Economic Impact of Brexit on London’s International Markets

By: Aidan Levi-Minzi

Nearly seven months after the scheduled departure of the UK from the EU in March of 2019, leaders still struggle to come to an agreement over Brexit, and as a “no-deal” exit seems more and more likely, London-based firms are preparing for the worst.

The European Union has granted the United Kingdom another extension just days before its October 31st deadline to leave the multinational bloc after failing to reach an agreement. EU President Donald Tusk said that the 27 other nations of the union have now agreed to give the UK a more “flexible” extension, which will allow the island nation to remain in the EU until January 31st, or leave if it comes to an agreement before then. “This gives time for the UK to make clear what it wants,” said European Parliament President David Sassoli.

Since becoming Prime Minister in July, Boris Johnson’s aggressive efforts to leave the Union have not been successful, as Parliament is having trouble reaching an agreement with the EU. The biggest culprit for the stagnated negotiations are the economic ramifications of Brexit. Here is what a departure from the EU would look like for businesses in London, Europe, and the world:

London is the world’s largest international financial center, generating over £120B ($152B) annually in output due to the global scale of its asset allocation and risk management. It is home to 37% of the world’s currency dealing, with special ties to the rest of Europe. European nations are responsible for a little over a quarter of London’s income, and London provides nearly 25% of Europe’s financial services. For example, around 90% of European interest-rate swaps are bought by London-based bankers. Interest-rate swaps are used to exchange one stream of interest payments for another, which have been used to price bonds sold from the Union’s Central Bank, a critical piece of the EU’s financial standing.

The upcoming election poses two outcomes that will likely damage London’s stake as the world’s international financial powerhouse. If Jeremy Corbyn’s Labour Party wins, it would be the most left Parliament has been since 1945. Mr. Corbyn is planning on implementing financial-transactions tax, more political control over mergers and acquisitions, and capitalisation at below-market, all of which would damage London’s economy. On the other hand, a majority Conservative Party parliament would lead the EU to end the story with a “no-deal” conclusion, thanks to Boris Johnson’s audacious push to leave the union as quickly as possible. London’s economic prowess depends on openness to international financial and human capital, proximity to subsea data cables, elite universities, and, most importantly, stable economic regulation with America and near seamless ones to Europe. These close ties are in jeopardy with the current political landscape.

If Brexit were to take effect, the EU would remove all of the international businesses’ “passports” that allow them to operate across Europe. Businesses will move to other cities within the European Union, such as Paris, Brussels, and Munich. Major international car manufacturers Honda and Ford are already closing major plants in the UK, which has led to a loss of over 5,000 jobs, and UK car manufacturer Jaguar Land Rover announced in January that it would be cutting over 4,500 predominantly UK-based jobs if a “no-deal” Brexit came to fruition. Barclays bank has already moved £166B worth of assets from the UK to EU member Ireland. Lloyds of London, a global insurance company, British Steel, HSBC, and airliner Airbus have all taken the first steps in removing themselves from England.

One possible solution would be to allow London to maintain its financial power by granting it special privileges, allowing international companies to continue conducting their businesses. However, England does not want its largest city to be financially regulated by the EU, and will not agree to a deal that sees the Union taking jobs and tax revenue from the UK while maintaining its economic control over Europe. To put this into perspective, it would be as though New York City and Wall Street were divorcing from the rest of America without any prior agreement to do so.

As Switzerland has found out, an “equivalence” deal, where London-based firms would receive recognition from the rest of Europe, has its drawbacks. In June of this past summer, the bloc announced that the deal, which allowed Swiss equities to be easily traded with EU members, was to expire. Because this recognition can be withdrawn at any time, economic instability becomes a major factor in whether businesses decide to stay or go. This may sound good to the EU, but a group of balkanised economies throughout continental Europe would have to support major companies that have left London. In essence, the ramifications of a more fragmented economy may be more costly to the EU than its capture of business in London.

London still has close ties with America, and it will do everything necessary to remain amicable with Europe. Businesses based in London should also begin to increase their revenue from non-European business partners. According to Lord Ashcroft Polls, nearly 33% of those who voted to leave said they did so in order to “regain control over immigration and its own borders”. These 12,369 voters should keep in mind that, as London loses her business allies, having a diverse global industry is a blessing, not a curse.

Works Cited:

Image Link: https://www.pinterest.com/pin/844776842576936065/

Ashcroft, Lord. (2016, June 24). How the United Kingdom Voted on Thursday…and why. Lord Ashcroft Polls. https://lordashcroftpolls.com/2016/06/how-the-united-kingdom-vo ted-and-why/

Dwyer, C. (2019, October 29). Rain Chexit: European Union Grants Brexit Delay To U.K. — Again. WBUR. Retrieved from https://www.wbur.org/npr /774031088/rain- chexit-european-u nion-grants- brexit-delay-to-u-k-again

Kuepper, Justin. (2019, April 15th). Interest Rate Swap Definition. Investopedia. Retrieved from https://www.investopedia.com/terms/i/interestrateswap.asp

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Portes, Jonathan. Forte, Giuseppe. (2017, March 10). The economic impact of Brexit. Oxford Review of Economic Policy. Retrieved from https://academic.oup.com/oxrep/article/33/s uppl_1/S31/3066076