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»Basically, everyone loses«

Continental Europe looks with gloating joy across the Channel amidst increasing signs of economic problems. But Brexit doesn’t only affect the population of Great Britain.

A British and an EU flag
© pur.pur

Stefan Reitz worked for the Directorate of General Economics at Deutsche Bundesbank for six years, until he took up an appointment at Kiel University in 2011 as Professor of Economics. It's therefore appropriate that - amongst many other projects - he also dedicates his time towards the consequences of Great Britain withdrawing from the European Union. His conclusion is disheartening: »Basically, everyone loses«.

Based on simple logic, there is no way around this conclusion, according to the scientist. »Brexit means that a functioning system of economic relationships is torn apart, and this cannot benefit either side,« argues Reitz, who sees Great Britain facing the most urgent problems.

Stefan Reitz
© pur.pur

Stefan Reitz

The status of the capital city of London as an international centre for financial services is a major concern for the UK. According to Reitz's assessment, the banks based in London operate so profitably because they automatically have valid licenses for the entire Union, thanks to the British EU membership.

»However, it is already becoming apparent that the financial institutions will relocate their operations to continental Europe if these licenses cease to apply - or even threaten to do so,« said Reitz. The result: cities like Paris, Frankfurt or Warsaw would become more interesting for the financial sector, and London would »suffer a massive loss of importance«, according to the scientist, who is active at both the Institute for Quantitative Business and Economics Research (QBER) and the Kiel Institute for the World Economy (IfW).

This loss of importance will be aggravated by what is known in economics as negative economies of scale. The higher the volume, the cheaper goods or services can be offered on the market. Conversely, the costs for financial services will increase due to Brexit, if a lower volume is provided, and consequently a significant number of workers will leave Great Britain, according to Reitz. Meaning that the financial services business will become less profitable, not only because it shrinks, but also because there is a lack of qualified personnel. In Reitz's opinion, it is »pure speculation” to try to quantify the consequences of Brexit in Euros or pounds, but as far as the consequences for the labour market are concerned, he is willing to risk a prognosis. »Not very implausible« would be the loss of jobs somewhere in the five-digit range, he believes.

The Brexit consequences for the real economy look a lot more complex. No matter whether it is cars, household appliances or machines, nowadays a product often only ends up in the hands of a customer after numerous individual parts have crossed national borders. However, if the free trade ceased and customs duties were therefore payable at each intermediate step, the products would become more expensive for all parties.

»This is also a problem for companies on the mainland,« emphasised Reitz. Often these companies are bound to the UK suppliers by long-term supply contracts, and can therefore not just quickly switch to partner companies in the duty-free Euro area. And because Britain is also a very important market for a number of EU countries, there are further negative consequences on the mainland.

However, the real economic threat to the island seems greater. For a long time, the UK has been the gateway to the EU for car companies from Japan and Korea, and it is similar for many other industries from this region. If this role ceases, there will be significant damage to the British economy, warned Reitz. Great Britain can only attempt to counteract this with a large number of bilateral trade agreements. However, Reitz believes that a shrunken Britain after leaving will not become more attractive to global giants such as China. In his view, the negotiations could therefore be lengthy, and more to the advantage of the other parties.

For the EU and its departing member, the scientist recommends a path which minimises the losses on both sides as much as possible. Which, he admits, is easier said than done. His fear is that, for political reasons, both sides can make limited concessions.

Author: Martin Geist