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Brexit and its consequences on affected countries, including Bulgaria

As the process of the United Kingdom leaving the European Union accelerates, there are more arising questions concerning the different routes and scenarios which this monumental change could take, as well as its direct and indirect influence on major affected countries— the United Kingdom itself, in addition to other EU Member States, such as in this case, Bulgaria.

 

Possible Brexit Scenarios:

Until very recently, the UK’s departure from the EU was anticipated to develop according to the following scenarios:

  1. A comprehensive free trade agreement, along the lines of the Comprehensive Economic and Trade Agreement (CETA), between the EU and Canada.
  2. A deep and comprehensive free trade agreement (DCFTA), along the likes of the one signed between the EU and some of its peripheral nations; Ukraine, Moldova and Georgia.
  3. And of course, there is always the likely possibility that the two sides will simply not reach a mutual agreement before the end of the 2020 deadline, leaving their relations solely to provisions lead by the World Trade Organisation (WTO). This scenario is what one might call ‘hard’ Brexit, yielding the worst consequences.

Following the latest progress of the negotiation process, it appears that the final proposal of the withdrawal agreement between UK and EU most probably will be voted down by the parliament, which implies several possibilities:

  1. Extension of article 50. If the parliament will not support the latest version of the withdrawal agreement, in order to avoid no-deal Brexit which may spark disorder, the single meaningful step is the prime minister to ask European Council to extend the deadline of entering into force of article 50 in order Theresa May to gain more time to conclude the deal. However, this request is not necessary to be granted The extension period cannot be too long but it is a precondition for the next scenarios which can unfold in order a political decision to be found.

After achieving the extension of article 50, three main scenarios are possible

  1. Renegotiation of the agreement. However, this is the not very likely option taking into account that UK is not in a position to impose changes in its favour and it is highly unlikely that the EU will agree to more concessions.
  2. Reversal of the process. This scenario can apply under different condition, which can be: new general elections and/or second referendum. So far Theresa May avoids whatever development into such directions but considering her very unstable political position and the contest within the Conservative party of her leadership and premiership, such process should not be avoided.
  3. Finally, in case the proposed agreement is voted down and no reversal of the process or renegotiation of the agreement are achieved, the last option becomes hard Brexit. This means a chaotic departure from the European Union, imposition of the WTO’s trade rules, resulting in establishment of borders between the Republic of Ireland and Northern Ireland, as well as chaos within trade relations between the UK and EU. As it was said, this will be extremely harmful for the both sides. At that point of the negotiations this scenario appears least likely.

The cause for the resistance against the latest version of the withdrawal agreement

What lays in the bottom of the the resistance against the latest version of the withdrawal agreement?

The fundamental issue that should be resolved with the agreement between EU and UK is the border between Republic of Ireland and North Ireland. The border between both parts of the Irish island was decided to be removed with the Good Friday Agreement from 1998 and the it was completely removed in 2005. However, in case of Brexit the border should be placed back, taking into account that Republic of Ireland remains in the EU while North Ireland, as a part of UK will be considered as a territory outside the Union. In order to resolve this issue, which will create not only economic but also political turbulences, the withdrawal agreement between EU and UK stipulates that:

  1. North Ireland remains permanently in the single market
  2. The rest of the UK, namely England, Scotland and Wels remain in the single market by the end of the transition period, which expires on December 31 2020.
  3. In case England, Scotland and Wels decide to extend the transition period, the British government should apply for such extension six months before the expiration of the transition period. The decision should be taken by a bilateral commission formed by both sides. In case the commission does not reach an agreement, Great Britain leaves the single market on 31.12.2020.
  4. After leaving the EU’s single market the Great Britain should stay in the custom union and apply the EU’s Customs Code.

 

As it can be seen, there are many clauses in the withdrawal agreement which create political challenges before the different parts of the UK’s political landscape:

  1. At first place these are the hard Brexiters who cannot accept that the UK would be obliged to apply the EU’s legislation during the transition period. What is more, it is completely unacceptable for them that the UK to remain in the custom union even after the transition period.
  2. On the other hand, Remainers from the whole political spectrum disagree with the deal insisting that it does not correspond to the public vote from the referendum and they feel free in such case to provoke reversal of the process.
  3. Next comes the coalition partners of the Conservative party from North Ireland, DUP, according to whom the separation of North Ireland from the rest of the UK represents a national treason.
  4. At the same time the Scottish politicians, who want Scotland to remain in the EU are discontent seeing that North Ireland will be in more privilege position than Scotland in regard to its trade relations with the Union.

Under these circumstances it is clear why the political situation in the UK considerably deteriorated in the last days and the most reasonable scenario is the extension of article 50.

 

Economic consequences from hard Brexit

Finally, It should be highlighted the economic consequences of Brexit for the UK and the EU and especially in case of no-deal scenario prevails. There have been many studies based on econometric analyses outlining the consequences of Brexit . It is important to note, however, that no model or analysis is perfectly accurate in its predictions, especially when it comes to an economy of such scale, making this a precedent with unpredictable repercution.

The UK’s economy is worth roughly 18% of the entire EU economy (when excluding the UK); meaning that on its own, the UK economy is only 5.5 times smaller than the whole EU27 economy. In relation to that, the exports towards EU27 (the 27 EU nations involved in the Brexit negotiations) make up about 7% of the UK’s gross domestic product (GDP). Meanwhile, EU27 exports towardsthe UK make up only 2.5% of overall EU exports. Disproportions become much more significant when one looks at import data. UK imports from EU27 equal to roughly 12% of the country’s GDP, whereas EU27 imports from the UK represent only 1.5% of the joint national GDP. Thus, general trade makes up almost 20% of the UK’s GDP, whereas, for EU27 it is only of roughly 4% of GDP, i.e. a difference of 5 times which puts the 27 EU nations in significant advantage.

