The many ways Brexit will impact South East Europe and beyond

Image by Reimund Bertrams from Pixabay

Britain outside the EU will be a long-term, real time empirical exercise in the value of safety in numbers.

The original Brexit date has been pushed back from March 29 to April 12 or even May 22. Brexit may yet be delayed further, even reversed but as things stand the risk of a no-deal Brexit remains uncomfortably high. This is more than enough reason to consider the impact Brexit will have on the region.

The first effect will be a smaller EU budget as the UK is a net contributor to the budget. Net recipient states such as Croatia and Slovenia can expect less financial support in the longer-term as a result of Brexit.

For the remaining countries of South East Europe outside the European Union, such as Montenegro and Serbia, the scope for joining the EU will have further receded. Namely, while European officials and politicians have been candid in saying there will likely be no expansion of the EU during the term of the next European Parliament, the departure of the UK from the EU will, however, remove an important, influential member state which has historically been in favour of expansion.

That dimming prospect of expansion will mean Croatia and Slovenia, who could reasonably be expected to gain most in economic terms for the expansion of the EU, to encapsulate the remaining countries of South East Europe would lose a further impetus to growth. A further cost for Croatia, as an immediate neighbour of Bosnia Herzegovina, Montenegro and Serbia is a higher perception of risk (i.e. as a state bordering a potentially unstable region) compared to having all these countries in the EU.

Some will argue that with the UK out of the EU its traditional role in resisting certain changes will allow the 27 member states to function more efficiently. I am not unsympathetic to this view, but from the perspective of a small member state in South East Europe, the loss of a UK with liberal convictions carries important risks.

France has long been associated with a stronger role for the state in the economy and together with Germany they have recently argued EU champions need to be formed to counter the rise of China. The risk of a more interventionist economic policy is a threat to newer member states in the East whose public sectors are not as developed as those in the West and could thus be captured. While no formal change to state aid rules has been proposed, an EU economic policy putting more focus on state intervention would risk undermining years of efforts to combat corruption and the perception of corruption in newer member states.

As we have argued previously, the fact a large member state is leaving necessarily means remaining large member states will have a greater say in EU affairs. This dynamic increases the chances of smaller member states being drawn more closely together. In any event, where smaller member states could previously hide behind the UK, when they agreed with its position, they will now have to seek like-minded partners and to more explicitly argue their points of view to be heard.

Brexit will not mean the end of uncertainty. Britain will have to negotiate its future relationship with the EU and even when that is completed, maintain a constant dialogue with Brussels to make sure its sticks to EU rules to ensure market access. Any form of Brexit without access to the single market and/or customs union would complicate trade relations, increase costs and uncertainty. All of this would be bad for trade while any further depreciation of the British Pound would exacerbate currency risk. In the longer term a weaker pound would mean a poorer Britain, further reducing export potential to the UK.

While goods exports from Croatia and Slovenia to the UK amounted to 1.5% and 1.9% of total exports in 2018 respectively, suggesting to a small direct impact, the tourism sectors in both countries (and elsewhere) are likely to suffer while any intermediate goods sourced from the UK in supply chains face disruption in the near and perhaps medium term and will increase costs of goods and services.  Clearly, those companies with a large share of UK revenues will be more adversely affected.

In the beginning Brexit will have an adverse impact on the EU economy. Over time though, the longer-term impacts, which will be more important, will become evident.

One opportunity, with the UK outside the single market, is for remaining countries to attract UK business to open subsidiaries so that they can continue to trade in the single market. How nimble the public and private sectors are in Croatia in pursuing any such opportunities remains to be seen, but an opportunity does exist.

Conservative estimates suggest that the financial industry has already transferred roughly one trillion in assets from the UK. While Dublin has been the major beneficiary of relocations from London, Luxembourg, Paris Frankfurt and Amsterdam have also attracted London’s business.

This atomisation of finance from Europe’s uncontested financial centre necessarily means the complexity and risk of the European financial scene will increase. This must be reflected in a higher cost of finance in Europe than would be the case without Brexit.

Every cloud has a silver lining and the same applies to Brexit, which is to say that countries of the region can expect some benefits. The Irish government has been forecasting a major impact on its economy from Brexit which is logical. A recession in Ireland would mean some of those people from the region who have emigrated there will move. A part of this cohort will return to their countries of origin and thus support economic growth at home.

Yet the most important message of all from Brexit is this: if a large G7 economy like the UK, with political experience, a respected civil service and judicial system can so badly misjudge a policy because it thinks it can pursue an independent course of action at no cost, what can small nations expect? Britain outside the EU will be a long-term, real time empirical exercise in the value of safety in numbers. Understanding how the EU works, working to make it better, and lobbying within its structures with allies for policy goals as the only viable long-term strategy for small states should become obvious over time.

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