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Sun. February 25, 2024
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International Affairs Forum

Around the World, Across the Political Spectrum

The Brexit Issue


Currently, Great Britain’s annual net budgetary transfers to the European Union amount to 13 billion pounds. In various forms, every year the European Union injects 7 billion pounds into the British economy. Hence, while - as a result of Brexit - Great Britain shall renegotiate the trade agreements with the European Union, it shall simultaneously reshape its trade flows also with the United States, Japan and China, not to mention the 60 Commonwealth nations, which would become a new and huge replacement area for all the economic sectors in which the EU incurs more difficulties in promoting British companies.

It is certainly a great economic change, but also a strategic and geopolitical revolution which many experts are already analyzing in Great Britain.

It is also worth recalling that over 50% of the current British trade regards the EU, while the trade balance with the other nations refers to Treaties reached only through the frame, namely the European regulatory framework. And not all European frames have favored the British economy.

It is a painful mystery how we can imagine a Union of countries competing with one another, with largely overlapping economies, in a context of international trade expansion, which uses one currency only (although this is not the British case), but has no common tax policy nor pools the public debt. An eternal situation of countries which always quarrel and compete, but have more convergent interests than it may seem. Sooner or later, however - as always happens within alliances - a leader creating a hierarchy will emerge.

Hence, Brexit is Great Britain’s way to say that it no longer wishes to accept a German-led European Union. Therefore Great Britain is reacting to an EU crisis which is structural and has not only merely commercial roots, but also strong geopolitical and strategic ones. In fact, the idea of some British economists is that reformulating the Treaties with the EU itself and, at the same time, with China, the Russian Federation and the United States - pending the TTIP - is more useful than indulging in a massive negotiation between the EU and these external commercial areas. This negotiation would inevitably favor the continental economies at the expense of Britain, which has another productive configuration compared to the German or the Spanish.

Hence, at the analytical level, the pros and cons, namely the Brexit and the Bremain are equal, and no one can now evaluate the specific weight of each economic or political choice. For Great Britain remaining in the EU means to avoid the tariff barriers and commercial brokerage costs which the Union has abolished. Therefore leaving the European system could be dangerous.

Nevertheless, given Great Britain’s economic size and importance, the Brexit supporters think it is always possible to negotiate new and more favorable terms and conditions with the EU. Moreover, outside the European Union, Great Britain will be in a position to renegotiate a new global tariff system without being obliged to be subject to EU regulations. The new trade rules could certainly stimulate further internationalization of the British economy, which would have open doors in China, Japan and Russia. All this while EU exports are shrinking.

With Brexit, Great Britain could also decide to carry out dumping on growing markets and quickly replace the exports of many EU countries, especially those in crisis. Furthermore, Great Britain pays 340 pounds a year to the EU for each household, while earning approximately 3,000 for each household.

Moreover, should Great Britain leave the European Union, the average costs would not decrease, because there would always be costly mechanisms for access to the European market or to the other geo-economic systems. Conversely, should Great Britain stop making transfers to the EU, the 350 million pounds a week (half of the British school budget), which are the cost for remaining in the EU and comply with its rules, could be spent to create new companies and improve vocational and scientific training - an issue to which Great Britain is particularly sensitive, as is the case with all the economies in which the service sector is particularly large and developed.

Leaving the EU does not absolutely mean reducing migration flows to Great Britain, as claimed by the Brexit opponents. After all, Great Britain could carry out more stringent controls at its borders thus avoiding - as currently happens – differentiating between the immigrants coming from the EU and the ones coming from other continents.

Furthermore, many Brexit supporters point out that now Great Britain counts for very little within the EU and hence it is highly unlikely for this situation to improve if voters decide to stay in the EU.

The British Treasury Ministry, which is firmly opposed to the country leaving the EU, notes that Brexit could make the British GDP shrink by 6% as from 2030. We do not know how Prime Minister Cameron’s government has made these calculations. Let us imagine it assumes an increase in the prices of goods and services imported from the EU, but this is by no means certain.

We are in a phase of structural deflation and competition among the EU Member States, one in which Great Britain could take advantage of by focusing on one country or the other.

As usual, the future renegotiation of Trade Agreements will lead to favor some sectors and penalize others.

Today, no one can predict what the British top exports to the EU will be in the coming years, and not even the structure of European exports to Great Britain. Hence, the British government reiterates that, in case of Brexit, the British GDP would decline by 5-6%. Shall we not also consider the inevitable expansion of British trade in the Commonwealth region? Again, rational forecasts cannot be made - everything will depend on the political mechanism of the upcoming negotiations and on a strategic and geo-economics context full of variable factors rather than constant ones.

