Brexit will affect EU companies too

EU-based firms should avoid Brexit complacency and plan for a new era

Go to the profile of Fernando Fernández
Oct 07, 2016
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Are Europe’s business leaders taking Brexit seriously? Many outside the UK believe that Britain will reverse its position and find a way to remain within the EU, a conceit that should be dismissed as wishful thinking or pure denial. But even those who accept that Brexit will be carried through, seem unaware or unconcerned about its potential impact on Europe’s business environment.

Such sentiments are misplaced. Brexit will have profound economic and political implications for European companies. For a start, European integration has now proven reversible, thus reintroducing political, regulatory and country risk in an area that has enjoyed remarkable stability for over half a century. This point alone should force company boardrooms to revisit their strategic assumptions.

In the short term, financial market volatility will increase as investors reassess their risk appetite. The European Central Bank (ECB) will respond by extending the period of zero cost, unlimited liquidity, perhaps even pushing interest rates deeper into negative territory. Unconventional monetary policies will increase investor pessimism and reduce banking profitability, while the economic costs of political uncertainty can only mount. As long as the ECB remains so dominant in shaping Europe’s economic landscape, calls for broader macroeconomic policymaking, (e.g. reform momentum, fiscal consolidation, private sector deleveraging and structural economic change), will remain unanswered and business sentiment will not improve.

Fading pragmatism

Brexit’s longer-term impact will depend on what deal the UK agrees with the EU. History suggests a less than amiable set of negotiations and outcome. To be sure, Britain will lose some of its allure, especially as Europe’s premier financial centre; but European companies and banks could also suffer. No major country is interested in a trade agreement with the UK prior to its EU departure, and Europe will miss the UK’s liberal pragmatic influence on economic policy, leaving the way open for more state intervention. Europe’s banks will lose a major EU financial market. Its successor—be it Paris or Frankfurt—may not carry the same international weight as London, and non-financial corporations will not easily find a business-friendly alternative.

Europe’s biggest business challenges, however, will be associated with political change. Brexit will force the Euro area to speed up economic, financial and fiscal integration, widening the divide between the Euro ‘ins’ and ‘outs’. To do this, the EU will need the democratic legitimacy of a new constitutional treaty, a particularly fraught undertaking in today’s increasingly nationalistic atmosphere. Stability, harmony and prosperity cannot therefore be assumed. Like the never-ending Greek saga, Brexit will aggravate Europe’s underlying tensions.

A time for strategic leadership

Doubts about the specifics of a post-Brexit Europe are no excuse for postponing intelligent action. With the risk outlook already changing for companies, their most sensible response might be to start designing alternative political scenarios, with corresponding strategies and action plans. This should not be too difficult: many European companies have strong in-house research units, and are used to playing the long game. In any case, adjusting to change is an important ingredient in any company’s culture. The challenge is, ultimately, one of leadership—having the vision and ability to guide a business through uncharted territory. The corporate response to Brexit will be as important as technological disruption to Europe’s future prosperity.

Go to the profile of Fernando Fernández

Fernando Fernández

Professor of Economics , IE Business School

Professor Fernandez joined IE Business School as Professor of Economics in September 2009. His professional development, which reflects his personal interests, has led him to explore all the different Economics’ fields. He started as a scholar fully dedicated to teaching and research; afterwards he worked in international economic policy at the IMF, in the banking arena at Santander Group, in international consulting and as Rector of private universities.