Eight Reasons the EU Will Suffer Far More Than UK in Brexit

-edited

The EU would be wise to make a deal with the UK. It will get clobbered in the event of no deal.

Conventional wisdom says the UK will get hit harder than the EU in the event of a no deal Brexit. Conventional wisdom is wrong.

Here are eight reasons the EU will suffer more in both the short and long term.

Reason 1: Corporate Taxes

The UK can and likely will slash corporate tax rates. A lower corporate tax rate will mitigate much of the profit damage suffered by UK corporations in the event of no deal.

Note that one of the EU's biggest complaints against Ireland now is the "unfair" corporate tax structure of Ireland.

Reason 2: Currency Fluctuations

A falling currency is good for exporters and bad for importers. The British Pound has been falling in anticipation of Brexit.

Reason 3: Balance of Trade

In the event of no deal, WTO tariffs kick unless the EU offers to work out a trade deal. Under WTO rules, the EU could do that and rules allow a lengthy 10 years to get it done. The EU should agree to do that, but with animosity rising, it probably won't.

In a rising tariff setup, exporters will suffer far more than importers. Germany has an enormous trade surplus with the UK.

Image from Order of Rank of Germany's Trading Partners.

Angela Merkel is very concerned about German exports as well she should be.

Throw in the increasing chance of Trump putting tariffs on German cars and the EU will get crucified. A very severe German recession is in the cards and the EU faces a double whammy of Brexit plus Trump.

Note that a falling currency will mitigate some of the Tariff damage on UK exporters while compounding the problems for the EU.

Reason 4: Fishing Rights

In Brexit, the UK halts all EU fishing rights. EU fishermen will get clobbered.

Reason 5: Trade Deals

The UK will be able to make its own trade deals and set tariffs how it pleases.

Reason 6: Rules and Regulations

The UK will finally be free of inane EU rules and regulations on basically everything but especially agriculture.

Reason 7: Brexit Fees and Pay to Play Fee

Some dispute this, but the UK can halt the Brexit breakup fee. Boris Johnson has threatened to do that. Regardless, the UK will stop paying into the EU coffers even it does pay the breakup bill. The EU has budgeted for UK payments. When the UK stops paying, the EU will have to raise taxes to cover the difference.

Reason 8: Long Term Consequences

Both the EU and UK will suffer in the event of no deal but the long-term consequences strongly favor of the UK.

Mike "Mish" Shedlock

Comments (60)
No. 1-18
Stuki
Stuki

Lowering "Corporate Taxes" only matter, if other taxes aren't simultaneously increased. Otherwise, it's just simple redistribution from one group of lobbyers to another.

A falling currency makes British people poorer. Their salaries lower. Their savings less worth.... It takes some real dedication to parroting regime sustaining nonsense, to claim that British people getting poorer, is somehow "good" for Britain.

In a rising tariff/increasing barriers to trade, environment, the larger entity generally suffers less than the smaller. Simply because larger size render domestic substitutes more likely and viable. Monaco imports darned near everything it consumes (which is a lot). Increasing trade barriers sufficiently, and they starve to death, unless dehydration beats starvation to it. Germany have both water and the ability to produce food. The only reason Trump can even remotely get away with posturing the way he is, is that America is large enough to suffer less from a trade shutdown than smaller countries individually. The EU is in a similar position. As is China. The UK..... it ain't Monaco, but at the same time, it's a lot smaller, and more dependent on imports, than the EU.

The potential benefit to be derived from Brexit, is simply one of (possibly) less regulation and other externally imposed inefficiencies. Like fishing rights (UK is an Island with lots of water per capita or area), lack of transfer payments, lack of plain weird regulations imposed for political posturing reasons by politicians removed even further from their "constituency" than those in London already are etc....

avidremainer
avidremainer

Mish you are normally rational but repeating Brexit unicorns doesn't make it so. I repeat a question that you have consistently ducked. What is the point of a WTO exit that only covers 20% of the UKs economy and ignores services?

