24 October 2016

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OpinionIs there life after Brexit

A risky gamble by British Prime Minister David Cameron to hold a referendum on withdrawal from the European Union ended up with a crashing defeat of its initiator, who was forced to resign after the announcement of election results.

Brexit implications for the UK and for the European Union may as well take a shape of a real tragedy. The dramatic decline in global markets of the pound, the euro, oil, and other assets indicates how these markets can react to the atmosphere of uncertainty following the referendum. And due to the fact that neither the initiators of the referendum, nor its opponents, nor officials in Brussels know exactly how to proceed, this uncertainty can be protracted.

The money, as many know, does not like uncertainty. Therefore, most likely, the experts predict the deepening of economic problems of Europe's second largest economy, which is the UK, and the European Union itself, in the coming months, if not years.

As for the UK, in January-April, we sold them goods worth $120 million and imported – worth nearly $246 million

These problems will inevitably affect Ukraine, which in the first four months of 2016 alone, exported to the EU countries its goods worth $4.3 billion (accounting for a 40% share in the total volume of Ukrainian exports) and imported the goods worth $5.2 billion (a 44.8% share of total imports). As for Britain, in January-April alone, we sold them goods worth $120 million and bought – worth $246 million. At the same time, while the total trade turnover with the EU has increased, the trade with the UK has dropped.

What kind of economic future awaits Europe and Britain after the referendum? The legal experts argue that the choice of options for Brussels and the future British government is rather small. In the first place, the UK could follow in the footsteps of Norway, becoming a member of the European Economic Zone instead of being an EU member state. This will allow the country to maintain access to the single European market but it will also require the continuation of contributions to the EU budget. As a member of this Zone, the UK will have to comply with the requirements of the EU regulations, including the requirement for the free movement of labor.

Obviously, the anti-immigration rhetoric of the initiators of the UK referendum will not allow the new leaders in London in the next few years to go for such an option. Despite realizing that their country has the lion's share of its products sold on the European market and therefore is interested in preserving economic ties with the EU, the Brits will most likely not allow their party leaders “betray the nation.”

The second option is to conclude an agreement with Brussels following Canada’s example. But the problem is that such a deal does not cover all trade nomenclature and does not eliminate many of the tariff barriers. Besides, it does not apply to financial services. The problem becomes particularly acute given that such an agreement will require years of negotiations.

One of the obvious consequences of Brexit may be the headquarters of EBRD moving from London to the continent

There is another option – to enter into agreements with the European Union following the example of the United States, China, and India, based on the principles of the World Trade Organization. But in this case, the parties will also have to go through long negotiations over a large bulk of problems with the small expected benefit for the UK. Again, these agreements will not apply to the regulation of financial services, which is particularly important for the City of London, which may lose its status of a European, and global, financial center.

By the way, one of the obvious consequences of Brexit may be the headquarters of the European Bank for Reconstruction and Development moving from London to the continent.

There are not many options for the process of the UK’s withdrawal from the EU, and all of them have little economic attractiveness for Britain. And there is no doubt that the problems emerging from the exit from the Union of one of the world’s largest economies will hold the attention of the Europeans for the next many years.

For the economic development of Ukraine, there will also be more harm than profit. It’s just that the deadlock in the Open Sky deal with the EU may be broken, as it used to be blocked because of a dispute between the UK and Spain over Gibraltar. But this is hardly comforting, isn’t it?

Let’s hope that the emotional response of the UK voters to the emotional challenges of our time and, above all, the European migration crisis will become a clear example for the rest of the Europeans that slamming a door is not always the best option.

Yuriy Kulikov

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