The implications of Brexit on European business, youth entrepreneurship and junior enterprises.

Juncker May 2016

Visit of Theresa May, British Prime Minister, to the EC. Jean-Claude Juncker, President of the EC, received Theresa May, British Prime Minister. Handshake between Theresa May, on the left, and Jean-Claude Juncker. Date: 21/10/2016 Reference: P-032756/00-03 Location: Brussels – EC/Berlaymont.

This article was exclusively written for the Sting by Mr Md. Minhajul Abedin, Mr Satya Shekhar, Mr Nikita Polukeev and Mr Divyaditya Singh, all student consultants at Westminster Business Consultants (WBC). WBC is a Junior Enterprise in the UK affiliated to the European Confederation of Junior Enterprises (JADE). The opinions expressed within reflect only the writers’ views and not The European Sting’s position on the issue.

It is important to remember that the British referendum is not legally binding; the British government must initiate “Brexit” process by invoking Article 50 of the Lisbon Treaty, 2009. The parliament has already approved Theresa May’s decision to activate Article 50 on the 29th of March even though most members of the Parliament (MPs) were against leaving the European Union (EU).

In fact, the British Prime Minister has been adamant that “Brexit means Brexit,” and that she intends to oversee the process. Once Article 50 is invoked, the EU and the UK have two years to negotiate a withdrawal agreement and the UK’s future relationship with the bloc. Any deal reached with the EU requires the consent of a “qualified majority,” meaning that 72% of the member states, representing at least 65% of the population of the EU, must vote in favour of the agreement.

If an agreement is reached, the treaties that currently govern the relationship between the EU and the United Kingdom, as a member state, will expire. If no agreement is reached, the treaties will automatically expire two years from the invocation date of Article 50. There is an option of extending negotiations beyond the two-year time limit. However, it would require the consent of all countries in the EU.

Two other points of the process are worth mentioning. The first is that many parties within the EU are involved, and because a member state has never left the bloc before, the internal process on the EU’s side of the table is itself being negotiated. The key groups are the European Council, the European Parliament, and the European Commission.

The second issue is instead more crucial. If the agreement reached between the EU and the UK is broad enough in scope to be considered a “mixed agreement” — which will most likely be if the parties negotiate not only trade but also security and foreign policy issues — then the agreement will need to be ratified by the parliament of every member state, which means every EU country would have a veto. From a negotiation point of view, this will not only increase the amount of time needed to reach a comprehensive agreement but also reduces the likelihood of a good deal.

What Leverage Does the EU have?

Because the EU needs to deter future exits, threats to walk away even from economically attractive deals become credible.

There are four important sources of leverage for the European Union.

The economics of trade. “Leave campaigners” have claimed that Britain will be negotiating from a position of strength because the EU exports more to the UK (around £290 billion) than the UK exports to the EU (around £220 billion).

This argument is quite misleading with little economic thought. In order to assess the bigger picture, it would be useful to look beyond the big numbers and rather look at the percentage of total exports represented for each party. While the UK exports a lower nominal amount to the EU, these exports represent about 44% of total UK exports. In contrast, exports to the UK are only about 10% of total EU exports. By this measure, a “hard Brexit” (a deal that hurts trade, to be more precise) is likely to be far worse for the United Kingdom than to the European Union.

This doesn’t mean that a good deal is impossible for British negotiators, but it does mean that putting too much weight on the political argument might be counterproductive.

The need to deter future exits. If the only players in this story were the UK and a firmly united EU, the UK would have more room to demand concessions. But the EU is not monolithic. One of the biggest concerns of EU negotiators will be the risk of setting a costly precedent. This deal will be closely watched by nationalist parties in other countries. If the UK can negotiate better terms than the ones possessed when it was a member state, it could encourage additional exits, which could jeopardise the union’s very existence.