PatchesRips
PatchesRips

Cut taxes to 0 if you want. If nobody can import from the place without tacking on vast tariffs as per WTO rules, what corporation in its right might will stay in the UK, let alone move there? We're already seeing the reverse trend, and the UK hasn't even left yet. And this is one of those rare analyses I've seen that champions a crumbling currency... yes, that's exactly how the US (and Britain, for that matter) got rich in the first place: by having a worthless currency nobody wanted to be holding when the music stopped and flushed out of their reserves because they had so little faith in its future. Terrific if all you export is bananas and straw hats and your people grow their own beans and never heard of a cell phone. And I'm truly impressed by the ability of supposedly grown man to read just one line in a list and ignore dozens of others that add up to vastly more. Now how about the corollary list showing Britain's partners with EVERYBODY highlighted in yellow, since Britain won't be losing tariff-free access to just ONE of its partners, but essentially ALL of them? And if Trump shuts out German cars, ALL of the EU will shut out American cars; it's as simple as that. The Yankees won't sell a car from Lisbon to Latvia if they pull that. That's WHY most European nations find it indispensable to be in the EU. Britain never got that, but it's about to. As for refusing to pay "the divorce bill", which is money Britain COMMITTED TO PAY AS A MEMBER OF THE EU, that will be seen by the bulk of mankind as a default on a promissory debt. Good luck ever getting a loan below 20% interest anytime in the next 50 years if you do that. EU fishermen will get clobbered? By what? Losing about 5% of their fishing grounds? They still have 60-some countries to sell their fish to, tariff-free. Just where are British fishermen going to sell their fish when WTO rules insist countries slap tariffs on them? It's the British fishermen who'll be watching their nets dry up and blow away in the wind. Brexit's going to be a disaster for everything except the writing of new tunes to whistle while passing grave yards... just like the one you've presented us with here today.

ZZR600
ZZR600

not much being said about UK pensioners living in Europe, who have seen a real cut in their income due to Euro/£ exchange rate

FromBrussels
FromBrussels

You are probably right Mish, the clueless, megalomaniac EU bunch( a la Juncker&CO) couldn t care less, I,am afraid, as long as their worthless, outrageously overpaid cushy jobs are guaranteed for life with a mighty golden handshake if necessary and mind boggling pensions afterwards ....

caradoc-again
caradoc-again

There are changes the EU has brought about that are to be applauded. Like FTA with Japan and future Mercosur etc plus others. Suspiciously like a response to brexit.

However, said changes are more deflationary to the EU. I dont see them able to do much outside of steal UK services, trade off cheap eastern European labour, put up none tariff barriers.

Its aging rapidly with a dysfunctional banking sector, dysfunctional currency, major democratic deficit and a fear of global competition. Worse start to the downward slope than Japan had late 1980s.

All the US need do is implement reciprocal tariffs on the EU, nothing more.

Brexit cannot be stopped now, too late. Its 1939 again and needs same level of determination. Battles will be lost, outcome of the war 6-10 years hence.

msurkan
msurkan

The question as to whether the EU or UK will hurt more from brexit is irrelevant. The real issue is whether the pain can be tolerated by internal political forces. On that level, Britain is far weaker. EU trade constitutes a far higher portion of the UK economy than vice versa. Moreover, from the EU’s perspective, the consequences of giving Britain a good deal are far worse than feeling an economic pinch from a significant drop in UK trade.

EU politicians view a prosperous post-Brexit UK as an existential threat to the survival of the union, which would encourage more states to leave. Thus, ANY pain is work bearing if it will assure a prostrate and suffering post Brexit UK.

Carlos_
Carlos_

Mish your analysis is as wrong on what is going to happen after Brexit as to your prediction of Cataluna. In the mean time people who deal with the harsh realities of the world noticed the following https://www.theguardian.com/politics/2019/jul/31/brexit-mess-with-good-friday-and-well-block-uk-trade-deal-us-politicians-warn https://www.theguardian.com/business/2019/jul/28/uk-aerospace-industry-steps-up-no-deal-brexit-plan-to-leave-regulator Fisheries The EU is the main export market for UK fish and fisheries products accounting for 70% of UK fisheries exports by value. Valued at £1.3 billion, this trade far exceeds the £980m value of fish landed in the UK, due to the added value from the processing sector. Some of the remaining 30% of exports that go to countries outside of the EU are governed by trade agreements negotiated by the EU that reduce trade barriers. So the single market, and additional trade agreements, are crucial to the success of the UK fishing industry.

This reliance on trade into the EU puts the industry in a position where unilaterally preventing access to UK waters would likely be met by reciprocal trade barriers and tariffs. This would increase the cost of their product, while reducing access to their biggest market. The question for the government, then, is how to balance a political issue against an economic one?

Reason 2: Currency Fluctuations Yes that will go really well when negotiating with Trump

Reason 7: Brexit Fees and Pay to Play Fee Basically make the UK more like Argentina...

