Daniel Lacalle

Brexit as an Opportunity (IM Magazine)

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Article published at IM Magazine (here).

Now that article 50 has been triggered, there is a lot of speculation about the disasters looming over Britain. However, many experts believe that besides the challenges ahead there are many opportunities to exploit. Daniel Lacalle, Commissioner of the Madrid Region in London explores the path that lies ahead of Britain in the post-EU era and how European regions like Madrid could benefit from it.

Brexit, the process of disconnecting the United Kingdom from the European Union, has been launched. The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened, but the challenges are relevant. Most economic indicators in the EU and UK have been strengthening. Growth and employment generation in the UK have been revised upward by the Bank of England, and investment banks estimate a similar improvement in Europe.

The UK economy continues to grow with a 20bps increase over post-referendum estimates, bringing GDP growth for 2017 to 1.6%. In addition to the recent revaluation of the Pound against the Euro, we have seen a similar improvement in estimates for the European Union, where GDP growth expectations have been revised up to 1.6% for 2017 and 1.8% for 2018. The reality is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes risk much lower, but we cannot forget that there is a risk.

The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long, and hard negotiation in which both sides have very different positions. If the European Union is smart, it would use Brexit as an opportunity to strengthen as an area of freedom, flexibility, attractive investment opportunities and global trade.
Exports and imports The 0.4% decreased in UK production experienced in the first months of 2017, was due to a decrease in the pharmaceutical sector of 0.9% mostly caused by the uncertainty about the Trump healthcare plan, not by Brexit.

The UK trade deficit fell to 4.7 billion pounds in the three months leading to January 2017. Exports grew at the fastest pace in ten years in the quarter, reaching a record high, and imports also skyrocketed. Therefore, it is safe to say that the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.

Contributions
The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the other member States. Spain for example, will have to pay around 1 billion Euros more per year.

Immigration
An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012 -according to a report by Capital Economics-, reaching 185,000 people. Total net immigration has also shot up, reaching more than 320,000 people, compared with a historical average of 150,000 people, according to the British government.

The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.

Trade
Nearly half of UK exports go to the EU, but of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.

The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.

Financial sector
With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the financial sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.

Regulation

According to Capital Economics and Open Europe, the cost to the UK of the 100 most expensive rules and regulations of the European Union is 33 billion pounds a year. Excessive bureaucracy and high taxes have limited potential growth and investment in Europe, particularly in the past eight years.

If the European Union does not take the initiative and begins to dismantle the bureaucratic ‘leviathan’ it has built, this cost will be a problem for many countries. However, we must not miss out on the fact that the UK is already one of the leading countries in ease of doing business. Therefore, eliminating unnecessary regulation and bureaucracy is one of the aces up the sleeve of the UK to attract investment post-Brexit.

Foreign investment
The European Union accounts for almost 46% of foreign investment in the United Kingdom; mainly due to the purchases by multinational companies of other British companies. This flow is not expected to be reduced and, of course, could be easily replaced. European investment has already reduced in recent years and has been more than offset by other countries.

The Opportunity for Madrid

Brexit presents many challenges and opportunities, for Spain as a country and particularly for the Region of Madrid, so that it keeps being a driving force for job creation and to attract investment. These are two distinctive qualities of the Madrid Regional Community.

For those businesses and services that want to remain partly or fully located within the EU, a region like Madrid offers an excellent opportunity for growth and diversification. This is a region fully committed to the European Union project, leader in economic freedom and as a business facilitator, which offers a unique combination of quality services and competitive costs.

The Community of Madrid is not just ready for this opportunity, but it is actually waiting for it with enormous commitment and enthusiasm. Madrid offers a competitive taxation and labour legislation that promotes business growth and employment, top quality infrastructure, a gateway into Europe and Latin America, competitive talent, quality of life and excellent public services. With more than 1.7 million square metres of available first class office space in the centre of Madrid, which ranks 2 in the Savills list of available prime real estate.

UK investment into the EU will not likely be reduced due to Brexit. If anything, it will increase, given the opportunity to develop activities within the EU and move part of some businesses abroad.

We are approaching a period of maximum uncertainty, but the opportunity is enormous. The European Union can come out of these negotiations strengthened, reducing bureaucracy and attracting investment and capital.
I believe Brexit is not going to be a zero-sum game. The challenges presented are only opportunities. If the EU takes them, there is a strong chance to grow, become more prosperous, and regain leadership.
The European Union can become a world leader in trade, growth, employment and investment attraction, with or without the UK in it. The opportunity is enormous, and we should make the most of it.
Daniel Lacalle, Commissioner of the Madrid Region in London, has a PhD in Economics, and is the author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).

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