In an apparently concerted effort to steer Britain towards a ‘hard Brexit’, several Brexit-supporting Cabinet members suggested this week that the part of Britain that had seen its concerns about migration and the loss of sovereignty “ignored” for so long would now finally be heard. This implies that the cosmopolitan, outward-looking part of society that wants to remain part of the European Single Market (read: the City of London) has had its time in the sun.
Prime minister Theresa May chimed in with their message outlining the two top priorities of her government: to take back control of borders and to repeal the sovereignty of the European Court of Justice. She thereby effectively ruled out continued membership of the single market, sending the pound down to a 31-year low against the dollar.
Though May said in an interview with the BBC that she aims to “make sure that British businesses have maximum opportunities to operate within the single market”, she did not mention the financial sector by name. This suggests it is not as much a priority to her as it was for previous governments.
Brexit means job losses
The order of the UK government’s negotiation priorities should make alarm bells ring with the country’s asset managers. Léon Cornelissen, CIO of Robeco, believes Britain will have to pay a heavy price if it opts for a ‘hard Brexit’.
“The weaker pound will push up inflation, and companies won’t sufficiently compensate workers with pay rises because they will say everything is uncertain,” he said. “So household incomes will suffer and GDP forecasts will come down. This uncertainty will hamper foreign and domestic investment in the UK; companies will take a wait-and-see attitude before committing to anything. The longer-term outlook depends on the Brexit scenario unfolding, but a hard Brexit points to heavy losses to GDP in the coming years.”
Consultancy Oliver Wyman said in a report published on Wednesday that the UK financial sector is set to lose £2bn (€2.28bn, at the time of writing) in revenue and 3,000-4,000 jobs even if it remains a member of the single market. But half of EU business could be lost if UK finance companies loses access to the single market. According to the consultancy, job losses could run as high as 75,000 (7% of all financial sector jobs in the UK), and tax intake could be down by £8-£10bn a year. This compares to a net contribution of approximately £8.5bn the UK makes to the EU annually.
Restricted trade with the EU may to some extent be offset by stronger trading relationships with the rest of the world however. But this is not likely to be the case for services: the only international free trade agreement to date that includes services is, indeed, the European Single Market.
Asset managers should remember that the EU has every incentive to make sure the UK pays a heavy economic price for leaving it.