So let me tell you what can happen if Brexit goes side ways Northern Ireland leaves Scotland leaves of all reasons to protect their fish exports into the EU.. GB gets to negotiate with the US under the handicap of being dying to leave WTO for something better ... Good luck with that..

Mish would say well the UK can drop tariffs to zero. Sure lets see how long the UK government last with that...

Francis.C
Francis.C

Reason 1: Corporate Taxes That's right but these corporates' production will not have access to the 2nd biggest world market → EU unlike Ireland … So not so attractive

Reason 2: Currency Fluctuations Right but UK imports more than exports so it cost more than it pays.

Reason 3: Balance of Trade Right about Germany, but on the UK side : First in raising tariff, don't forget that 53% of imports to UK are coming from EU (352 billions) which in not good at all for UK consumer. Second, 46% of export of UK go to EU which represents 291 billions £, compared to 4 476 billions £ the EU exports in the world (intra and extra EU). So a decrease of exportations doesn't have the same impact on each economy. Third : Angela Merkel is clearly important in Europe but you don't seem to know well how it works. She's not the only ruler for all the European policies. And I don't speak only of the French. Fourth : Prevision on Trump policies on german cars is more fortune telling than something else and whatever tariff, it concerns Germany not UK … Fifth on the note about mitigation of falling currency for UK exporter, this is right but it's twice worse for importations which represent 24% of our GDP, a big source of high inflation.

Reason 4: Fishing Rights Generally right even with the lost of the access to EU area. That represents only 90k tons compared to the 722k tons of UK fishing (12% lose) but globally a win.

Reason 5: Trade Deals UK will lose free Trade Deals with EU (27 nations), Japan, South Korea, Mexico, Canada, Singapore, Vietnam, Australia, New Zealand, Argentina, Brazil, Paraguay, Uruguay, Venezuela, Chile, Colombia, Peru, Ecuador and Bolivia. And the time to remake each deal need years and years !!! Without forgotting, the America First principle in the next negociation with US as the US ambassador has said (prepare you to eat chicken washed with Chorine etc.) Because, finally, in a deal, the size matters so you're right on the fact that we can make as we please but that's doesn't mean that the result will be what we want. Care Bears is a film, not a economic reality. (Think about China/India)

Reason 6: Rules and Regulations Right about the freedom, except that a bunch a these rules are made to protect consumers (and our children) and few of these rules really restrict the UK economy but like a lot of others subjects, we are going to rediscover that we are the main source of our problems. It's the way of responsibility.

Reason 7: Brexit Fees and Pay to Play Fee Wrong, EU doesn't use strategy of raising tax. They will go to court and sincerely with big chance to win. The consequence will be the payment but more dangerous for us, we will have made a failure to pay which will decrease the trust of all our future trade partners around the world. That is really not a good point to make a deal and maybe some move from rating agencies which have a direct impact on our debt interest.

Reason 8: Long Term Consequences You have the right to make wishful thinking but I'm sorry to say that nobody is skilled enough to say the long term consequences. To do it, is selling illusions. Illusions which can be true or not. So it's better to stay humble. History will judge.

What is sad here is you just don't speak about to see the potential end of the UK, with a possible departure of Scotland and/or Northern Ireland in case of a No Deal and so many issues we need to work on.

I don't really understand that some people continue to try to see things on 1 side like if they try to convince themselves. Here and now, we speak about this the future of the next generation, of our children and their children. I don't know for you, but because the situation is too serious, I prefer to stay lucid rather lull me to delusion.

It will be hard and scary. Many will suffer and especially among the most fragile of us. There will be blood and tears. If there is victory, it will have a very bitter taste. Keeping the spirit high, Yes ! Invoking Unicorn, No !

Mish
Mish

Editor

"Cut taxes to 0 if you want. If nobody can import from the place without tacking on vast tariffs as per WTO rules"

For starters, You don't understand WTO rules!

Mish
Mish

Editor

"Mish you are normally rational but repeating Brexit unicorns doesn't make it so. I repeat a question that you have consistently ducked. What is the point of a WTO exit that only covers 20% of the UKs economy and ignores services?"

The point is the UK will be free to setup its own trade agreements. How can you not understand the benefits of that?

The question seems silly.

Mish
Mish

Editor

I agree with Stuki that a falling currency is not a good thing. But with all the emphasis on manufacturing exports, it is not generally viewed as such. And to be sure, German manufacturing will suffer.

