I have waited a day from the EU referendum result to write this blog entry. If I had written this blog yesterday, it may have been un-publishable due to the number of expletives it would have contained. However, I think it is important that some analysis of the outcome of the decision to leave the EU is made as to the likely effects on small businesses.
Marketers love a mnemonic (and matrices) and PESTEL (or PESTLE) is one commonly used to structure an examination of a business’s macro-environment. PESTEL stands for POLITICAL, ECONOMIC, SOCIETAL, TECHNOLOGICAL, ENVIRONMENTAL, LEGAL.
In writing this blog, I am indebted to the speech by Professor Michael Dougan of Liverpool University, the UK’s leading expert in European and constitutional law, made during the referendum campaign. Professor Dougan’s speech is available on YouTube (https://youtu.be/USTypBKEd8Y).
- The political fallout from the EU referendum has started. It can be described in one word, chaos. The prime minister has resigned and the leader of the opposition may not last the week. Sein Fein have called for a referendum on the unification of Ireland and the SNP a second referendum on Scottish independence. Our former EU partners are calling us to start divorce proceedings immediately. Our politicians, including many on the Leave side, want a delay before the big red button is pushed. The Mayor of Calais is asking the French government to end the treaty which places our border in her town. A petition calling for a second referendum is approaching 1.5 million signatures. On the Leave side both the restriction of EU immigration and the pledge to spend money on the NHS seems to have been dumped. The political chaos we are likely to see over coming months and years will cause huge uncertainty for business. I suspect we are entering a period similar to the late 1950’s/early 1960’s which saw political upheaval and a series of short-lived governments (Eden/MacMillan/Hume). Norman Smith, the BBC political journalist called Thursday’s vote the biggest political crisis to hit the UK since Suez. Personally, I think it will be worse.
- More importantly for businesses, especially those who export, once the Article 50 button is pushed, all our trade agreements lapse. This doesn’t just mean our relationship with the EU but also with every other nation on earth. All these agreements will need to be rewritten and there is no guarantee we will get as favourable a deal as we have at present. Our main bargaining chip with other nations is our EU membership. Currently we can offer trading partners unfettered access to the single market. Outside the EU we may not be able to do that, especially if we take the line proffered by Michael Gove, who is unwilling to accept the free movement of EU citizens and thus proposes leaving the single market. It also needs to be noted that the Article 50 process is our divorce from the EU. Following the two-year divorce period we will need a new trade agreement with the EU or a series of bilateral agreements with it. Switzerland has signed hundreds of these bilateral agreements over the last 50 years. Canada has taken seven years to sign an outline trade agreement with the EU. While it is possible we will have a new trading arrangement within five years of leaving the EU, other third-party nations may not want to negotiate with us until after the EU deal is completed.
- The referendum is not a binding vote, it is advisory. MPs will have to vote in parliament to ratify the outcome. This may not take place until after the party conference season when the Conservatives have selected a new leader and prime minister. The current Conservative majority is 12. It is likely that this vote may be turned into a vote of confidence in the new Prime Minister. There may be support from the DUP and the one UKIP MP for exit but it will only take a small number of Conservative rebels to trigger a new general election. I suspect such a vote is highly probable. In any case, the new prime minister may want an election to try to secure their position.
- Leaving the EU and an independent Scotland also has real implications for the rest of the UK’s borders. If Scotland leaves the UK to join the EU it faces having to accept the Shengen protocols on passport free travel. As England will be outside the EU (and Shengen), we face a hard border with customs and immigration controls. A new Hadrian’s wall will need to be built. Similarly in Northern Ireland, custom’s controls will have to be introduced. We have a separate free movement deal with Ireland but this relates to people not goods. During the troubles, before the Anglo-Irish agreement, smuggling, particularly of goods such as liquid fuel, was rife and customs checks were normal. Security posts , now all demolished, were placed on the border with Eire. They may need to come back or customs controls placed at Belfast ports. If you read Mr Nice, the autobiography of the drug dealer Howard Marks, you will see how he identified Ireland as the hole in Britain’s customs fence.
- We are currently in an economic phony war. The markets are in free fall at the moment with the pound down against all other currencies, even the junk Zimbabwean dollar. They may recover quickly or, more likely, slowly. However business does not like uncertainty and the markets will likely be volatile for months to come.
- However, there are bigger economic issues at hand. Firstly, Britain is now a less favourable place to invest. As stated above our main bargaining chip, access to the single market has gone. Britain is no longer the ideal place for inward investment if you want to deal in Europe. Ryanair has already said it is no longer looking to the UK for expansion opportunities and sees both Germany and France as better options. The Common Markets Agreement, the single market in financial services, now appears dead. If it does go ahead, the UK, and the city of London will not be involved. Banks wanting to operate in the EU require an European banking licence. To get a licence, they must be headquartered in an EU state. They therefore cannot be headquartered in London. Big foreign banks currently headquartered in London will move at least part of their operation to a base within the EU, probably in Frankfurt.