As a consequence, there may be several agreements that the EU is tempted to accept on purely economic grounds (preferring them to “no deal”), but that are off the table because they could incentivize other defections from the EU. Because the EU needs to deter future exits, threats to walk away even from economically attractive deals become credible. This gives the EU leverage, albeit at the cost of making “no deal” more likely. As Martin Schulz, president of the European Parliament has stated, “There is no intention to ensure that the UK receives a bad deal, but it is clear that there can be no better deal with the EU than EU membership. The EU moreover must look out for its members’ interests and uphold its founding principles. The single market, for example, entails four freedoms (capital, goods, services, persons) and not three, or three and a half.”

Too many veto players. As mentioned previously, any final deal will require agreement from a qualified majority of EU member states, or unanimity in the event of a mixed agreement. This potentially gives veto power to many small coalitions of member states — or to every individual state if there is a mixed agreement. It narrows the zone of a possible agreement but also allows the EU to credibly say that the UK will have to make significant concessions to bring enough EU votes on board.

The psychology of precedents. Although it’s a smaller factor than those listed above, the psychology of deal making is currently working against the UK. All of the precedents in place — Norway, Switzerland, and even Canada — instantiate the European claim that there can be no “sweetheart deal,” and that it is not possible to get access to the European market without serious conditions and contributions.

What Leverage Does the UK Have?

Some of the most influential countries in the EU are the ones that are most dependent on trade with the UK.

UK negotiators also have at least three sources of leverage, although I do not wish to imply that each leverage is as equal to the other (as discussed below).

The Economic impact on the EU. Although it has less to lose than the UK, the European is likely to be adversely affected in the event of a deal that is bad for trade (e.g., high tariffs). While this might not be sufficient leverage on its own, it does give the British negotiators some influence.

Influence over major members. It is important to note that EU-level data masks considerable heterogeneity that exists among member countries with regards to the balance of trade with the UK. Notably, some of the most influential countries in the EU (such as Germany) are the ones that are most dependent on trade with the UK.

How these relationships are managed and how they can be used to influence the Brexit negotiations with the EU will be crucial considerations for the UK. I disagree with those who think the UK’s leverage vis-à-vis Germany is all that matters, and that this one trade deficit ensures a good UK-EU deal — but it certainly is likely to be on the agenda.

Security concerns. If the only issues on the table are trade and immigration, the EU arguably is in a strong position. But if the UK can make a strong case that a bad deal with the EU would threaten cooperation on other matters such as security, that could help tip the scales. Such a threat ought not to be credible: In my view, two centuries of UK history show that every time the British have moved further away from Europe, they eventually regretted the decision — and have had to return when things unravelled on the continent.

Everyone loses when the UK and EU drift apart on matters of security, the recent terrorist attack might be a good indicator of the value of co-operation. And yet there are reasons that Europeans should take the threat to strategic cooperation seriously. The outcome of the referendum shows a strong isolationist attitude in the UK, and the EU might want to consider the degree to which relationships might deteriorate if the eventual deal is perceived as one-sided (or punitive) by the British people.

What Are the Major Issues?

Let’s start with some context. The European Union is based on the idea of a single market, characterised by four freedoms. They are the free movement, across borders, of goods, services, capital, and people.

There are three consequences of this arrangement that are of particular relevance to Brexit negotiators: free trade between EU member states (think “tariff-free”); businesses in the member states being subject to EU regulations; and citizens of any member state being able to move to another member state to live or work there. All of these were important factors leading up to the Brexit vote, and they are central to the negotiations that will take place between the UK and the EU.

Trade and immigration. Two of the most important issues are trade and immigration. It is worth considering them together because doing so helps to highlight a key conflict in the negotiations. Simply put, the UK wants to keep the trade relationship with EU members as it is today (free trade) but significantly change the rules surrounding the free movement of people between the EU and the UK. Roughly half of the immigrants to the UK come from the EU, and polls conducted in the run-up to the referendum suggest that over 50% of those who supported Brexit considered immigration their biggest concern.

David Davis, who was appointed Secretary of State for Exiting the European Union by the current PM Mrs May, believes both goals are achievable: “The ideal outcome (and in my view the most likely, after a lot of wrangling) is continued tariff-free access. Once the European nations realise that we are not going to budge on control of our borders, they will want to talk, in their own interest.”

