IMD Professor Reacts
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BREXIT? I vote OUT!!!

IMD Professor Arturo Bris on the Brexit debate

I know that, as a Spaniard, I cannot vote in the upcoming Brexit referendum. The outcome is uncertain, and the ultimate decision by British voters is going to be driven by both rational and emotional decisions. Rationally—most people say—leaving the EU will be devastating for the UK’s economy in terms of competitiveness, trade and employment. However, many also feel that the UK is less independent inside the EU and that the Union has not been very beneficial to the UK.

But what about those of us in the EU who will remain part of it? If we could vote to leave or remain, what would be best for the EU without taking the UK into consideration?

If I could vote, my decision would be also a combination of emotional and rational issues. The UK and its culture have undoubtedly impacted my life—I am writing this article in English. I listen to British music and like drinking Scotch. I also own a Dyson vacuum cleaner. However, and to be completely honest, today the European Union would be much better off without the UK in it. Let me explain why.

First of all, the European Union is the greatest political innovation of the 20th century, yet the UK has never been a fully committed member, especially in the last few years. The British pound was the first to be excluded from the European Exchange Rate Mechanism (ERM) in 1992, and has never been replaced by the Euro. The UK has been more of an obstacle than a driving force in the expansion of Europe to the East. The efforts of continental European countries such as France and Germany to move towards more integrated economic and social policies have recently been blocked by the different British administrations. Cameron’s demands for a “special status” if they decide to remain is indeed something the UK has always had. The February 2016 agreement about changing Britain’s EU membership was outrageous in my opinion and is proof that the Britain wants to be in open marriage rather than a Union.

Financial services in the UK represent 12% of GDP and 7% of direct employment, and I gauge that if we added other jobs that service the financial sector, these figures may double. When one arrives in London City Airport early on a Monday morning, it is revealing to see that most executives are flying off to other European destinations. And this is because the UK financial sector serves primarily other European countries: 38% of the UK’s export of financial services go to the European Union. So, first of all, in the absence of the financial sector, the UK would be, in terms of regional GDP per capita, not very different from Portugal.

But more interestingly, promoting EU regulation that gradually brings financial markets (OTC markets, repo, currency, stocks and bonds, treasuries) to continental Europe would create wealth where it should be created. Opposition to the London Stock Exchange and Deutsche Boerse merger in March 2016 came with the argument that Frankfurt would lose ground as a financial hub. With Britain out of the EU, the continent could now host the world’s largest financial market. The Telegraph has recently reported (June 18th, 2016) that London is no longer on the list of the 10 best European cities for investing in property; that  ranking that is now topped by Birmingham, Berlin and Hamburg, and includes Copenhagen, Lisbon, Amsterdam and Milan ahead of London. There are thus several European capitals with the right access to markets, high quality telecommunications, and availability of skilled and international human capital to replace London as the market of markets.

Let us not forget that newcomers such as the biggest Chinese banks are choosing Luxembourg, not London, to set up their headquarters. Finally, we have an amazing opportunity to rebuild financial markets that have brought a lot of trouble to the world and have caused massive losses to our societies: Lehman Brothers was operating its Repo 105 program in London, and the division of AIG that caused the collapse of the largest insurance company in the world (AIG Financial Products) was headquartered in the City as well.

The European Union that we are now building is the result of commitments and trade-offs, but also an amazing adventure that is bringing prosperity to millions of people. Currently the natural expansion of the Union is towards the East, and has added countries such as Estonia, Romania and (hopefully) Serbia. We are building one of the greatest economic and political powers in human history. The EU is the land of Picasso and Chopin, Leonardo and Van Gogh, Audi and BMW, Spotify and Skype, Red Bull and Molière, Atlético de Madrid and Maersk, Ryanair and Stella Artois. In his 2008 book “The Second World,” Parag Khanna recognizes that there are only three global powers: the US, China, and Europe. The rest of the world’s countries form what he calls the Second World. We have made huge progress in the last 10 years in bringing some of these second-world countries into the first—it would seem natural that we in the EU let one country move out without much grief and loss.

One argument that seems faulty to me is that, just as the EU creates win-win opportunities for its members, a Brexit would be bad for both Britain and the EU. I am not so sure: trade from and to the EU would not suffer much (or do we think that British customers will stop buying Mercedes and will close their Santander accounts?); In the long run the Euro will be stronger once the pound loses ground as the currency of a more isolated economy. Moreover, politically we will survive. The EU has already gone through its worse crisis in 2009-2010 and has shown amazing resiliency. And the potential implosion of the EU after a Brexit has been anticipated precisely by those who never believed in the EU and the euro in the first place (to name names: the Financial Times and the Wall Street Journal). Indeed I think that the EU will be politically and socially stronger once Britain leaves. Once the damage done by irrationality and emotions in the UK is visible to Europeans, there will be no interest whatsoever in breaking up the Union: it will increase Greece’s commitment to the euro; it will accelerate the process by which Serbia and other countries comply to the accession requirements, and it will speed up the integration agenda.

Then there’s Gibraltar. An isolated Britain would be in a weaker position to negotiate the return of Gibraltar, the last colony in Europe, to its rightful owner.

Finally, the most important reason why I would vote in favor of a Brexit if I were allowed is that, in the current context, the EU without Britain is better than accepting the stringent conditions attached to it staying in. I am frightened by an appeasement strategy in which we give too much in return to make Cameron come back to the negotiation table. The discrimination against EU citizens (and Syrian refugees) that came out of the February agreement is already too onerous, and would definitely represent a step back on the marvelous journey that we are building together.

All in all, Brexit is more likely to break up Britain than Europe—so to Brexit, I vote OUT.

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center. He will be giving a keynote speech at IMD's Orchestrating Winning Performance (OWP) which takes place from June 27 to July 1 2016.


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