Table 1. Trade between the UK and EU27, in terms of GDP %

Imports Exports Trade Turnover
EU 27 1,5% 2,5% 4%
United Kingdom 11,9% 7,1% 19,1%

Source: Eurostat

Another important factor to consider, which of course will be affected by Brexit, is foreign direct investments (FDI). Significant imbalance emerges when comparing mutual investments between EU27 and the UK. While investments done by EU27 MSs in the UK account for only 5.6% of the EU27’s GDP, investments made by the UK in EU27 represents 38% of UK’s GDP. On the other hand, investments made by the UK in EU27 are roughly a third less in nominal terms, but still account for over 25.5% of the country’s GDP, whereas for the EU27 nations it is only a little over 8% of the Union’s GDP. At the same time, over 45% of the investments made by the UK in EU27 are investments in financial services. Meaning that even in their investment activities, the UK’s business predominantly invests in MSs’ financial sectors.

 

Table 2.FDI flow between the United Kingdom and EU27, in regards to GDP %

Incoming Outgoing
EU 27 5,6% 8,1%
United Kingdom 38,2% 26,5%

Source:Eurostat

 

Brexit’s economic consequences— quantitative assessments

 

  1. Consequences concerning both the United Kingdom and EU 27

 

With few exceptions, almost all analyses point to the fact that the biggest post-Brexit loser comes out to be the United Kingdom. The most sophisticated models acknowledge that the UK’s GDP will fall by between 2.7% and 7.7% by 2030.

Table 3.Data summary of the econometric models showing long term effects of Brexit on the UK and EU27’s GDP by 2030

Average Values EU 27 United Kingdom
Best Case Scenario -0,11% -1,31%
Worst Case Scenario -0,52% -4,21%

It is important to note, that the outlined GDP deviations of Brexit from the remain scenario take place in a period of 10 years, until 2030. What this means is that the influence which Brexit has on EU27’s GDP annually is minuscule; between 0.01% and 0.05%.

In contrast, its influence on the UK’s GDP is almost 10 times higher; between 0.13% and 0.42% annually. The main arising question, in this case, considering the fact that the UK’s economy is only about 5.5 times smaller than that of the EU27, is why  the consequences of Brexit on the two sides aren’t of roughly the same scale, but is rather almost twice as big on the UK. To what do we owe this skewed loss distribution?

The answer is that the weaker side almost always absorbs the majority of the loss from the implemented customs duties and non-tariff barriers, because, firstly, it cannot impose its own interests on the more powerful side (i.e. the EU). And secondly, all of the preexisting trade agreements remain unchanged for the EU, whereas the UK would yet be to sign new trade agreements, from a much weaker standpoint. De facto, up until this point, the UK has been trading with over 50 countries on the basis of incredibly favourable trade agreements, which had been signed with the EU. These trade agreements now have to be renegotiated, where it is unlikely that the conditions would remain as favourable. In addition, the UK would have to form agreements with 67 other countries, in order to lead its own trade policy, in accordance with the research done by the Exchequer, which will most likely be an incredibly long process.

 

  1. Consequences affecting Bulgaria, as well as other countries independent of the EU

 

It is evident that the UK will face significantly more backlash than EU27, following Brexit. When measuring the potential influence it will have on Member States, it is evident that these effects will not be as perfectly and symmetrically distributed among the different countries, but rather that there will be both countries which face significant negative consequences, and ones which see barely any difference at all. Countries historically tied to the UK through their trade and commerce agreements, as well as ones with the most dynamic commerce relationships will face the biggest backlash from the UK’s departure from the EU. For example, Germany, Holland, France, Belgium and Italy would be the UK’s biggest trade partners based on the amount of import and export of goods. However, at the same time, because these countries have large economies of scale, smaller partners, whose GDP is more so influenced through their trade with the United Kingdom are significantly more vulnerable. Subsequently, although Germany is the UK’s biggest trade partner, their trade relations with the UK account for only 4.2% of Germany’s economy. To contrast, although the trade volume of Ireland is a relatively insignificant compared to the UK’s overall trade volume, their commerce size accounts for 15.7% of Ireland’s total GDP. Hence, the countries most affected by Brexit would be Ireland, Malta, Cyprus, Belgium, Luxembourg, and to a much lesser extent, Holland.

Luckily, Bulgaria would remain practically unaffected. Bulgaria’s trade with the United Kingdom accounts for merely 2% of the country’s GDP, equally distributed between import and exports. The trade turnout, in relation to services, is even less, accounting for only 0.2% of Bulgaria’s GDP. Considering total FDI accounts for 84% of Bulgaria’s GDP, the UK’s own contribution is incredibly insignificant, at 0.6%. Potential indirect consequences could be brought due to change in trade relations between the UK and other countries Bulgaria has considerable trade relations with Germany, Italy, Romania and France, but again, these particular MSs are not among those facing the most threat. Even more, it is very likely that Bulgaria will in fact see positive effects following Brexit taking into account its low labour and other input cost.

 

Beyond model forecasts

Brexit is very unprecedented, making it close to impossible to make an accurate economic forecast. It represents an enormous political and economic shock for the European Union, which could easily sway its very core either way, having unpredictable consequences. At the same time, Brexit increases the uncertainty of the entire EU, not just the UK, which could easily decrease Europe’s ability to attract investment and even repel potential investors. This could have severely negative consequences on the financial systems of the entire Eurozone. On the other hand, many investors saw the UK as a transitional hub for their further investments in the rest of the EU, which will undoubtedly change now.

 

 

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