Few things are certain about the UK’s referendum that was held in June. Brexit won with a majority, but it has not yet been formally triggered.
Before the UK government sends official notification that it is leaving the EU, nothing will have changed. Still, it is virtually certain that some form of change is on its way, and until the nature of this change becomes clearer, uncertainty and market volatility will remain high.
UK economy remains competitive
Foreign investors may hold back on investing in the UK. As the UK needs overseas capital to cover its current account deficit, such a blow would further weaken the pound. But in terms of the fundamentals, based on international measures of competitiveness, the UK seems in decent shape. The UK ranks in the top tier of the competitiveness leagues, alongside Switzerland, the Netherlands, Denmark and Australia. Alexis P. Lautenberg, Honorary Councillor of the British-Swiss Chamber of Commerce and Chairman of the Swiss Finance Council, explains: “Being too early to tell, the prevailing sentiment is the uncertainty ahead of a negotiation whose timeline and direction depend on an interactive process. The UK is confronted with a trade-off between securing its access to the EU internal market, in particular in the highly regulated services field, and politically loaded considerations such as migration and the integrity of the country. The EU will define its negotiating position in the light of that trade-off. While on both fronts economic interests will be very much at the core, political and systemic considerations will ultimately delineate the outcome.”
Looking at London as a global financial hub, Lautenberg adds: “The role of London today is the result of very different drivers which have evolved over time. The diversity of the financial landscape as well as the quality of its professional services are and will remain strong assets. Depending on the outcome of the Brexit process, certain segments may of course be affected more than others, namely direct passporting into the EU and/or some Euro denominated transactions.”
Effects for Switzerland’s economy
While the EU as a whole is Switzerland’s largest trading partner, the UK is among the country’s most significant partner within the bloc; this significance is compounded by indirect effects. Brexit’s biggest impact on Switzerland is increasing upward pressure on the Swiss franc. The Swiss National Bank was prepared to respond to this, and has so far kept the volatility under control. The key question is how long the SNB’s intervention will be needed, and to what degree? The situation is challenging for Switzerland but not new.
Assessing the benefits for the Swiss financial sector, Lautenberg adds: “The impact of Brexit on Switzerland must be assessed at two different levels. There is, first, the result of the future policy regime between the UK and the EU. Short of full access to the EU internal financial market for UK financial services providers, there may be both converging interests but also growing competition with their Swiss counterparts. The future trade regime for the UK will, second, impact Brussels’ propensity in its dealings with Switzerland both timewise and materially. In both cases Switzerland will have to live with the emerging ‘new normality,’ which may well offer opportunities in the medium term.”
As it will take two years before Britain’s exit from the EU is completed and new rules and regulations are in place, companies will have time to get organised and prepare for the new reality. It is recommended that this time be used for strategic analysis and adjustments. Assessing possible obstacles for Swiss companies to do business with the UK, Lautenberg says: “One of the important choices for the UK is whether to remain or leave the European customs union. Should London decide to quit the latter, Switzerland and the UK would have to negotiate a bilateral free trade instrument which logically would include services, which is the missing bit in Bern’s contractual relations with Brussels.”
Negative long-term consequences should be limited if Brexit is executed smoothly. The biggest risk is political, but the wish of all parties concerned to minimise risk and uncertainties could hopefully lead to necessary and important long-term reform of the EU itself.