In the aftermath of Brexit. Time to open champagne in Brussels and Frankfurt?

Let me tell you a story first.

Once upon a time a man walked uphill. He was on his way for a long time, the sun was high, he was thirsty and tired. And he carried on his back a heavy backpack with a squealing and fighting pig. Then seams of the backpack had ripped, the pig was instantly free so he ran back downhill.

The man had mixed feelings. He befriended the pig during all their time together and he felt somehow lonely and abandoned. But he needed to keep moving. With each passing step he felt it easier to walk on his own. With each passing step the man felt better.

Evening came. It had started to get darker and cooler. And the pig reappeared. He was silent, obviously tired and not-so-happy. The man looked at him, said nothing and continued to move. The pig locked in step with the man. But the man had never again carried the pig on his back and never asked the pig to follow him.

Last morning after the results of Brexit vote were announced, the whole world seemed to freeze in disbelief. Markets plummeted with pound devaluing for about 10% and British banks 1/3 instantly cheaper. Why?

City of London knows better than everybody else where its competitive advantage is. This is a combination of EU membership and access to single market with Anglo-Saxon legal system and less regulation. Now half of the rug is going to be swept from under their feet. Without the “EU Passport” British banks will immediately find themselves being just the guys selling mortgages in Suffolk. Frankfurt yesterday officially opened the doors wide for any financial institutions willing to leave UK for EU. I don’t think a lot of global players will keep the headquarters in London if Brexit just follows through – UK is simply not big enough market to make it worthwhile. UK bank system will join the Swiss one in the gradual decline with Germans (and potentially French) as biggest beneficiaries.

Foreign trade will suffer too. Below are the figures of how big EU as UK’s trade partner is as of November 2015[i]:

Can you imagine a tectonic shift in UK foreign trade if it has to trade with EU according to WTO rules instead of FTA arrangement that they enjoy now? Are UK businesses so competitive to survive this with EU economy is six times as big[ii] as UK one? For EU companies the solution is simple – check new opportunities within the bloc as most probably somewhere there is an interesting potential partner to substitute the overpriced UK one. If no such luck, check the world outside. And if TTIP is signed this year, God save the Queen… Moreover, US just reconfirmed the initial stance that UK is to be the last in the queue of countries willing to conclude FTA with them. Not good news.

Immigration issue is another fallacy. Those who enjoy visa-free travel to UK probably do not recall that UK is not a part of Schengen Treaty and retains its proprietary border control service. All the immigration except for free movement of people within EU is tightly controlled by Home Office and not a single refugee had entered UK without local authorities’ expressed consent. And can you imagine a foreigner permanently entering UK to enjoy that prices without significant amassed wealth or more or less clear job prospects? Don’t think it to be a problem worth a real discussion.

So to remain competitive UK has only two viable options – backpedal somehow or rejoin the EFTA to become its fifth member together with Iceland, Liechtenstein, Norway and Switzerland to benefit from European Economic Area Agreement. And that would mean adherence to all EU rules without having a say in EU matters. Perfect outcome of the vote indeed!

And who are the real beneficiaries in UK? Just two men: Boris Johnson, who is on the move to become the PM right now and Nigel Farage, who aspires to become one someday. The Leave supporters are the last to gain something else than a new Prime Minister except trouble and headache. EU now has a perfect negotiating position – if you want something from us, play by our rules. No more British cheques, no more “no ever-closer union”, no more “no to Euro as single EU currency”. This is all in the past. Now it comes to “My way or highway” type of conversation with UK holding the short end of the stick.

And this is not to mention Scotland and North Ireland where positive vote on separation is a real possibility now. Those territories leaving can become the last two cherries on a cake on the grave of British Empire.

So let’s sit back and enjoy the ride. Really interesting to see how UK plans to deal with all the mess they created. And EU just needs to put to good use this opportunity for closer integration so unexpectedly delivered to it on a silver plate. Good luck, Brussels! And please don’t fail European unity cause this time.

[i] https://www.tradingeconomics.com/united-kingdom/exports

[ii] "Report for Selected Country Groups and Subjects (PPP valuation of country GDP)"