue at the forefront of Brexit, it is unlikely such a solution would be adopted as it would appear to be a betrayal of the reasons for Brexit.

Scenario 1 — remain within the EEA

The second scenario is a move entirely external to the EEA and even to leave the Council of Europe. This is because the council houses the European Court of Human Rights, which enforces the European Convention on Human Rights. This is in essence a governing body that is able to overrule UK laws on certain issues. This was a key issue in the Brexit campaign, and so exiting from this would appear to be the solution. However, the UK would then be in a position of needing to renegotiate all trade tariffs with all countries including the EU. As it stands the EU has every incentive to make this a very painful time for the UK to show an example to other EU members about the pitfalls of exiting the EU, EEA and other EU Treaties.

Scenario 2 — Exit all EU treaties

In this scenario, potentially the bleakest of outcomes is faced by the UK, I fear. Already slipped to the 6th biggest economy in the quake of the referendum due to the lowest exchange rate in the pound since the UK couldn’t keep the lights on or collect its garbage. If Scotland leaves, and with a further two years of recession of around 3% per annum, the UK would be the world’s 7–9th largest economy. Negotiating trade tariffs from such a weak position would unlikely allow the UK to negotiate better deals than already exist as part of the world’s second largest economy, the EU.

If we take auto manufacturing as an example, while 20% of high quality German cars manufactured in Germany are sold to the UK (source FT); in 2015, 77.3% of UK manufactured cars where exported, with 57.5% of all UK manufactured cars being exported to the EU. Many global and UK auto manufacturers are based in the UK as an English speaking manufacturing environment to access the EU market. Leaving the EEA means this benefit no longer exists, and the EU as a whole can sustain much more damage to its German auto manufacturing exports to the UK, than the UK can sustain tariff increases on its exports to the EU. In the UK, 180,000 people are directly employed by this industry, with another 640,000 people estimated to be employed supporting it (source SMMT).

“less than 8% of EU exports come to the UK while 44% of UK exports go to the EU” (Source The Treasury).

I assume that increased external tariffs on UK exported goods will not be offset by a weaker pound. Therefore, our UK exports will not be cost competitive while it will also cost more for the UK to import goods from abroad. This situation will lead to an increase in inflation, undermining the pound’s purchasing value even within its own borders. Such a situation of a weak pound, high inflation and increased tariffs on exports does not make for a good short, medium or long term outlook for the UK economy.

Let’s be clear, I am not saying that immigration is not an issue for the UK. I am saying there were three alternatives available to the UK. In any such situation one must understand the best alternative to a negotiated agreement. Our negotiated agreement had us paying a net 1.59% of our 2015/16 tax revenue (or £8.5 billion) per annum. This gave the UK democratically elected MEPs influencing the EU while participating in the tariff free EEA and accepting its required four freedoms allowing UK & EU citizens the right to live and work in 28 countries without restriction.

That option is now off the table, so our best alternative economically is to remain in the EEA to continue benefiting from being the English speaking gateway to the EEA for the world; however, without political influence on the course of that market, still being required to accept freedom of movement of people and potentially still having to pay an annual fee to the EU. Finally our worst alternative to a negotiated agreement is to entirely exit from European treaties altogether; including the Council of Europe and renegotiate our entire political and economic position in the world as the world’s 7–9th largest economy (behind the US, China, Japan, Germany, France and Brazil — source UN).

Of the three, the last two appear weaker, and I fear that the UK will move to the third option, potentially crippling us the most.