Beginning Brexit: Bracing for impact

Steep fall in the value of pound has changed merger calculations for companies around the world

The world did not end. No recession unfolded. Nine months after Britain voted to leave the European Union (EU), disregarding warnings of grim economic consequences, a nation famous for calmly carrying on has seemingly gone about its business.
 
As Prime Minister Theresa May on Wednesday officially initiated Britain’s exit from Europe — Brexit, in everyday talk — the lack of disaster was touted by those steering the departure as a sign of little trouble ahead.
 
“There were predictions about what would happen to the economy if the United Kingdom voted to leave,” May told Parliament on Wednesday. “Those predictions have not proved to be correct. We see a strong economy.”

 

But the reassuring talk did not reckon with one significant detail: Nothing has actually happened yet.
 
May has only set in motion the complex, politically fraught divorce proceedings through which Britain must settle its affairs with the 27 jilted members of the EU. The outcome will almost certainly be costly: Britain has placed in jeopardy its trading relationship with Europe, its largest customer for exports, while imperiling London’s status as banker to the planet.
 
The markets essentially shrugged. The move was as expected as the next Super Bowl. The pound dipped a tad. So did shares on London’s stock market.

 
The immediate impact of May’s action was to start negotiations on future dealings across the English Channel. Those talks have a two-year deadline. If no deal is struck before then, Britain and Europe would plunge into a state of chaotic uncertainty.
 
Trade would revert to the rules of the World Trade Organization, making Britain’s exports to Europe vulnerable to tariffs and other barriers to commerce, including health and safety rules.
 
London’s bankers would be effectively severed from Europe, with many transactions for clients based on the Continent rendered illegal.
 
Until now, such issues were wrapped in layers of hypotheticals, with the details left for some indeterminate day when Britain’s government would make it real. That day has come.

 
Though the financial industry has been preparing to move jobs to other financial capitals in anticipation of a messy Brexit, other industries have waited for clarity. Now, they will feel pressure to act — shifting some lines of business to European capitals, perhaps shelving British expansions.
 
Global banking giants like Citigroup, HSBC and JPMorgan Chase may soon carry out plans to shift thousands of jobs to financial centers in the European Union. Goldman Sachs recently confirmed that it is moving hundreds of jobs out of London while expanding offices in Frankfurt and Paris.
 
Vodafone, the telecommunications giant, said after the referendum that it might shift its headquarters from London.

 
“The fact of setting this clock ticking is significant, because two years for many businesses is enough time for them to adapt, but short enough that they have to start making decisions really quickly,” said Nicolas Véron, an economist and senior fellow at Bruegel, a research institution in Brussels. “You will start to see very observable, concrete consequences of Brexit very soon.”
 
Britain has exploited its inclusion in Europe’s vast single market to make itself a dominant hub for multinational companies as various as aviation, pharmaceuticals and finance. They have set up factories, marketing teams and trading floors in Britain while selling to clients from Ireland to Greece, as if this swath of geography — home to some 500 million people — were one country.

 
So much for all that.
 
European leaders have consistently reaffirmed that remaining in the single market requires that Britain accept the free movement of people. That collides with a primary aim of many Brexit supporters — restricting immigration.
 
After months of pretending that a finesse could be found, May in January declared her government’s choice: enter immigration limits, goodbye single market.
 
Long before this political reckoning with reality, executives at global banks were already mulling which jobs to move from London to other cities in the European Union — Dublin, Frankfurt, Paris, Amsterdam, Luxembourg.
 
“People will have to move,” said William Wright, founder and managing director of New Financial, a research institution in London. “There’s no other option.”

 
Predicting how many jobs will move has become a thriving cottage industry. Oliver Wyman, the global consultancy, concluded that if, as now seems likely, transactions in London for European clients are sharply curtailed, as many as 35,000 British jobs could disappear with as much as 20 billion pounds ($24.8 billion) in revenue.
 
After the Brexit vote, May met with Nissan’s chief executive to offer assurances that her government would do what was necessary to keep auto manufacturing competitive. Nissan said it would continue to make sport utility vehicles in Sunderland, a city in northern England.
 
Brexit supporters called the outcome a template for how a pragmatic British government would prevent businesses from abandoning its shores — with tax cuts, friendly regulation and deal making. But if Britain promised anything meaningful to Nissan, it probably violated World Trade Organization rules. Nissan has since said it continues to assess the uncertain economics of Britain. Ford and BMW are reassessing their British factories, too.

 
For now, Britain has managed to avoid the most frightening economic forecasts.
 
Before the referendum last June, the British Treasury predicted that a vote to exit could shrink the economy by as much 6 per cent annually for the first two years.
 
The economy expanded by 1.8 per cent last year. British consumers continued to spend. British factories continued to churn out cars, medical devices and aircraft parts, many of them destined for Europe.
 
This month, Toyota announced plans to sink an additional £240 million (about $297 million) into a factory in Derbyshire, though it qualified that it required reliable access to Europe. Snap, the parent company of social media darling Snapchat that raised $3.4 billion in an initial public offering, recently picked London as its international headquarters.

 
But consumer spending has been increasingly paid for by debt. The British pound has surrendered 17 per cent of its value against the dollar since the referendum, raising the cost of imported goods. Investment is flagging.
 
A weaker pound helps exports, making British goods cheaper on world markets. But exports have also been aided by the very thing Britain is trying to ditch — inclusion in Europe.
 
Proponents of Brexit tend to dismiss Europe as a land leading only in the numbers of unemployed men who are moving in with their parents. Britain’s next era is supposed to be centered on trade with faster growing, innovative nations like the United States.

 
Britain and Europe must negotiate a trade deal that will prevent a rupture to commerce. During the campaign, Brexit supporters argued that Europe would ultimately make it happen because its most powerful member, Germany, now sends a parade of BMWs, Audis and Volkswagens to Britain.
 
But trade negotiations are vulnerable to the manipulations of politically protected industries. This one seems particularly prone to acrimony. European leaders confront existential threats to their union, with political parties across the Continent hostile to its powers. Many are intent on using Britain to illustrate what they contend happens when a member leaves — nothing good.

 
“It’s common sense,” said Véron, an economist. “You don’t allow someone who leaves the club to have better terms than someone who’s in the club, or otherwise the club doesn’t mean anything.”
 
Even if European leaders seek middle ground, any one of the member nations could hijack the proceedings with their demands while the clock ticks away. Last year, a single province of Belgium nearly scuppered a trade deal negotiated between all of Europe and Canada in seeking favour for its dairy farmers.
 
In a bid to stake out a stronger negotiating position, May has threatened to walk away if Europe does not extend good terms. “No deal for Britain is better than a bad deal,” she said in January.

 
Whatever the comparative rankings of unfortunate events, Britain’s leaving Europe sans deal would be bad, as economists and people running businesses have said.
 
It is often said that businesses fear uncertainty more than anything. May just eliminated some of that. But she replaced it with an apparent certainty that presents its own troubles: Britain really is departing the largest consumer market on earth.
 
©2017 The New York Times News Service