What are the opportunities and challenges of Brexit for both the UK and the EU?

Published by The Telegraph and Doorbraak

How will Brexit affect the United Kingdom? How will it affect the European Union? As with everything, there are opportunities and challenges. Hereunder I provide an overview.

Opportunities for the UK

One of the main benefits for the UK is that it will be able to break free from the shackles of the Brussels regulatory machine. With Open Europe, we have estimated that not less than two thirds of the impact of regulations in the UK results from rules decided at the EU level. Even Brussels acknowledges that its top-down, one-size-fits-all approach is in need of reform. Hence the launch of its “Better Regulation” programme in 2014, which has yielded only disappointing results.

A second main benefit is that the UK will be able to beat the EU when it comes to securing trade access to the rest of the world. To be fair, the EU has done a pretty decent job here lately, having secured deals with Canada, Japan, Southern American countries and Vietnam, so in all likelihood, Britain’s first preoccupation will be to now safeguard this trade access negotiated by the EU before it can focus its attention on convincing the likes of America, India, Israel, and China.

Thirdly, and politically perhaps more visible, is that the UK will no longer need to contribute to the – largely wasteful – EU budget. Then the UK may well opt to “pay to play”, which is what the likes of Norway and Switzerland do.

Fourthly, Britain will have greater control over migration. The EU’s regulatory framework has bound the UK government’s hands when it comes to controlling family reunification for non-UK citizens and social benefits for EU citizens.

Challenges for the UK

The most important downside of Brexit is that the EU is likely to restrict current EU-UK trade in case of UK regulatory divergence. The EU could, of course, simply make its own regulatory framework more attractive for businesses, to challenge UK competition, but it prefers protectionism.

With Open Europe, we have estimated that whether the UK benefits from Brexit not only depends on safeguarding market access to the EU but also on how successful the UK is in compensating the loss of market access with making the UK economy more competitive, which includes deregulation, and with convincing non-European partners to open up trade.

British businesses that are dependent on trade with the EU are likely to be wary of regulatory divergence, rightly fearing the resulting loss of market access. Therefore, ultimately, the UK may decide that aligning with the EU’s costly “REACH” chemical rules, its petty MIFID rulebook for financial services, or its innovation-killing GDPR rules for data may still be worth it, given the attached market access to the EU.

An even more burdensome update of any of these acronym-bearing regulations may however change the trade-off and drive the UK to full-on Singapore-style divergence. Indeed, the EU recently announced proposals for yet another batch of top-down EU regulation, under the label " European green deal ".

Challenges for the EU

This doesn’t need much explanation. When the second biggest economy of the EU, which is also the second biggest contributor to the EU budget as well as a nuclear power leaves the club, it is not something to celebrate - not that this has led to much introspection in Brussels. The market access restrictions which the EU will impose as a result of UK regulatory divergence will also hurt EU businesses and consumers, given that trade is mutually beneficial.

The latter is often forgotten by pundits, but the discussion on fish and financial services will be a useful reminder of that: British companies will want to continue to be able to sell their fish in the EU market, while many EU companies depend on sophisticated British financial services, such as financial clearing.

Yet, in the public debate, one often hears that the UK would have the absolute “upper hand” on fish, while the EU would not have to care about UK financial services access to its market.

Opportunities for the EU

For free market supporting EU countries, the loss of the UK as a strong voice supporting these kinds of policies, is regretful. However, over the years, the UK has actually not been able to stop all that much EU over-regulation. It’s the most outvoted member state, something which ultimately also resulted in Brexit.

Perhaps the UK may be more influential outside of the club than inside. As Swedish centre-right MEP Jörgen Warborn puts it: the UK’s “ambitious goals for its business climate are one of the best things that can happen to Europe right now”, as “for far too long, issues of business climate and the conditions for European entrepreneurs have been missing on the agenda in Brussels.”

He’s correct, of course: every time the EU will come up with yet another plan for business-unfriendly regulations, the business community will simply point at the UK and its more innovation-friendly attitude.

It will be quite amusing to see how this year’s discussion on the EU’s seven-year budget will bring the reality home to the even the most extreme Eurocrat that EU spending cuts will really be hard to avoid, given the loss of the UK’s contribution.  Some EU budget austerity is a great thing for EU citizens, given how EU spending has been documented to support organized crime in parts of Southern and Eastern Europe. The precedent of Brexit will also be invoked every time there are plans for yet another round of power transfers to the Brussels level.

In an ideal world, the EU would reform to an organization focused mainly on scrapping barriers. However, Brexit may yet trigger more fundamental reform of the European Union than the UK could ever have driven from inside the club.