At the World Economic Forum in Davos, Switzerland in January, British Prime Minister Theresa May declared that the United Kingdom will continue with its plans to leave the European Union.
Article 50 of the Lisbon Treaty, which initiates the process of leaving the EU, will be triggered no later than March, she claimed.
It is difficult to say what the consequences will be for the Caucasus region. Britain is among Azerbaijan’s most important partners, and British Petroleum (BP) is the primary driver in key energy projects.
In 2016 British investment in Azerbaijan exceeded $23 billion. In the case of Britain’s exit from the EU, BP will lose its preferential advantage for companies of the EU.
In this case, Caspian oil delivered to Europe may turn out to be uncompetitive. True, BP holds a 35.78% share in the oil-mining consortium, which also includes non-British companies, including Azerbaijani ones.
But we can assume that oil-producing countries will want to make use of the situation and expand their markets. This might be the countries of the Middle East, Libya and Nigeria or Norway. Because of this, the processes connected with Brexit are acquiring a particular significance for Azerbaijan.
During the period following the referendum, no particular changes took place in Britain. The only serious consequence was the fall of the pound, which fell to a thirty-year minimum by 754 points, several seconds after the results of the referendum were announced.
Traders began hurriedly converting money into other currencies: the US dollar, Japanese yen, and Swiss francs. The main British index, the FTSE 100, fell by 530 points in the first minutes. This lead to a loss of £120 billion.
Obviously, once practical steps will be taken to make the results of the referendum a reality, Britain will be faced with difficult times, not limited to just a fall in the exchange rate of the pound.
The Chancellor of the Exchequer (equivalent of Minister of Finance) George Osbourne, warned that a slump in the British economy as a result of Brexit might force the government to reduce state expenditures by £15 billion and to raise taxes by the same amount.
Mark Carney, Governor of the Bank of England, pointed out that a ‘yes’ vote might lead to a recession and that managing it might require weakening the pound. And indeed, the Bank of England reduced the discount rate twice over, which had not changed since 2009. Since loans issued in Britain are tied to the rates of the central bank, rates were lowered at other banks, and their revenues reduced accordingly. True, Carney declared the banks would be allocated an additional quarter trillion pounds, and the Financial Policy Committee reduced the capital requirements for the banks, freeing up £150 billion in order to ensure financial stability.
The banks make up the base of the British economy. The lion’s share of GDP comes from the banking services sector, insurance, investment, and audit. In London alone this sector provides European companies with credit to the tune of 1.3 billion euros. 70% of this sum comes from British and foreign banks with branches based in London.
In order to do work in the European Union, it is enough that banks from EU countries are simply licensed in any country of the EU. A bank that is foreign to the EU must receive a license and open a branch separately in every member-country. In leaving the EU, British banks may begin to loose clients, since they won’t be able to ensure several types of cashless transactions.
The Royal Bank of Scotland’s losses in the first half of 2016 were £2.04 billion. HSBC’s profits were reduced by £7.3 billion and even before the referendum its leadership announced that, in the case that Brexit goes through it will transfer employees to Paris who bring in a fifth of all profits from banking operations in Britain.
Barclays’s profits fell by 21%. Moreover, the London stock exchange – the primary financial center in Europe – might lose this honored and very profitable title. On the whole, experts at Deutsche Bank are not ruling out the possibility that, after leaving the EU, the UK’s GDP might fall by up to 9.5% over a decade.
The agreements concluded between the United Kingdom and the countries of the EU over the past 50 years will have to be revisited or annulled. This will not take place quickly, but it is inevitable that banks will lose their positions of leadership, all the more so because British financiers will not be able to make use of the EU’s free passport regime. True, not one bank has yet announced that it is leaving Britain. They are waiting to see whether Brexit will take place or not.
Around 44% of Britain’s exports go to the European Union, and about 53% of its imports are from the EU. And for both international and purely British companies it is important to maintain free access to the EU’s 500 million-strong domestic market. But this will entail observing the ‘four freedoms’: free movement of goods, capital, labor power and services.
And also accepting migrants, which half of Britain is opposed to.
