BREXIT: Adios muchachos!

Adelina Toader, Vlad Dobrea (Translated by Cosmin Ghiodveanu)
English Section / 31 ianuarie 2020

BREXIT: Adios muchachos!

A historic moment for the European Union, which starting with February 1st, will lose an important member of its community! After 47 years in the European Union and three years of negotiations and disagreements which turned into a political crisis, the UK left the community bloc at midnight, throwing itself into an uncertain future Brexit.

Negotiations on future bilateral relations are again generating the risk of the occurrence of a "hard" Brexit, with effects that will only be felt starting with January 2021, when the transition period expires, Michel Barnier, the chief negotiator on Brexit, warns.

Michel Barnier said: "The first stage is completed and we must rebuild everything. By the end of this year, if we do not have a new agreement, it will no longer be a routine situation, there will be no regulations. We need to be aware that there is a risk of reaching the edge of the precipice, especially in terms of trade relations".

In the absence of a bilateral trade agreement, the economic relations between Brussels and London will be subject to less favorable World Trade Organization (WTO) regulations.

Michel Barnier reiterated that there is "very little time" to reach a new agreement during the transition period, as Prime Minister Boris Johnson insists. The new agreement will have to contain trade, security, energy, transport and fisheries regulations.

The European Commission has drawn up maps showing the traffic between the European Union and the United Kingdom after Brexit, and the system reveals that there will be customs controls between the British province of Northern Ireland, which remains in the European customs union, and the rest of British territory.

In addition to trade issues, the UK risks facing an internal crisis, as politicians in Scotland, Northern Ireland and Wales plead for independence amid dissatisfaction with the country's exit from the European Union.

Ratification of the agreement

On January 30th evening The European Parliament ratified the UK's agreement for the withdrawal from the European Union and the European Atomic Energy Community, international news agencies reported.

The document was approved with 621 votes in favor, 49 against and 13 abstentions, which means that the simple majority of the votes cast (according to Article 50 of the Treaty on European Union) was met.

In order to come into effect, the withdrawal agreement between the European Union and the United Kingdom must still be subject to a final vote (by a qualified majority) in the European Council.

Nigel Farage: "I hope it is the beginning of the end for the EU"

Brexit could mark the beginning of the end for the European Union, British politician Nigel Farage, in his last speech as MEP, said in a European Parliament meeting in Brussels on January 30th, according to Reuters.

In the debate that preceded the ratification of the UK's withdrawal agreement from the European Union, Farage stressed that the UK will never return to the European Union.

The Brexit Party leader said that leaving the European Union should be the height of his political ambitions, but suggested that Brexit could trigger a broader debate on the future of the European Union. "I hope this is the beginning of the end of this project. It's a bad project, it's not just undemocratic, it's antidemocratic, "said Farage. "What happens at 23:00 this Friday, January 31, 2020, marks a point of no return; once we left we we won't be back, the rest are details", he concluded.

Preconditions for a new trade deal

European Commission President Ursula von der Leyen said in a European Parliament meeting in Brussels on January 29th that strong guarantees of fair competition from the UK are a precondition for a new trade agreement with the European Union, following Brexit.

Ursula von der Leyen told the Eurodeputies: "We are considering a free trade agreement with zero tariffs and zero quotas. But the precondition is that EU and UK businesses will continue to compete on an equal footing. We will certainly not expose our companies to unfair competition."

Von der Leyen also said that the EU will be "vigilant" on how the divorce agreement will be implemented at the sensitive Irish border.

"No partnership will ensure the benefits of EU membership," she added, but warned that "the more the UK commits to comply with our rules (...), the more open its access to the single market will be".

"I want the EU and the United Kingdom to remain good friends and partners", the European Commission president said. She added that "we must devote all our energy, 24 hours a day, seven days a week, to achieve results" in the negotiation on the future relationship.

Romania's economy among the most protected from the effects of Brexit

The process of Great Britain's exit from the European Union will only marginally affect the Romanian economy. The United Kingdom is Romania's ninth largest trading partner and ranks last in the top ten largest foreign direct investors in Romania in 2018, according to the analysis "The BREXIT effect", made by Romanian business information solution provider KeysFin.

There are over 1600 companies with shareholders from the United Kingdom in Romania, according to data submitted by companies to the Ministry of Public Finance. Of these, about 1300 have a direct, majority share which exceeds 50%, of British investments. The turnover of the companies directly controlled, mostly, by investors in the United Kingdom was about 20 billion lei in 2018.

Roxana Popescu, managing director of KeysFin, said: "The relatively small trade ties with the UK place Romania among the most protected European economies from the direct effects of BREXIT, with the direct impact on the local level being marginal. However, one of the main economic risks we see regarding this event is the contagion that could be generated by an uncontrolled process of Britain leaving the European Union. Despite the minimal probability that we see for this scenario, with neither party wanting such a development, the impact on the financial markets could be a major one".

