Brian Gaynor: Many twists left yet on road to Brexit

Brexit is the main topic of conversation in British and Irish business circles at present. The focus is on the controversial divorce between two economic entities that appeared to have a good, albeit imperfect, relationship.

The United Kingdom wants to have its cake and eat it too, as it has decided to leave the European Union but wishes to hold on to many of its membership benefits. The EU cannot allow the UK to leave and continue to trade with EU countries under the same free trade agreements as it has had over the past 44 years.

The dilemma was highlighted in a speech by UK Prime Minister Theresa May in Florence on September 22, when she said her country wanted a transition period of around two years, which would mean the UK would not leave the EU until 2021.

Under this transition proposal, the freedom of movement between the UK and EU would continue for another four years, with Britain paying its full contribution to Brussels of around 9 billion ($16.7b) per year during this period.

May went on to say: “The strength of feeling that the British people have about this need for control and the direct accountability of their politicians is one reason why, throughout its membership, the United Kingdom has never totally felt at home being in the European Union. And perhaps because of our history and geography, the European Union never felt to us like an integral part of our national story in the way it does to so many elsewhere in Europe”.

These comments suggested the UK has been a reluctant EU member from the beginning, an assessment that is not borne out by the facts.

Britain joined the EU on January 1, 1973, creating huge problems for New Zealand because of our reliance on exports to the UK, particularly of agricultural products.

Britain wanted to join the EU to foster its economic development, with supporters arguing it should avoid the temptation “to seek, month after month, to prove that membership of the EU has created all Britain’s ills”.

The UK turned its back on its traditional trading partners and New Zealand experienced a severe recession in the mid-1970s, partly due to Britain’s European decision.

That decision was reconfirmed in June 1975 when Harold Wilson’s pro-Europe Labour Party was re-elected.

Prime Minister Margaret Thatcher won a number of battles against the excessive powers of Brussels, but the EU ultimately brought about her downfall as her anti-EU views led to Tory pro-European MPs dumping her.

A significant development occurred in September 2006 when Nigel Farage, a former commodities trader, was elected leader of the UK Independence Party, an organisation that was determined to lead the UK out of Europe.

Farage finally got his breakthrough in January 2013 when PM David Cameron announced there would be a referendum on Britain’s EU membership by the end of 2017.

The referendum was held on June 23, 2016, with 17.4 million (51.9 per cent) voting to leave and 16.1 million (48.1 per cent) voting to remain.

The turnout was 72.2 per cent, compared with 66.4 per cent at the 2015 UK general election.

The regional differences were clearly reflected in the polls, with London, Scotland and Northern Ireland voting to remain while all the other regions voted to leave.

The Brexit decision has not been all doom and gloom, even though London’s financial sector has been strongly opposed to it. The following statistics highlight recent economic developments:

• The UK economy grew by 1.7 per cent in the June 2017 year, the same as the June 2016 year.
• The UK unemployment rate is 4.3 per cent compared with 4.9 per cent 12 months ago.
• Inflation is 2.7 per cent compared with 0.8 per cent in June 2016.
• The London Stock Exchange has risen 17 per cent since the Brexit vote.

Pound sterling has fallen 8 per cent against the euro since June 23, 2016, by 2 per cent against the US dollar and by 10 per cent against the NZ dollar.Immigration is one of the major Brexit issues and the source of birth of the main immigrant groups in the UK are:  Poland (911,000), India (833,000), Pakistan (534,000), Republic of Ireland (389,000) and Romania (310,000). These figures exclude second generation immigrants.

The Brexit decision has had an impact on this area, with the latest immigration figures showing a decline from 638,000 to 588,000 over the past 12 months. It is difficult to judge the impact of Brexit on long-term migration, but it is likely to reduce the flows from Poland, Romania and other eastern European countries.

Meanwhile, May has triggered article 50 of the Lisbon Treaty, officially starting the two-year legal process for the country to leave the EU. The deadline date is March 29, 2019, with May’s Florence speech clearly indicating that she wants an additional two-year transition period, which would mean a final exit date around March 2021.

The Brexit talks between EU chief negotiator Michael Barnier and British Secretary David Davis have been described as a “stalemate”, “deadlocked”, “shambolic” and “going nowhere”. This is not surprising as Britain is the first country to negotiate an EU exit.

A large number of issues need to be thrashed out between Barnier and Davies, with five of the major ones being:

• Trade. What type of trading deal can Britain negotiate with the EU as 44 per cent of the country’s exports go to EU countries and 53 per cent of its imports come from these countries? Britain will lose its free access to EU countries once it leaves.
• Migration. Prime Minister May has committed to reducing immigration from EU countries but Britain has a low unemployment rate and many industries, particularly healthcare, hospitality, construction and technology, are heavily reliant on foreign workers.
• Rights of citizens. This is a major issue, particularly in relation to pension access and state-funded health, as there are an estimated 3 million EU-born individuals living permanently in the UK and 1.2 million UK-born citizens living in the EU.
• Divorce settlement. Britain will be expected to make a payment for a number of EU spending commitments, including infrastructure projects, farm subsidies and pensions for EU bureaucrats. This settlement could be as high as 100b, although media sources indicated this week that the figure was more likely to be around 40b.
• Ireland/Northern Ireland border. The 499km border, which is a boundary between the Republic of Ireland and the United Kingdom, was established in May 1921 after the Anglo-Irish Treaty gave Southern Ireland independence from the UK. Customs controls were maintained until January 1, 1993, when all customs checks were abolished between EU members as part of the single market. Every day, an estimated 30,000 people cross this boundary, which was once a policed border, mainly to work on the other side.

These issues are creating considerable debate in the UK, as is the border issue in Ireland.  Who will pay for the border? What impact will it have on individuals who live on one side and work on the other? Will it have a political impact in Northern Ireland and reignite sectarian conflict? Why should Northern Ireland be forced to leave the EU when a clear majority voted to remain?

The Brexit negotiations will have little impact on New Zealand but they will be watched with keen interest in this part of the world.

Nevertheless, New Zealand and Australian trade officials are trying to negotiate better access to Britain, particularly for sheep meat, post Brexit. However, New Zealand has well and truly moved on and is far less dependent on sheep meat exports than it was pre-1973.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.