Brexit Continues & Puts Additional Pressure on UK Industry

The end of this month marks the one-year anniversary of the referendum when British public decided, by a narrow majority, to leave the European Union, the so called Brexit. The unexpected result has triggered a series of events that affect the future of Britain’s economy and its relationship with the rest of Europe.

The pro-Brexit campaign claimed that leaving the EU was necessary to stop unwanted immigration of EU nationals, reverse unfair EU regulations that hurt the economy, and stop paying billions of pounds to the Union in taxes. They also claimed that the United Kingdom would not lose access to the European single market.

The situation post referendum is quite different. While formal Brexit negotiations are about to begin — after the British government, in March, triggered Article 50 of the European Treaty to leave the Union — British people and businesses are already feeling the effects on the road to fully disconnect from the EU.

Most of the talk in the press has been about the financial industry, the status of London as the capital of European Fintech, and the role of the City (London’s financial district) in the post-Brexit era.  Losing access to the single market and the EU “Bank Passport” –which allows financial services to be offered across the EU–, could be a disaster for many banks, fintech companies and investment firms.

The IT industry is also feeling the effects of the Brexit decision. Companies are unsure of the status of many high-skilled workers in their UK facilities, who could lose their right of residency. In fact, many EU workers are already preparing to leave, and recruiters are having a hard time sourcing talent outside the country. The drop in the British pound is also a deterrent to many, as their salaries are no longer so attractive to consider moving to Britain.

“This is creating significant recruitment challenges in sectors that have historically relied on non-UK labor to fill roles,” Gerwyn Davies, labor market adviser at CIPD, which represents human resources professionals, told The Guardian. “With skills and labor shortages set to continue, there’s a risk that many vacancies will be left unfilled which could act as a brake on output growth in the UK in the years ahead.”

Some companies are also prime for takeovers, as foreign investors step in lured by “sales” of previously unaffordable tech giants.

One example was last year’s acquisition of Arm Technologies by Japanese tech group Softbank. Prime Minister Theresa May welcomed the prospective deal as “in the national interest” and a vote of confidence in post-Brexit Britain, in spite of her warnings after the referendum that foreign takeovers would in future be subject to tougher scrutiny. The fall in the pound following the referendum has left the UK currency nearly 30 per cent lower against the Japanese yen, making Arm an attractive target.

Most of the software and fintech companies, who once considered London the best location for their business, are already relocating some operations to continental Europe and Ireland, with the intention of moving their corporate headquarters, to maintain access to the single market and the EU bank passport. One example is Transferwise, one of the biggest fintech firms in Europe, which announced that it will move to keep access to the single market.

No easy access to the single market

The other 27 EU member states have been adamant: If the UK does not accept the basic rules for full access to internal market for products and services, free movement of people, and compliance with European regulations, it cannot keep its access to the single market.

In reality, it means that in order to stay in the EU market, the UK will have to swallow the same conditions that the “leave” camp voted against, with one important change: The UK will no longer have any decision power on any new rules, as it will lose representation in the European Parliament and Commission. In fact, after invoking Article 50, the UK lost its voice in the European Council.

UK will need to comply with EU regulations to trade with EU member states

In order for British companies to continue offering products and services in the EU, regardless of access to the single market, they’ll have to comply with privacy and security regulations such as the General Data Protection Regulation (GDPR), and materials such as RoHS and Conflict Minerals rules. The GDPR will be a hard sell to the UK government as they want to ban encryption to fight terrorism.

Even if the UK is able to secure a Free Trade Agreement (FTA) with the EU instead of single market membership, it will only mean that UK goods and services will not be taxed. They still won’t play by the same rules as members. For example, many EU governments could refuse to let UK companies bid for strategic infrastructure and technology projects, and the UK could lose all access to European technology programs such as Horizon 2020. Leaving the Customs Union also presents tech businesses with significant concerns about the impact of the reintroduction of customs checks and additional bureaucracy that will slow down cross-border flow of hardware and digital goods.

This could be a disaster for the supply chain of electronic products, as anything entering or exiting the UK will need additional paperwork, and customs clearance, plus certifications of compliance with EU regulations.

To revert to trading with the EU only on World Trade Organization (WTO) terms would cause serious harm to Britain’s economy. It would mean the EU imposing tariffs plus a full panoply of non-tariff barriers on almost half Britain’s exports.

Meanwhile, during the expected two-year long Brexit negotiations, the UK cannot officially start new free trade agreements negotiations with third countries until it leaves the Customs Union.

Some people, however, believe that Brexit could help the UK tech sector to be more competitive. The drop in the pound’s value makes manufacturing and salaries cheaper, helping the trade balance. But that will remain to be seen once the final agreement with the EU is reached.

There is no way to know what is going to be the result of the Brexit negotiations. There are some voices that argue for a second referendum to allow the British people to reconsider leaving the EU. Both the newly elected French President Macron and German Chancellor Merkel have recently said that if the UK decides to cancel Brexit they will be happy to help Britain stay in the Union.

Theresa May has a very difficult road ahead, both at home and with the EU negotiators. The results of last week’s elections didn’t help her position, and the European Council will not make it easy for her government to get the deal she wants.

So far there have been only declarations of intent and speculation. When the negotiations officially come to a close, we’ll be able to see the different positions. But for many Britons and EU citizens in the UK Brexit has already started, and its consequences are being felt.

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