The top three companies with direct British shareholders, based on their turnover, are part of the processing industry and are: Ursus Breweries (1.8 billion lei), Adient Automotive România (1.2 billion lei) and Crh Ciment România (974 million lei).

The chart also includes companies such as: Bricostore, Sews Romania, Adient, Plexus Services Ro, Alcedo, Endava Romania and Glaxosmithkline (Gsk).

According to the analyzed data, the companies with direct majority British shareholders from Romania had a total net profit of about one billion lei in 2018. And the most profitable were: Ursus Breweries, Crh Ciment Romania, Ipsos Interactive Services, Aviva, Endava Romania , Dnata Catering, Alcedo, Paypoint Services and Glaxosmithkline (Gsk). Together, the above companies concentrate over 55% of the total profit of the companies with direct majority British shareholders present in Romania, (555 million lei).

Great Britain, among the top 10 foreign investors in Romania

According to the methodology of the National Bank of Romania, foreign direct investments in Romania have increased by 66% in the last 10 years, exceeding 81 billion euros in 2018. The value of British investments increased by 135% in the same time period, past 1.7 billion euros.

The UK ranks last in the ranking of the top 10 foreign direct investors in Romania, in 2018. In the last 10 years, the UK has oscillated between the 16th place (2009) and 10th (in 2014 and 2018) place in the top of foreign investors in Romania.

The main sectors that Brits invest in, in terms of turnover, are: the processing industry (10.2 billion lei, representing 51% of the total), trade (3.9 billion lei and 20% of the total) and IT&C (2.3 billion lei, or 11% of the total).

Most British investors in Romania choose the Capital, meaning that, geographically, Bucharest is ranked first in terms of turnover (9.4 billion lei, which constitutes about 47% of the total). Next in the chart of the largest direct British investments are: Cluj (1.6 billion lei and 8% of the total) and Timiş (1.3 billion lei and 7% of the total).

Local companies controlled by British investors have had over 50,000 employees, and their staff expenses have reached 4 billion lei in 2018.

The indirect impact of Brexit

Trade (exports plus imports) between Romania and the United Kingdom saw a 9% increase in 2018, compared to 2017 and 33% compared to 2014. Thus, according to the data of the National Institute of Statistics (INS), the trade turnover between the two countries reached 4.6 billion euros in 2018.

The United Kingdom is Romania's 9th largest trading partner and the 5th largest market for local exports, up over 34% over the last 5 years, to 2.9 billion euros in 2018. Imports from the UK have also increased by 31% compared to 2014, to over 1.7 billion euros in 2018.

However, although Romania saw the best results in 2018 regarding the evolution of the trade balance, with a trade surplus of 1.1 billion euros (exports less imports), with the United Kingdom, the trade turnover between the two states accounts for only 3% of Romania's foreign trade.

There are over 328,000 Romanian citizens, in the UK, representing the third largest community of Europeans, after Poland and Ireland, and the negotiations on the free movement of persons will continue to be one of the most sensitive issues, along with the free movement of goods. The process of withdrawal of the United Kingdom from the European Union is therefore a lengthy one, with KeysFin estimates suggesting it will extend until the end of next year.

From an economic point of view, Romania's trade relations with the United Kingdom are relatively modest, which places our country among the most protected European economies from the direct effects of Brexit.

However, an escalation of tensions between the two sides or a worsening of the conditions on the international financial markets would be passed on to the Romanian economy rather quickly due to the main macroeconomic imbalances that Romania is already experiencing, in contrast to the other states in the region: its budget and trade deficits, which significantly affect the domestic and foreign financing ability capacity of the Romanian economy.

XTB Romania: A drop in attractiveness in the short term and a rise in the negotiating power in the medium and long term, after Brexit

Great Britain's exit from the EU is followed by a period of difficult negotiations to establish the future relationship in various areas, including: mutual access to the internal goods and services market, rules in the field of information exchange, security systems, access to fishing areas, licensing of drugs, rights of British citizens in the EU and of Europeans in the United Kingdom, among others.

So far, Brexit has been viewed with relative serenity by investors: the pound has fluctuated in January in a narrow range of less than 3% against the US dollar. From the January 20th peak until the 30th, at 12:30, the British stock market index lost almost 4%, but the movement may have been related to the general drops of the capital markets of Asia, Europe and the US correlated with the increase of the number of new virus cases, XTB Romania said.

According to a 2018 study by economists at Stanford and Nottingham University, Brexit-induced uncertainty has caused investments to decrease by about 6%.