Unfortunately, this is not at all how the EU sees it. Donald Tusk, President of the European Council, has made clear that for the UK to have access to the single market “requires acceptance of all four EU freedoms — including freedom of movement. There can be no single market à la carte.” Other EU leaders have made similar pronouncements. How much wiggle room there is, and what kinds of concessions might be made on trade and immigration, remains to be seen (and negotiated).

Money paid to the EU. The UK pays more into the EU budget than it gets back in rebates and other payments to sectors of the UK economy. Leave campaigners and supporters argued that the money saved through Brexit could be used elsewhere (e.g., to enhance the UK’s National Health Service).

Here, we see the same conflict: From the EU perspective, if the UK wishes to have continued access to the single market, it will be required to pay dues.

There is a clear precedent for this stance. Norway, which is not a member of the EU, pays into the EU budget in order to have access to the single market. The precise amount that the UK would pay will have to be negotiated.

Regulations. Leave supporters complained about onerous regulations imposed by the EU, including environmental standards, product safety rules, and minimum working conditions for employees. Although Brexit would put an end to EU-imposed regulations, there are two important factors to keep in mind. First, many (perhaps most) regulations will continue because they or similar ones are important for the UK, even if the EU is not imposing them. The UK will not, for example, abolish all product safety or environmental regulations after Brexit. Second, the EU could continue to impose certain regulations after Brexit in exchange for the UK’s access to the single market. Again, this is consistent with the Norway precedent, although UK negotiators will want to avoid regulatory influence from the EU.

Free movement of people. Much of the Leave campaign’s rhetoric was aimed at stemming the tide of immigrants from Europe, but barriers to free movement of people would hurt both sides in the negotiation. Millions of UK citizens live and work in Europe, and even the loudest proponents of Brexit want them to retain their rights. Former Mayor of London, Boris Johnson, a leading voice in the Leave camp who now has been appointed foreign secretary, promised as much in an opinion piece he wrote following the referendum: “British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI — the BDI — has very sensibly reminded us, there will continue to be free trade, and access to the single market. The only change — and it will not come in any great rush — is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation.”

The desire to address the anxiety of the British people is understandable. What is difficult to understand is how the foreign secretary intends to secure the rights of British citizens to free movement without offering reciprocal rights to citizens of other EU member states (or, for that matter, without offering any concessions at all).

Financial services. A particular concern for the UK in these negotiations is the fate of London’s financial services sector. It plays an outsize role in the broader EU financial industry, where it has a trade surplus of almost £20 billion with the rest of Europe. How far the UK is willing to go (or be lobbied to go) to protect the sector — or, put differently, how much the EU can extract in exchange for concessions to the City — is an open question.

Impact on the Junior Enterprise Movement Youth Entrepreneurship The primary pillars of Brexit that threaten the Junior Enterprise movement are immigration and regulations, specifically for services. The frontiers of trade in goods, healthcare regulations, jurisdiction and so on, do not have any significant relations to the JE movement.

As hinted by the Prime Minister in her address to dignitaries and journalists at the Lancaster House, a ‘hard’ Brexit is highly anticipated at least in some facets of the potential deals. This may cut off the free movement of people completely. For starters, students from the EU may be subjected to work restrictions, and they may also have to apply for a Tier 4 Student Visas and the system of work permits might fly into action. Students from the European Union may no longer enjoy fee reductions, consequently pulling down the influx of EU students. JEs in the UK can expect the number of nationalities and diversity to diminish. Correspondingly, Britons can face similar restrictions, and the benefits of crossing the English Channel and the Northern Sea might not look that attractive. Hence, JE’s in EU can see fewer Britons engaging in their market analysing data and participating to joint project completions. It is worth mentioning that many countries around the world have a similar or even better education system than the Europeans. They cannot establish international relation systems like the JE’s in Europe because of the travel and blending restrictions between countries. This further emphasises the need for free communication and interaction leading to an ongoing European collaboration between JE’s.