- Currently the UK has a large number of foreign firms located here solely for single market access. Look at the big car manufacturers. Mini (BMW) have their Oxford factory. Nissan are based in Sunderland and Honda in Swindon. I wasn’t surprised when Sunderland voted out as the North East has been a happy hunting ground for UKIP at recent elections but Swindon was a surprise. Both these towns are places where the main employer is only located there because of EU access. Both towns receive significant development grants from the EU. The North East of England receives more EU money than any other part of the UK. That is now all gone. I remember when Ford closed its Bathgate factory in central Scotland. They were gone in eighteen months and the knock on effect to smaller local suppliers to them was disastrous. If the likes of Nissan decide that the UK is not going to give them appropriate access to the EU, they will go and the likes of Slovakia and Bulgaria can offer a workforce and lower pay.
- It may be much more difficult for small businesses to obtain funding. The governor of the Bank of England had to release £250 billion into the market yesterday to try to limit the economic damage of Brexit. That was money designed to keep existing lending fluid and to try and prevent a run on the pound. The markets are jittery. Lenders, already risk averse, may decide to withdraw from the small business lending market. Cash flow may become difficult and growth plans may need to be put on hold.
- There seems to be an appetite in certain parts of UK society to retrench. An appetite for isolationism. I have read comments today on twitter of a spate of racist abuse. Cards telling Polish immigrants to go home have been pushed through their letterbox. Jim Al Khalili, the physics professor and TV presenter had to delete hundreds of racist messages from his twitter feed. A friend, although born and bred in the UK, was asked by a colleague at work how long she could stay in the UK, simply because she is Asian. Yes, such actions are taken by a minority but they tell a story. Together with Nigel Farage’s Breaking Point poster these acts are telling our neighbours we are fearful of foreigners and they may become unwilling to trade with us, or visit the UK because of such acts.
- Britain is now a deeply divided nation. We are split, young against old, working class against middle, educated against uneducated, Scottish against English. This can only lead to strife. Public unrest may take place, particularly as several of the leading Leave politicians are, within hours of the vote, reneging against their main campaign pledges such as extra spending for the NHS and control of immigration. When Leave voters, mainly working class and with lower educational attainment, realise they are not going to be given what they were promised, they may rebel with the only means at their disposal, violence. During the campaign Leave wrote cheques they cannot possibly honour. They spent our EU membership fee ten times over, promising £100 billion in spending with only £10 billion available. That is a recipe for social unrest.
- We currently receive a billion pounds in EU grants for scientific and technological research in the UK. We have a vibrant technological economy. That funding will end and there is no guarantee that the new UK government post-Brexit will be able to supply similar levels of aid to the science community. We currently receive 18% of EU science funding, more than all other EU members. That funding is at risk. This is going to have a severe effect on universities and tech companies.
- Science is based on international cooperation. Most big scientific studies are shared with other nations. An isolationist stance may result in less international cooperation and current partners looking elsewhere for assistance.
- Big tech firms like Google view a global economy. The world is located in the cloud. Britain may no longer be the place to locate.
- Our new nuclear power plants are a deal between the UK, China and France. They could now be at risk. We could have issues with energy security.
- Britain receives significant funding for environmental projects from the EU. We also receive funding for green energy production. That now ceases. It is notable that many in the Leave camp are climate change deniers, most notably Lord Lawson who runs an anti-global warming group. Several Leave politicians want to remove legislation on issues such as fossil fuel emissions. We could be once again seen as the dirty man of Europe.
- This is a biggie. Our current legal system is intrinsically tied to our EU membership. Over 50 years, laws both domestic and European based, have been influenced by our EU membership. So has case precedent. On leaving the EU all of it will have to be rewritten or re-enacted.
- I worked for twenty years in consumer protection and most of our consumer rights and protections are EU based. Even our rules for labelling food take into account EU rules. Take the Consumer Rights Act 2014. This is a piece of UK law. It contains domestic controls, such as the 30 day limit for rejecting faulty goods. It also contains EU measures such the 14 day right to cancel distance contracts. Like many pieces of our law it is a single act made up of laws from both domestic and EU sources. Leaving the EU means it needs to be unpicked. All our product safety rules rely on the General Product Safety Regulations to some extent. These regulations are made under the European Communities Act 1972 which Brexit supporters want to revoke post-haste. Either a new act needs to be introduced replicating the terms of the European Communities Acts power to introduce statutory instruments or new regulations will need to be drafted and enacted. This issue runs across our legal landscape and it is going to take decades to sort out.
- Professor Michael Dougan believes there is so much law needing to be addressed, that parliament could not cope. there is simply not enough time available to parliament to go through the process of debate. He feels that the new cabinet will have to take extraordinary powers to introduce new laws without reference to the Commons or the Lords. This could result in a dilution of the UK’s democracy.
Some may feel all I am doing is advocating project fear. Personally, I feel it is project realism. Britain is in for a rocky ride over the next few years and that is not good for business. As is often the case, the worst affected sector may be small businesses.