Claudiu Cazacu, Consulting Strategist at XTB Romania, says: "What happened on January 31st event was no surprise, and companies and consumers have already made the relevant short-term decisions. The medium- and long-term impact will depend to a large extent on the concrete outcome of the negotiations in the period between January 1, 2021 and the end of the transition. The attractiveness of the UK labor market for EU workers is likely to decline, in the medium term, with negative effects on the economy.

In the long term, the UK's chance would be a clever positioning in relation to the EU which would allow it free or almost free access to the European market of goods and services, especially in the financial sector, but also to set up its own free trade agreements with other major economies. Thus, it could, over time, generate high overall economic benefits, offsetting the losses suffered in these almost 4 years after the referendum. Thus, it could, over time, generate high overall economic benefits, offsetting the losses suffered in these almost 4 years after the referendum. This is, for the moment, a possibility. Investors will likely resume, after a pause for several months, the habit of following the UK / EU negotiations and for that reason the volatility of the British pound and capital market will increase significantly in the second half of the year".

Radu Puiu, Research Analyst at XTB Romania, said: "A significant impact could be visible at the level of the manufacturing sector, which is showing increasing signs of a slowdown on a global level.

The possibility of isolation from the free market and the emergence of commercial frictions affect the prospects of this pillar of the British economy. Analysts are considering the effects, which is why the forecasts for 2020 indicate a contraction of the sector of 0.8%. In addition, the United Kingdom used to represent a "gateway" to the continent for companies outside the European Union, through which to benefit from the conditions of free trade, but in the current context, the attractiveness of the island economy, from the perspective of a place for business, it could be reduced."

The UK and the US are saying that a trade agreement could be reached this year

British foreign secretary, Dominic Raab, and US State Secretary SUA, Mike Pompeo said on January 30th that a trade deal between the two countries could be concluded before the presidential elections, Reuters concludes.

"I am confident that a deal can be reached", Raab told reporter. "There is a huge alignment when it comes to the common economic interest. Of course, there are going to be difficult problems".

Pompeo said: "I agree".

Brexit forever?

The departure from the EU has a longer history: Britain joined the EU bloc on January 1, 1973, at that time being considered the "sick man of Europe", because it negotiated a non-participation clause in the Eurozone.

But the turmoil of the Eurozone crisis, fears of mass immigration and a series of mistakes by former prime minister David Cameron have led to the historic vote in which 52% of Britons voted to become the first nation to leave the EU bloc.

Conservative leader David Cameron, who bet on a pro-EU campaign lost and resigned as prime-minister the next day. He was replaced by Theresa May, the Interior Minister, who also supported the same campaign.

Theresa May formally invoked the exit procedure on March 29, 2017, sending a notice to Brussels, which gave the UK time until March 29th, 2019, to leave the alliance.

After more than a year of fierce discussions, British and EU negotiators reached an agreement on November 13, 2018. Nevertheless, the British prime-minister faced an angry reaction from his own party. Several supporters of Brexit thought that the proposed deal could leave Great Britain be dependent on the trade rules of the EU.

On January 15, 2019, British parliamentarians voted against the agreement in the biggest government defeat in the history of the British parliament. Brussels refused to renegotiate. The UK House of Commons again rejected the agreement on March 12th, and did so again for the third time on March 29th.

The EU agreed to delay Brexit until May 22nd and then until October 31st, 2019. As a result, Britain was forced to hold elections for the European Parliament on May 23, which were won by anti-EU populist's Nigel Farage party.

The defeat in the European elections and the Parliament's refusal to support the Brexit deal forced Theresa May to resign as leader of the Conservative party on June 7th. On July 23rd, party members elected Boris Johnson as their new leader, and he became prime minister the next day.

Backed by Farage, Johnson promised to leave the UK from the EU on October 31, with or without a deal. He announced his "final" proposals for Brexit on October 2nd.

On October 22nd, British MPs approved, in principle, a new Brexit agreement, signed days earlier with the EU. But they rejected Johnson's offer to rush the final approval before October 31st. On October 28th, EU members agreed to postpone Brexit for another three months until January 31st, 2020.

Johnson's resounding victory in the general elections of December 12th, paved the way for the passing of the Brexit draft law through Parliament on January 9th 2020. Queen Elizabeth the 2nd gave her approval for Great Britain leaving the EU on January 23rd. Boris Johnson went to Brussels the next day and signed the Brexit deal with two other top officials.

For supporters, Brexit is a dream "independence day" for a United Kingdom that escapes what they call the "curse of social order" dominated by Germany that has bankrupted the population of the community of over 500 million people. US President Donald Trump praised Brexit as "a wonderful thing" and a smart move.

Some European leaders have suggested that Britain may one day change its mind.

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