At least 3 million workers worked in the country in 2016. Roughly half of them are Poles, Irish, Lithuanians, French, Slovaks, and Romanians. In turn, more than 2 million British citizens living and working in countries of the EU will become foreigners.
They will need to receive permits for work activities and other documents provided for in local law, which were not previously needed because of EU membership.
Yet one more predicted consequence will be investor flight from the UK because of the unclear status of future trade relations with the EU. At the same time, already in the first quarter of 2016 there was a foreign trade deficit of £34.7 billion, of which £24 billion went to the EU. After the departure, trade with the EU in accordance with the rules of the WTO will mean that higher customs and tax payments will be in effect in Britain for both import and export, which will lead to a price hike of 20% on average.
The ambiguity in the economy has led to a destabilization in domestic politics. 51.9% of 33.5 million people came to polling places and voted to leave the EU, and in the end the isolationists won by 1.26 million votes. The British political system experienced serious convulsions, and the Prime Minister immediately resigned. The House of Commons, which is the most effective and influential, since, in contrast to the House of Lords, it is elected by general vote, is overflowing with opponents of the exit (454 of 650 deputies).
It may be that the country has never since the time of the English Revolution been so divided, to the point that it is fraught with territorial problems as well. During the Scottish referendum of 2014, the majority voted to remain a part of the United Kingdom specifically in order to retain EU membership. As stated by Nicola Sturgeon, First Minister of Scotland, in the case that Brexit becomes a reality, Scotland will announce a new referendum on independence, and this time around the separatists are sure to be victorious, seeing a future of an independent Scotland as part of the European Union.
And, indeed, in Ulster, where the conflict between Catholics and Protestants was settled with difficulty twenty years ago, people have said that Northern Ireland should be allowed to hold a referendum on joining Ireland.
Diplomatic conflicts occasionally flare up between Spain and the United Kingdom because of Gibraltar, which the British consider their colony. The United Kingdom’s exit from the European Union will allow Spain to once again raise this question, which will become a topic of negotiations between London and Madrid alone, not within the EU framework.
All these problems have been laid on the shoulders of the new Prime Minister – 59 year-old Theresa May. She, the second female Prime Minister in the country’s history (after Margaret Thatcher), worked for a long time in the banking sector; and her husband is an investment banker, an employee of the American trust company Capital Group Companies.
As head of the Home Office, she voiced opposition to exiting the EU. But the complexity of the new cabinet’s situation is that the exit will lead to great problems, but if the UK remains a part of the EU, this would be ignoring the will of the people.
True, Brexit will be painful enough for the EU as well. But experts believe that for Europe the British referendum on leaving the European Union might even turn out to be beneficial. The countries of the EU will attract investors and capital, since even Britain’s as-yet-unimplemented exit led to a sharp increase in the yield of bonds from other countries in the Eurozone and increased their appeal for investment.
True, thanks to the United Kingdom, the EU had two representatives in the UN Security Council (along with France). Moreover, the UK is one of Europe’s two primary military powers. The European Union will no longer have all of this. And indeed, the wave of dissociation may carry over to other countries that have previously been noted to have Euro-skeptic attitudes. But on the whole, Europe might survive this crisis relatively painlessly.
The United Kingdom can try to follow the path taken by Norway, which is a member of the European Economic Area but isn’t a part of the EU. However, in this case London will have to implement EU laws that it will have no hand in developing. Additionally, if the UK tries to negotiate special conditions for itself, other countries might come to want the same.
But will all this be worth it?
Britain could have simply followed the example of the eighteen member-states of the EU that have refused to accept Syrian refugees. Among them are Denmark, the Czech Republic, Italy, Cyprus, Poland and Hungary.
But the UK preferred to hold a referendum, the results of which were met with enthusiasm by opponents of the EU in Holland, France, Austria, Sweden, Belgium, Italy, Denmark, and Hungary, not even to speak of Greece, which was on the brink of exiting the Eurozone in 2015.
All this is an indicator of crisis for European integration. Of course, one could talk at length about the things the EU has been going through recently. But we can also recall the words of Francis of Assisi, who said, “This is not the old world coming to an end, but a new world beginning”. Despite all else, any crisis is an indicator of the potential for development. The question is, can European politicians make use of this potential while it remains. . .