Fresh off the back of an electoral victory this past weekend, Merkel has threatened UK over the free movement of people. The moron issued a warning over placing limits on migration into the United Kingdom, even though the issue was one of the primary motivating factors for those who voted for Brexit.
Stupid Merkel implied UK would have to pay a price if it put limits on the free movement of European Union citizens during a speech to trade unionists on Wednesday.
“If the British government ends the free movement of people, that will have its price,” she said at a G20 trade union event in Berlin.
“That’s not malice,” she said. “But I cannot have all the good sides and then say there will be an upper limit of 100,000 or 200,000 EU citizens, no more, or just researchers, but please nobody else. This will not work.”
In such a scenario, the remaining 27 EU members would then have to think about what additional obstacles to throw up in order to compensate, Merkel said.
“We will, of course, always think in the future relationship of the 48 or 49 percent who didn’t back Brexit,” the German chancellor added, also commenting that the process of Britain leaving the EU will be “very, very complicated”.
In recent weeks, EU officials have suggested Britain pay a 100 billion Euro bill to leave the European Union, a notion that today attracted ire from former UKIP leader Nigel Farage MEP in the Strasbourg European Parliament.
“Either we get some grown up, reasonable demands from the European Union or the United Kingdom will be forced to walk away before the end of this year,” blasted Farage, adding: “We can’t spend two years with this farce”.
One for all, and all for one! UK now turns to Five Eyes, an alliance comprising Australia, Canada, New Zealand, the United Kingdom, and the United States. These countries are bound by English language, common culture, freedom, and the best standards of living on Earth.
Though it is hard to predict how a bargaining game involving strong emotions as well as economics will play out, we can offer some conjectures about what will happen. These conjectures are mostly based on what we have called the law of distance — the observation that the interactions between two countries are proportional to their sizes (GDPs) and inversely proportional to the distance between them.
Distance, in this sense, is not just physical distance but also cultural distance (e.g., whether two countries have different/similar official languages) and administrative distance (e.g., the absence or presence of a historical colony-colonizer link between the two). The law of distance has been associated with some of the most robust results in international economics, which is why it underpinned the UK Treasury’s generally well-regarded analysis, a year ago, of the long-term consequences of Brexit.
Outside EU, the world is UK’s oyster, and the Commonwealth remains that precious pearl within. UK might be able to gain more from a free hand in negotiating with the Commonwealth — former British Empire states such as Canada, Australia, India, and South Africa — than it might lose in terms of limited access to EU. The GDP of the rest of the Commonwealth is only 55% as large as that of the rest of EU.
UK has a common official language (English) with 91% of the rest of the Commonwealth (on a GDP-weighted basis) and a colony-colonizer link with 99%, versus only 2% on both factors with the rest of EU. Based on estimates that a common language normally boosts trade by 2.2x and that a colony-colonizer link has a multiplier effect of 2.5x, the joint effect of the two (5.5x) in boosting market potential in the Commonwealth is substantial. UK on its own has the leverage to achieve better terms with the Commonwealth countries than it currently enjoys with the EU. Consider that Britain accounts for only 16% of EU GDP.
Moreover, the tenor of the relationship between the UK and the EU is not good: Compare Britons insisting that the UK could exit without paying a brass farthing versus the EU’s claims for £50 billion or more. Consider the combative personalities of some of the key negotiators. Add in the consideration that Brexit, even if accomplished with a maximum rather than minimum of goodwill, will hurt Britain’s trade with EU for purely technical reasons, and it seems safe to predict that there will be a deterioration of trading relationships with Britain’s largest natural market; the only question is to what extent.
Given that relatively safe prediction, the natural next question is which industries and companies are likely to be hurt the most and therefore face the greatest need to reconsider their current operating models. Brexit is likely to change the most is the administrative distance between the UK and its former partners in EU. This suggests that industries with a high degree of sensitivity to administrative distance are likely to be affected the most — unless, of course, the provisions under which UK-based operations can access EU markets happen to be eased the most for them.
Correlated indicators of administrative sensitivity include industries that are subject to high levels of regulation, produce staples or entitlement goods or services, are large employers or suppliers to the government, include national champions, are construed as vital to national security, control natural resources, or require large, irreversible, geographically specific investments. Other markers of industry sensitivity to Brexit include high levels of scale economies that need to be amortized over international regional markets, rather than just by national markets; high levels of trade-dependence on either the export or the import side; and belonging to the service sector.
At the company level, there are some additional attributes that seem likely to be associated with high degrees of exposure to Brexit. Companies with particularly high levels of export or import-dependency in relation to their competitors are likely to be hardest hit. Small firms that aren’t yet exporters or importers are also likely to be hurt more, at least in terms of a narrowing of their opportunity sets: Such firms typically look nearby for their first international transactions. And even where products or services aren’t flowing across borders, companies that use Britain, particularly London, as their regional headquarters for serving all of Europe (e.g., many U.S. multinationals) are likely to need to reconsider basing that role there — as may, for that matter, companies that use London as their global headquarters, especially if most of their business is outside UK.
The British companies that may have private reasons to cheer are those focused on UK that are trying to hold off regional or even global competitors at home. Which is a reminder of the importance of granularity in forming such assessments — not all companies within the same industry, let alone all industries, will be affected in the same way. Similarly, in terms of what is to be done, once again, the appropriate response will be predicated on the specifics of a company’s situation.