What’s the deal with Brexit?

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“They need us more than we need them” is a common refrain amongst leavers. The skewed logic. is based on balance of trade statistics. The EU sells more to the UK than the UK does to the EU, ergo the EU ‘needs’ the UK more than the UK needs the EU. While trade numbers indeed show this, the elephant in the room that keeps being ignored by the leave contingent is that the EU’s trade with the UK adds up to a paltry 2.3% of its GDP. By contrast the amount of goods and services sold by the UK to the EU amounts to a staggering 48% of the UK’s GDP. The EU trading bloc is the second largest in the world behind the US, one set of numbers I found showed that it is actually in the first spot by 1% or so. By contrast the UK GDP is currently the fifth largest in the world, and economists predict this will change drop to the 7th largest after Brexit. The EU GDP in 2018 was $18.8 trillion. The UK’s economy was $ 2.82 trillion. Post Brexit the UK will lose ready access to its biggest trading partner, worth nearly 50% of its GDP. The EU in contrast will continue to enjoy frictionless trade with itself, and its 27 member countries will no doubt take up the slack of newly uncompetitive UK goods and services.

The UK leaving may actually be a boon for certain industry sectors like agriculture. Certainly car manufacturer VW will continue to sell its range of ‘there’s-an-app-for-that’ peoples cars to the 508 million people living in the EU. As will Mini, FIAT, Peugeot, Citroen, BMW, Ferrari, Audi and Mercedes. The Brits will no doubt offer their range of (now more expensive) Jaguars and Land Rover’s across the channel to bolster domestic sales to their 66 million UK inhabitants. The bottom line is that 64% of the EU’s trade is easily done, sansred tape, amongst its member states. While only 2.3% of the EU’s trade is done with the UK.

The global economy is flashing warning signs that there could be a recession on the way, fueled in no small part by Trumps spat with China. The EU has to be in a better position to weather the storm. Of course the US is also waiting in the wings to sell its chlorine soaked poultry and GM foods into the UK market, along with other products that haven’t been able to pass stringent EU standards, but for sure this trade is going to come on terms favorable to the US. So while the EU will hurt, the UK is going to hurt much more with a no deal Brexit.

What does this mean for insurers and financial services business?

Having a single set of regulations across the EU has been a boon for London headquartered insurers and banks as passporting, that important EU rule allowing compliant financial institutions to trade anywhere in the EU without hinderance, demonstrated the spirit and advantage of collaboration. This all comes to an end on 1 November. The ECB (European Central Bank) says that UK financial services businesses have already, or are in the process of, moving $1.1 trillion of assets into the Eurozone to fund new operations. Some rather inflated forecasts stated that as many as 20 000 financial services jobs would be shifted across the channel as a result of Brexit. This sector accounts for nearly 7% of the UK’s GDP. The EU has been pretty explicit about the fact that it will not entertain any sector specific ‘equivalence’ of regulations either. Equivalence wason the table but should have been negotiated during the implementation phase of Brexit. With no deal this is no longer an option. In fact the EU ended its equivalence deal with Switzerland also after that country vacillated over details. We wait and we watch.