Why a hard Brexit will cost the UK more than Europe

Brussels has several cards up its sleeve that could hinder Theresa May’s plans for a clean and painless Brexit.

Theresa May delivers her Brexit speech
Britain's Prime Minister Theresa May delivered her keynote 'Hard 'Brexit' speech at Lancaster House in London [Facundo Arrizabalaga/EPA]

On January 17, British Prime Minister Theresa May delivered a much-awaited speech charting her country’s course towards exiting the European Union. In an uncanny twist of history, she chose Lancaster House – the very place Margaret Thatcher had vibrantly celebrated the inclusion of the United Kingdom to the European single market – to promote a vision of Britain as an economically isolated country driven by nationalism.

Less than 30 years since Thatcher’s celebratory speech, the former champion of a globalised and ultra-liberal European economy has succumbed to ideological fears and xenophobia.

Towards a hazardous road

If the Brexit supporters and populist press have acclaimed the offensive tone adopted by May and her preference for a “hard Brexit”, the truth is that the British prime minister is driving her country down a hazardous road and does not have the upper hand in the upcoming negotiations with the EU.

Both the British and the European economy may continue to suffer as a result of this unexpected divorce, but the UK has more to lose in this conflict than the EU, which has displayed an impressively unified front so far in this conflict.

May’s speech may have sounded convincing to her supporters, but it was plagued by contradictions. Her objective was to demonstrate that she is capable of declaring Britain’s “independence from Europe”, as demanded by Brexit voters, while securing most of the economic benefits her country enjoyed from its EU membership.

As such, she announced the decision to leave the single market, but also underlined the need for targeting reciprocity in future economic agreements with the union. She called for a decrease in the number of European workers in the UK, but admitted that her country desperately needs educated immigrants.

And the paroxysm of contradiction was reached when she declared that she would negotiate for the permanence of duty free exports towards the EU, while rejecting the common tariffs with other countries, such as the United States.

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However, European countries are unlikely to display any leniency towards London. A strict enforcement of the treaties previously signed between London and the EU would categorically prohibit the UK from negotiating any bilateral trade agreements before the end of the Brexit negotiations.

Moreover, Guy Verhofstadt who heads the Brexit talks on behalf of the EU, is preparing to present an invoice to the UK, expected to be worth more than $40bn, in order to settle all current British commitments to European policies.

Long-term impact

These short-term challenges may be hard to swallow for the UK, but the biggest threat for the country’s economic stability will the long-term impact of Brexit on its economy.

All eyes are now on London and the future of the capital’s financial institutions that have been the source of a significant percentage of the British wealth over the past few decades.

A hard Brexit means that British firms will be stripped of their European financial passports and their ability to clear Euro-denominated securities.

As a result, Douglas Flint, the chief executive of HSBC, confirmed that his bank would probably transfer its clearing operations to its Paris office. This is significant as, although security-clearing only represents a few thousand jobs, they are at the centre of several key banking operations – syndication, risk management, cash flow optimisation, etc.

Moreover, a study from Ernst & Young, presented at the British parliament on January 10, estimated that close to 250,000 high-end jobs were at risk of being relocated to Paris or Frankfurt.

Understanding this risk, the UK Chancellor Philip Hammond threatened to turn his country into a fiscal haven by breaking with European regulations and protections, promoting lowered standards to attract more investments.

Notwithstanding that such a measure would increase British budget deficits and represent a significant step backwards in the establishment of sound and fair fiscal policies, May remains determined to bully her way out of the EU with such threats.

Yet, on that level, the EU once again has the upper hand as Brussels could impose sanctions on fiscal lobbying and hamper British companies’ access to the European market.

Consequences far beyond anticipations

May’s hope is to leverage the economic risk on the European front with increased partnership with the new American administration led by Donald Trump, whose recent diatribe on the EU welcomed its dismantlement. But one can question why the new American president, whose inauguration speech was about increasing protectionism and refusing concessions to international partners, would make an exception for the UK.

If the British economy has not felt yet the impact of the Brexit vote, it is due to the collapse of the British currency that boosted exports and tourism. But those positive outcomes are always short-lived. The simultaneous increase in import prices in energy and technology will eventually reduce the structural competitiveness of British companies as well as their capacity to invest overseas.

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On the political front, May purposely forgot to mention the impact of Brexit on the calls for independence in Scotland which may organise a new independence referendum as early as next year. The reintroduction of a formal frontier between Northern Ireland and the Republic of Ireland also holds the seeds of renewed conflicts.

However determined and confident supporters of Brexit may appear, their country remains in a position of weakness after the EU membership referendum and has much to lose in these negotiations.

Neither the Germans, nor the French – or any other European country in that matter – is willing to be bullied around, and the Britons are about to discover the cost of their decision.

Remi Piet is a research associate on political economy and foreign policy at the Florida International University.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.