The representative organisation for the UK’s universities has calculated that between 2012 and 2013, EU nationals encompassed 5.5 percent of the total UK student population, contributing £3.7 billion to the UK economy and providing 34,000 jobs – the number has steadily increased ever since. The upcoming Brexit will likely affect the workforce of junior enterprises, with special regards to the UK itself. This is due to the high number of EU students coming to the UK In order to complete their degrees while becoming part of junior enterprises over the English Channel. In the longer term, it seems likely that EU students will have to pay higher fee rates that currently apply to those from outside of the EU. However, those looking on the brighter side have pointed out that the pound’s fall in value, if sustained, will continue to make studying in the UK more affordable for all international students. Additionally, In October, home secretary Amber Rudd announced several consultations on student visas, in the context of a series of strategies to reduce overall immigration numbers. She outlined a possible two-tier system, in which “tougher rules” would apply to students enrolling in “lower quality courses”. There could also be more widespread changes to the current student visa system, affecting all international students.

More than 100 universities and other organisations have so far joined the #WeAreInternational campaign, which aims to ensure Brexit does not result in fewer international students and academics coming to the UK. In addition, British students will presumably no longer be eligible for funding via the Erasmus exchange program – or not to the current extent – though UK universities will strive to maintain strong exchange partnerships within and beyond Europe, however still drastically affecting the movement of youth entrepreneurship from and to Great Britain.

Secondly, several of the UK businesses that engage and target services provided by the JEs are often represented by an increasing number of start-ups and small firms, many of which pioneered by EU residents. A few years down the line, we can expect this number to start slowing as work permits, mobility limitation and new market regulations kick in. Equivalently, the same applies for young British entrepreneurs looking forward to materialising their dreams on the European mainland. As far as junior entrepreneurs are concerned, localisation and restrictions are synonymous.

Alongside, certain programs aiming to support junior entrepreneurs across Europe are funded by the EU, therefore arising budget constraints due to the cut in the contribution by Britain shall push the funding down the priorities list of the EU and perhaps penalise junior entrepreneurs from the UK. Alongside, as the exchange of best practices is at the crucial basis of the JE movement and physically working together is conceivably among the best ways to accomplish the latter task, restriction in free movement of people and increase in VISA requirements can significantly affect this great international share of knowledge limiting it mainly to virtual outcomes. Despite the strong beliefs from both sides, the European Confederation of Junior Enterprises and the JE factions in UK, that the relations between the two bodies will not be practically affected on paper, the possible limitations resulting from the BREXIT agreements might in fact limit the possibilities of concretely collaborating and enhance the obstructions in movement of junior entrepreneurs.

We’re not taking into consideration the positive effects of a British exit in other respects like Security and Law and Jurisdictions. After London suffered what was the worst terrorist attack since 2005, populist leaders across the Union are pointing at unrestricted immigration as a contributing factor to terrorism, favouring in fact high restriction on the movement of people.

About the authors

Md. Minhajul Abedin is currently an International Development Consultant at Westminster Business Consultants (WBC) based in London. He is a recipient of the Westminster International Scholarship and his experience includes some working at the United States Department of State, AFS-USA and iEARN-BD. Minhajul is the leading author of this article and was chosen as Project Manager for the latter due to the great commitment towards the firm’s activities and his passion for international relations.

Satya Shekhar is a London based Indian. Interested in history, culture and society, he would also want to become a Buddhist monk. Satya is an elected Course-representative and student advisor in the University of Westminster. He is currently a Senior Consultant at WBC in the Business Development Department and he regularly contributes to the accomplishment of several projects and the acquisition of others.

Nikita Polukeev is a Russian full-time student at the University of Westminster. Nikita has a huge interest in Economics and International Relations, which are in fact the main topics of his study pathway. He is currently an International Development Consultant at WBC where he actively contributes to regular enlargement operations and where he constantly proves his high involvement in international activities.

Divyaditya Singh is a Marketing Consultant at WBC. He focuses mainly on articles and blogs creation within the firm while contributing to the visibility of the Junior Enterprise. He is undertaking a Marketing course at Westminster Business School.

Edited by: Gregorio Davico and Helal Zraiq on 28th March 2017

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