Britain’s economic welfare is heavily dependent on its trade within the EU. Indeed, it was principally for the economic benefits of being in the free trade area that Britain took up membership in 1973. Since then, the British economy has undergone transformation that has seen London rise to the summit of the financial sector. It was surely no coincidence that London voted overwhelmingly in favour of remaining in the EU.
Now, Brexit could damage London’s position as the financial capital of the world. While factors such as language, local infrastructure and human capital all make London an attractive place for investment, it is their combination with Britain’s access to the Single Market – the principal pull-factor for Foreign Direct Investment (FDI) – which has made the capital city so successful. Already, with fears that Britain may lose ‘passporting’ rights for financial services, which gives companies housed in one member state the right of establishment and provision of cross-border services in all other members, financial services powerhouses Goldman Sachs and HSBC are preparing to shift operations away from London.
Brexit is not only bad news for finance. Another, less-vaunted industry likely to be impacted by Brexit is Britain’s growing tech industry, Silicon Roundabout in the east of London. Britain’s impending exit from the EU’s Digital Single Market is likely to push technological enterprises to relocate to other upcoming cities, such as Berlin, Madrid or Amsterdam. Britain’s standing as a leader in fintech (technology to improve financial services) is also in danger, not least because many workers in this sector are high-skilled EU migrants, whose continued visa-free right to reside in the UK is in doubt.
Perhaps most concerning, however, is that Brexit could push many talented young university-educated Brits to leave the country. The referendum revealed huge demographic divisions between young and old, and between university-educated and non-university-educated voters. In light of these trends, reports of the number of Brits enquiring about citizenship in EU countries could signify that although the vote may have been decided by fears of unfettered immigration, a significant segment of the population is equally fearful of losing its right to emigrate. The inconvenient truth behind these stories is that young graduates, whose prospects are most likely to be affected by any demise of London’s status as the financial capital, are also the most geographically mobile and willing to uproot to pursue opportunities abroad.
If Britain’s brightest and best start pursuing their careers overseas, then Brexit could have devastating long-term implications for its standing in the world. As of 2013, graduates represented 38% of the workforce, and only 4% of these were unemployed. Meanwhile, the percentage of inactive non-graduates was over double that of graduates. Unsurprisingly, graduates tend to dominate the high-skilled professions, with 50% of all graduates working in such sectors as human resources, marketing and finance, versus less than 10% of non-graduates. If Britain were to see a significant portion of its current graduate population depart (and future graduates, as students embark on their studies abroad in order to benefit from fast-track citizenship schemes on offer in Europe), it would be left with a significant skills gap which, somewhat ironically, could only be remedied in the short-term by mass immigration.
The potential for a post-Brexit trade and brain drain hinges on what kind of deal Britain is able to strike with the EU. Of course, the best way to address the problem of a possible flight of both FDI and human capital out of the country, would be to simply remain a member of the single market, by redefining membership to an EEA arrangement akin to the Norway-EU relationship. However, this is unlikely to satisfy Leave voters, who voted principally on the issue of freedom of movement. It is more likely that Britain will remove itself from the single market, and seek to renegotiate sector-by-sector bilateral deals, in the style of the Swiss arrangement. Under these terms however, Britain’s passporting rights would be lost, and its access to the single market of services limited, so Britain’s financial sector would be vulnerable.
The most advisable step for Britain to take in the first place, would be to unilaterally guarantee the residency rights of EU migrants currently living and working in the UK. This pre-emptive gesture of goodwill would set a constructive tone heading into the preliminary negotiations with Europe. The government must also take steps to fill the vacuum in funding to certain sectors of the economy once EU funding ceases to apply, most notably to the funding of research in higher education institutions. More radical policies to safeguard London’s financial sector could include a repeal of the European cap on banker bonus pay-outs, while stark reductions in corporation tax could encourage companies in all sectors to stay, and policies of tax relief to protect start-up companies in digital and technology sectors could stave off mass exodus.
An Australian-style points system became something of a soundbite in the Referendum debates. Should the worst happen and highly skilled British graduates leave the country en masse, such a system will be of use, in order to try and replace like with like, although the attractiveness of post-Brexit UK as a destination for skilled workers is in doubt. It is possible that net immigration will fall, simply because more Brits will be making the opposite journey out of the country. The problem lies in predicting how the British economy will evolve in light of Brexit: Will a new sector become the pre-eminent driver of growth? Is there life after finance? Many questions remain unanswered in light of the UK decision. The only real certainty in all of this is that Britain’s future looks uncertain.