DISPLACEMENT OF AXIS

Today it is obvious that by deciding to withdraw from the European Union, the UK leadership will make every effort to ensure it has a guaranteed access to the single European market but at the same time ensure partial restrictions on the freedom of movement for citizens on both sides and refuse to pay contributions to the EU budget. London will ignore the requirement announced by France and Germany to speed up the process of withdrawal from the European Union in accordance with the results of the referendum on country's membership in the European Union (51.9% of Britons voted for the leave). The only thing that the leading countries of continental Europe could achieve were the assurances that in the best case the negotiations would begin next year and the UK would give up presidency of the European Council in the second half of 2017 (the presidency changes every six months).

Jobs for the British

Certainly, the immigration crisis in Europe has become the "trigger" that made the British vote for the leave from the EU. The UK nationals have already been dissatisfied that their jobs were occupied by the citizens of the Eastern European countries - Poland, Romania, Bulgaria. While the migrants from the Middle East coupled with the emergence of Muslim neighborhoods in many cities across the UK has become a headache of the local authorities, this was the last straw for local nationals.

According to various estimates, up to three million citizens from the EU countries live the UK, while there are no more than 1.3 million British nationals in the EU. At the same time, the population of the UK since 2000 has increased from 58.9 to 64.7 million in 2016, which makes nearly 10%. Thus, €10.9 billion (about 0.5% of GDP) paid to the European Union budget will be essential for the UK authorities to create new jobs for the British.

The search for new forms of relations

After the shock of the election results and the demand of London from Berlin and Paris to activate immediately the Article 50 of the Lisbon Treaty to withdraw from the European Union, a painstaking work on building new relations between Britain and the European Union countries has begun. Certainly, the quality of these relations firstly depends on the leaders of Germany and France - it is not surprising that the new British prime minister Theresa May has made her first international visit (20-21 July) to these two countries.

During her meetings, she has made clear that the number of migrants into the country must be limited but the freedom of movement of goods, capital and services with the EU must be maintained. Thus, Mrs. May has stated unequivocally that the United Kingdom was going to start negotiations on the withdrawal from the EU only in 2017. The question is why France and Germany continue to appease the vagaries of the UK without saying categorically “No” to London?

The reason is simple – a sharp leave of the Britain from the European Union and the severance of economic ties can hit both the EU countries and the economy of Albion. The trade deficit between the UK and the EU countries amounts to €75 billion – the British exports equals to €295 billion versus €370 billion imports from continental Europe. The only thing that may disturb London statistically is that the EU accounts for 45% of exports and 53% of total imports. Of course, in case of a sharp conflict with France, official London will be able to replace the imports from the EU in the short term and even at a reasonable cost but it will much difficult to find new markets for the British products.

In any case, the reality is that neither the EU countries, nor the UK do need any shock. As noted by chancellor Merkel, since the British prime minister will not be able to chair the European Council, some new forms and means to maintain the existing relations will be found.

From European to global banking center

The withdrawal of France, Italy or even Spain would have created more problems for the EU leadership than a similar decision by the UK. This is not about the fact that the United Kingdom, as an island nation, is less integrated in the European processes. Failure to accept a single European currency (euro) and a commitment to the national currency (pound sterling) combined with maximum independence of the Bank of England allows painless implementation of the country's withdrawal from the EU.

Some experts believe that the British leave will also mean the leave of financial institutions from London and the loss of London’s existing status of the main European financial center. In this case, one of the worst options would be the loss of a single economic environment within the European Union, in which the British companies would have been denied the right to hold “a single EU passport”. That is, such companies will not be registered in the EU, and lose the right to take advantage of the single European market.

However, no matter how it was unfortunate for the European Union, European banks have long since lost importance in the world, giving way to the largest US investment banks, which immediately after the announcement of the referendum results have supported London as a global financial center.

By the way, the decision to withdraw from the European Union opens up good prospects for bolstering the role of the British pound sterling in global trading. Despite the fact that the British currency has considerably weakened against the US dollar after the announcement of the referendum results, it has regained significant portion of the loss following the events.

In any case, after a month from the date of announcement of the referendum results, the British economy has not suffered from any significant changes. However, if there are symptoms of a slowdown in the British economy, then, according to Mark Carney of the Bank of England, the financial institution still can stimulate the economy to mitigate the negative consequences of the leave.

Will the World Financial Center move?

Meanwhile, the absence of the UK behind the negotiations table of the European Union would allow France and Germany to notably "tighten the screws" for other EU member states including but not limited to the introduction of fiscal measures concerning the budget deficit, tight control by the European Central Bank over the banking activities.

Currently, many experts ask: how the leave will affect the banking system within the Eurozone?

On July 21, the Governing Council of the European Central Bank (ECB) announced that it maintained the benchmark interest rate at a record low of 0% and the deposit rate at minus 0.4%. ECB President Mario Draghi said that the Bank was ready to support the market if necessary but there was no need to discuss additional financial tools. Note that the ECB is going to keep inflation below 2% in the medium term, which means that it does not see any specific threat to EU banks.

In addition, the EU will tighten control over the budget deficits of member countries, which must not exceed 3%. Accordingly, a far greater threat to the financial stability of the European Union is the situation in Spain, and not the Brexit. For example, in Spain, the budget deficit amounted to 5.1% instead of the EU approved 4.2% in 2015. There is still no government in Spain while the situation with the budget deficit did not improve this year. Consequently, this may mean that the EU will apply fines totaling €2.2 billion followed by the default.

Finally, it is likely that continental Europe may soon get a new financial center instead of London. In particular, on July 7, the shareholders of the London Stock Exchange (London Stock Exchange Group - LSEG) overwhelmingly approved the merger with the Frankfurt Stock Exchange (Deutsche Börse AG). In accordance with the terms of this transaction, the shareholders of Deutsche Börse will receive about 54.4% of the shares of the combined company, and LSEG will get 45,6%, hence, creating Europe's largest securities market operator.

By the way, Frankfurt may be a substitute for the bankers who want to leave London. Thus, if the British prime minister will not be able to negotiate with the leadership of the EU on the free movement of capital, the title of Europe's financial capital will go to Frankfurt.

In any case, the future of the EU will largely depend on the negotiations with Great Britain starting only in the next year.