Democracy triumphs in UK’s ‘independence day’

Writing this piece just minutes after the Euro game result which saw the England football team kicked out of the Euro championships by losing to Iceland (a volcanic island as we were reminded by the sports commentator), one feels sorry for the Brits who only a century ago lorded it over one of the largest Empires.

But do not worry as the Maltese government is prepared for a UK exit and all its ministries are totally geared for the horrendous workload that will face us next year when we take on the EU presidency. Our leaders told us to relax as we are in good hands. They remind us mockingly of the slogan of the PN electoral team before the last election... Par Idejn Sodi (a pair of safe hands).

Former PM Lawrence Gonzi was interviewed last weekend for his views on the turmoil that has struck English politicians. He was confident that like water the situation will level out and equilibrium will be reached whenever democracy triumphs. Equally reassuring was Prime Minister Joseph Muscat. He felt Brexit could provide new opportunities for Malta and for Maltese companies, as the country could now possibly serve as the UK’s gateway into Europe, and vice versa.

The Brexit camp were saying to expect no nasty shocks as the prime minister heir apparent Boris Johnson, who headed the Brexit camp, was relaxed after enjoying a game of cricket last Sunday. He nonchalantly reassured us all that the pound is stable. Sadly, the pound was revealed to have fallen to a 31-year low, trading at about $1.345, a fall of 1.7% as it later partly recovered during the day.

Not so cool was the reaction from across the Channel as European diplomats have dismissed claims by Boris Johnson that the UK could negotiate access to the EU single market without obeying any of the rules. The Guardian reported an EU diplomat saying: “You cannot have your cake and eat it,” as the Treasury’s forecasts for post-Brexit Britain included predictions that the economy could slip into recession, making every household in the country £4,300 a year worse off. All this scenario mirrors the wish of the majority who voted on a planned referendum last Thursday whether to exit the EU, with close to 52% voting they wished to do so.

It is strange that London, Northern Ireland and Scottish communities voted overwhelmingly to remain in. It is no secret that foreign banks have started to slowly shed workers and plan to relocate although the exodus is subdued. For them London has become a global financial hub, on a par with Wall Street. Over the years, the banking and funds management industry became crucial to the British economy, with a trade surplus of 10.2 billion pounds, in the first three months of the year. It is interesting to note how England exports a high proportion to other EU states and these are eager not to upset the apple cart if and when tariff barriers are imposed once Article 50 of the Lisbon treaty is invoked.

Malta and Estonia are both small states which depend a lot on trade with the bulldog island. The worst to suffer as always are SMEs. The costs associated with shipping internationally would sky-rocket, likely to scare off many of the businesses that currently ship into the UK, and shipping into the European Union would become prohibitively expensive. It is predicted that the regulated financial services sector could see a particular influx of companies and institutions moving operations from Britain to Ireland (or Malta) in order to maintain a foothold in the EU markets.

In the event of a full Brexit, regulated financial services firms based in the UK would lose their passporting rights to carry on business in any other state in the EEA without having to obtain an authorisation or registration on a country-by-country basis.

Naturally asset managers fear that they would no longer be able sell UK regulated funds into the EU following a Brexit. All this depends how long the exit negotiations will take but certainly, within the next two years, the dust will settle and England will start facing reality – its democratic wish of independence from Brussels.

As might be expected, outside the single market, higher non-tariff barriers (NTB) on both goods and services have a noticeable impact on international trade. With the UK no longer being part of the single market, in the worst case goods NTBs cost 0.47% of GDP and services 0.15%. Under a new agreement UK-EU it is worth noting that in reality access for services is not guaranteed.

Most importantly for Malta we expect that exports could face significant NTBs as England proceeds to exit the EU, although one cannot underestimate new opportunities for British banking agencies wanting to relocate to Malta, provided our regulatory infrastructure is robust to take the strain, otherwise they may choose Dublin or Luxembourg. Some business relating to funds and gaming may relocate to Malta from Gibraltar. There will surely be some short-term uncertainty and disruption but in the longer run, the long-term attractiveness of Malta is likely to depend on whether it adopts pro-competitiveness policies and markets.

One hopes that the Think Tank chaired by Charles Mangion, jointly financed by the MFSA and the finance ministry ably advised by a coterie of Big Four audit experts and a handful of larger law firms, will sharpen tools and look out for opportunities. Action is needed to balance out losing FDI and a possibility of fewer UK tourists who prefer to holiday at home given the weaker pound.

From a wider political perspective one can understand the Eurosceptic stance taken by the British electorate, who have for the past 43 years criticized the grip on their social and financial lives by the perceived diktat coming out from mandarins in Brussels. Another fear was uncontrolled migration due to the EU policy of free movement of citizens within the Union. Such resentment and angry protest is active in other EU member states such as France, Netherlands and Hungary. Typically, Hungary, under Viktor Orbán’s current leadership, has introduced a number of less-than-liberal domestic reforms. A continuation of these problems combined with the precedent of a possible Brexit could prompt Hungary to also question seriously its future within the EU.

Other countries to watch that may trigger calls for reform are the Baltic states. Estonia, Latvia and Lithuania have sought to be among the group that is the most integrated should a “two-speed” EU ever fully emerge. However, the presence of other states that are either semi-integrated or isolated on the fringes of the EU are likely to be exposed to Russian efforts to exert greater influence on European affairs as Moscow seeks to gain power by continually exploiting the EU’s divides and disagreements.

With the UK out of the EU, the very essence and logic of the Union would change. It would deny the assumption that the EU is about accumulating integration and that the countries in the EU would never leave. One cannot forget that only recently Slovakia threatened to leave the EU due to the refugee issue, so one might only imagine that the founding members of the EU are concerned of the domino effect which the UK’s departure might prompt.

More exits will usurp the powers of unity and it goes without saying that a smaller EU cannot be taken seriously by the other world powers, especially in the eyes of Russia, which always sees the loss of territory as a sign of weakness. In conclusion, we respect the wishes of the majority in England and look forward with calm and patience to ease exit negotiations with the rebel candidate. Let us hope that as England leaves the family, sanity prevails not to break up the political peace that the unity project has bequeathed us since the end of the second World War. 

George Mangion is a senior partner in PKF, an audit and consultancy firm. His efforts have seen PKF being instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island. He can be contacted at [email protected] or on +356 2148 4373.