A global context is changing very rapidly and it is unpredictable both in relation to Great Britain and the EU. It is not at all certain that the pound sterling - which is currently 5.6% undervalued compared to its commercial value – shall remain "low", thus attracting capital from abroad. Indeed, it is likely that - after the signing of the TTIP between Great Britain and the United States - there will be an increase in the pound sterling at purchasing power parity and a parallel increase in the euro.

The advocates of Great Britain’ stay in the Union, provide the following assessment on the Leave costs. The transport costs would increase (by 4-7.5%) since most of the vehicles used are produced in the EU region. However, setting the great British automotive industry again into motion could become reasonable, with a large market outside the EU which requires being motorized. A replacement economy would be created in the British transport sector which would increase employment. Furthermore, the means of transport have a short payback time which implies a decreasing trend of unit costs.

With Brexit, the prices of alcoholic beverages would increase (again in a 4-7% range), which is certainly bad news for all pub-goers. But which is the British share of alcohol imports from the EU? The British producers and dealers of this industry report that the imports are decreasing steadily, from about 151 million bottles in 2010 to 142 million ones in 2014. The British government also charges high excise duties on alcohol, in addition to the EU common taxation. As we can see, the structure of alcohol prices in Great Britain is more complex than it may seem and the industry will be probably able to resort to effective replacement practices, to the delight of all British barflies.
Again according to the Remain supporters, food prices would increase by 3-5%.

However, how can such a statistical evaluation be made on one of the most diversified markets? The already high prices of the selected, high quality and “high end" food products - almost all imported and consumed by the British upper classes are likely to further increase. But probably the prices of lowbrow food for the working class, traditionally scarcely influenced by imports, will not rise much.

Clothing prices are expected to increase between 2% and 4%, but we think that the price of high fashion and luxury products imported from France and Italy may increase. Today, the networks selling low-cost clothes already largely defy EU regulations and manufacturing processes.

Again, according to the Bremain advocates, as a result of Brexit, the best possible scenario is that average revenue per household would fall by approximately 1.9% per year. In a worst case scenario, the purchasing power per household would decrease by over 4% per year.

But how? It is inconceivable that a country like Great Britain would forcedly renegotiate, with the EU or the WTO, with less favorable terms and conditions than those currently existing with the EU. In fact, after the possible Brexit, Great Britain could follow the Norway’s and Switzerland’s examples and join the European Economic Area (EEA) and EFTA. Or it could renegotiate trade agreements with the WTO only.

Hence are we sure that both negotiations would make Great Britain obtain dramatically more draconian terms and conditions than the EU ones? And why?

However, it is likely for Great Britain to create good synergies with the Swiss Confederation, which walked out of EFTA in 1993, as well as with the other EEA countries, thus taking advantage of the weight of its economy and its world standing on the financial and stock markets.

Are we sure that a second trade agreement with the EU would be harder than the current one for Great Britain, after the EU possibly discovering the clout of the British economy is no longer subject to its regulations? Or its ability to "do harm" to the EU countries on global markets?

In that case, I think that many countries would do everything to bring Great Britain back into the EU, after the possible Brexit. Again, at commercial level - and here the Bremain supporters show to have credible arguments - if Great Britain adhered to the EEA there would be more transaction costs for British exporters to those countries, with the inevitable reintroduction of quotas and administered prices for agricultural and fishery products.

Being outside the EU, Great Britain should renegotiate - and not always from a position of strength - trade agreements with the European Union and other 50 countries, in addition to having to renew temporary trade agreements with other 67 nations.

A situation of "economic uncertainty" would block British companies’ decisions and investment, driving back a lot of capital which could be used in the British production system, as well as in its innovative finance.

However, as the Brexit supporters maintain, the time schedule may be reduced by a standardization of negotiations. This is a dangerous, albeit not impossible, choice. Moreover, if Britain were to use only the WTO for tariffs and trade, it should decide its import tariffs on its own.

Nevertheless, if Great Britain decided to maintain zero tariffs with the EU countries - which is in its own interest - it should unilaterally reduce its tariffs for imports from all the WTO members, should there be no specific preferential agreements with particular countries.

However, the EU economic and political leverage vis-à-vis Great Britain is still very significant: only 8% of EU exports go to Great Britain, while over 50% of UK exports go to the EU region. Only 3.1% of European GDP depends on exports to Great Britain, while 12.6% of the British GDP depends on trade with Europe.  But man does not live by bread alone.

Brexit is the materialization of Great Britain’s dream of a new global role, the memory of an imperial past, as well as confirmation of the fact that the British people are not, and will never be, fully Europeans and the other way round.

In these cases, we should well revise the EU Treaties and  rethink the structure of the European single currency - which luckily Great Britain has not adopted – as well as create a new myth for the whole continent, including Great Britain.

This is exactly what will never happen and the EU business as usual will also destroy many of the good results the EU has achieved over the years. 

Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, theHebrew University of Jerusalem and the Yeshiva University in New York.

He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and Khashoggi Holding’s advisor.

In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France."


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