Ronwilliams
Ronwilliams

More LEAVE delusions. Little England can make deals for sure, but it will have to re-make 40-60 that it loses with BREXIT. And it only took them 3 years to re-sign 4 little ones. And nobody seriously thinks Little England has the economic clout to get the same quality of deal, or as many, as a market 10 times as large. Canada has CETA but told Little England to go away when it asked for a free trade deal. Falling Pound may make exports cheaper but countries, especially America want to EXPORT not Import. Trade deficits and all that. A peso-like Pound will make that impossible. Speaking of America, Little Englanders' fantasy FTA with America will die on the Irish border, regardless of tRump's promises. EU countries average about 8% of their trade with Little England-a serious hit but nowhere near the 40% of Little England's exports to the EU. Finally, EU countries have the ability to pull hundreds of thousands of jobs (Airbus, BMW, etc., etc.) out of Little England to bolster their own economies. Little England has maybe three bars it can pull out of the EU. Yes, Little England can become a low tax, low regulation country for a while, but there are plenty of other countries that can out lower themselves already.

ArferPDaley
ArferPDaley

Interesting Angles there

Reason 1: Corporate Taxes - Now I have just moved my Company to Dublin. It's wasn't the taxes I I am moving reluctantly I am a Brit, its market size. 65m vs 450m , and paperwork. I used to fill out all customs stuff , carnets etc just to take equipment to trade shows , used to have a permanent team ... So not going back to that Also I moved to selling humanware - people security experts but they need FOM and carry a lot of tech so it makes sense to leave Blighty and British experts unfortunately. And no I do not want to sell in Australia, USA, Asia (except for Sri Lnak and India where we have a presence already. It makes no sense for my business. +

Reason 2: Currency Fluctuations

  • is good for currency speculators and not for business as you have to hedge .. Seriously have you ever run a an international business ? If you don't know the value of your contract when the invoice is paid how can you make a profit ??? You have to hedge ..

Reason 3: Balance of Trade

MY European Customers (of which I have far more) are not really happy with being called NAzi's , USSR etc So I think the appetite to help the Uk is all but dried up.

Reason 4: Fishing Rights - no comment other than I remember the Cod Wars with Iceland .. The fish move round the sea although I am told they would rather be caught by true Brits.

Reason 5: Trade Deals - Trade deals are a numbers game - You have 1.2bn people you call the shots. So any country of less than 65m we can get a great deal pity they won't have large disposable incomes r buy Plane wings. Seriously in 30 yrs of international sales never won or lost or even mentioend an FTA in a sales engagement. But I was not selling commodity, bags or sugar etc so we will compete with India, Vietnam, Malaysia and China .. good luck with that

Reason 6: Rules and Regulations

Hate to bust that bubble , but if you want sell in Brazil, or Laos, Thailand India USA Japan - you have to follow their domestic regulations and even the USA has it's quirks. SO we can have a bonfire of regulations to make exporting to the UK easier ... makes perfect sense to me ... lets increase the deficit to the ROW and not just the EU.

Reason 7: Brexit Fees and Pay to Play Fee

Let's show the world that we may not pay up on our commitments - great marketing campaign for the companies that want to move in to take advantage of the low tax low reg business environment

Reason 8: Long Term Consequences

Yes not only the UK and the EU but also many parts of the World . If The EU goes tits up then countries to export to it will feel the pinch same with UK

But they don't see the benefits of Blue Passports , Easier to Export to and the long term more jam for all.

Other than that I agree totally especially about the fishermen

DeanKB
DeanKB

I'm sorry, but this is a nonsense. Cut corporation tax? The UK exchequer will pay for it - i.e. UK taxpayers. That's NOT a positive outcome. Currency fluctuations can force inflation up, pushing up interest rates - but just ignore that! The EU loss will be spread amongst its members - the UK takes its hit all on its own. Trade deals are far, far more involved & complicated than the UK simply "making its own" - and what's the guarantee that the UK will get better deals than the entire EU?! Why? Rules & regulations are hardly "inane". They guarantee standards & protect consumers - UK manufacturers, for instance, not following EU regs will be unable to export to the EU. The UK cannot simply withhold contracted fees, with the EU doing nothing in return! It's a fantasy! And the long term consequences do not "strongly favour the EU". I mean, why has Sterling bombed since the vote? Why has it dropped on the threat of no-deal? The EU CANNOT give the UK special deals - what's the point of a trading block like the EU if you can leave & get better or equal status? It's utter bollocks - a thin, poorly thought out article that really is piss poor.