The last couple of weeks have seen unprecedented media coverage, social media commentary and at times light hearted jabs at the Brits, who on June 23rd voted to leave the European Union in a 52% to 48% Referendum. Law firms and others involved in international business have had a field day, issuing guidance and client advisories and so we felt it was appropriate that we should not ignore the topic (although it was tempting) but instead consider the impact for US businesses and whether it makes any difference at all.
The reason for holding the Referendum started several years ago when the UK Prime Minister, David Cameron, made election pledges (partly to satisfy some of the increasingly loud Euro-sceptics within his own party), that if he won the general election, he would call an “in/out” Referendum with a question relating to the UK’s ongoing membership of the EU. The issue had become increasingly emotive as a result of the rise of the popularity of the UK Independence Party (UKIP), as signaled by their significant gains in local elections over the last few years. Much of UKIP’s success, and indeed the Referendum campaign itself, was focused on concerns over the recent increase immigration into the UK as a consequence of the growth of the EU through new members joining. Once inside the EU, there is “free movement of people”, enabling EU citizens (not those with only residency rights) to move from member state to member state.
Cameron sought support from the EU by attempting to re-negotiate some key elements of the UK’s membership at the end of 2015, which was intended to address concerns and provide support for the “Remain” campaign. Once the referendum was called, both sides sought to persuade the British people of the merits of “Leave” or “Remain” – at times exaggerating the facts, misstating reality and generally (on both sides) playing a bit dirty. Some would say, that’s politics!
The Referendum was called for June 23rd 2016 and there was a pretty respectable turn-out of approximately 73%. The people voted and the Leave campaign won by around 1.2 million votes: or 4% of votes cast. Since the Referendum result was announced, there has also been lots of debate around whether the result can be overturned, blocked or another referendum called. For example, over 4 million people have signed an online petition calling for a second referendum and there have been a number of peaceful public demonstrations across the UK.
The hours after
The political fall-out has been significant and remains fluid. Since David Cameron had led the Remain campaign, he declared his position untenable and resigned as Prime Minister, initially planning to leave his post after the Conservative Party’s Annual Conference in October 2016. However, following a short campaign amongst the party in recent days, it seems likely that Theresa May, the current Home Secretary, will become the new Prime Minister as soon as this week. Meanwhile, the opposition party, the Labour Party, led by Jeremy Corbyn revolted, with half the shadow cabinet resigning, although at the time of writing, Corbyn himself has confirmed that he will not go. The UKIP party is elated and its leader has insulted every member of the European Commission that he can (and now resigned) – although interestingly the Leave campaign seems to now be somewhat distancing itself from UKIP. The Scottish Independence Party (who led the independence referendum for Scotland a couple of years ago) has indicated that it will put the independence vote again to the Scottish people and, if it splits from the UK, will consider re-joining the EU as an independent country. The leader of another UK political party, the Liberal Democrats has stated their next election manifesto promise will be to rejoin the EU (or otherwise ignore the Referendum result if notice to Leave has not yet been given). Clearly there is much emotion and uncertainty in the UK at the moment, and it will not dissipate quickly.
The markets around the world initially reacted badly to the news, with both the pound falling to its lowest since 1985 and stock markets across Europe and on both sides of the Atlantic (and in Asia) dropping. Both have gained some ground since the initial shock.
The next 2 years
The Referendum is not legally binding, but the UK Government will be under pressure to uphold the will of its people – particularly when it has asked them the question! The much talked about Article 50 of the Treaty of Lisbon, which is the EU’s constitution, requires that the UK serves notice on the EU of its intention to leave, following which there is a period of two years during which it needs to negotiate its exit with the remaining 27 member states. Part of those negotiations is to ensure ongoing trade is possible: in both directions. The complexity of those negotiations cannot be underestimated as all sides will be looking to achieve the best result. As yet, Article 50 notice has not been served, a task for the next Prime Minister, at which point the two year negotiation period will begin, so the UK will not formally leave the EU for some time yet.
The question asked by many US businesses will be whether it impacts on them – either now or in the future. Let’s tackle the easy one first: there is currently no change in anything. The UK remains united and remains a member of the EU. It has the same government, although will soon be led by a new Prime Minister. The laws remain the same and it has not floated out into the middle of the Atlantic.
The more serious question is what the changes will be as negotiations take effect and the UK’s exit allows changes to laws and regulations that were previously put in place as part of EU law. Many UK laws were required to be adopted to ensure harmonization of laws around the EU states. Whilst there are some EU laws which have direct applicability into UK law, most will need to be changed or revoked if the UK Government decide that changes are needed. One of the challenges to wholesale revocation or wild pull-backs is that the EU will still remain a very important trading partner for UK businesses. For example, UK data protection laws will need to be aligned with EU data protection laws in order for UK-based businesses operating within the EU to receive EU citizen data. For US companies who often seek to put in place Europe-wide policies, at this point it seems likely that very little will change as the UK’s interpretation of the EU provisions is likely, if anything, to be more business friendly.
We expect that there may be some regulatory changes and its possible that employment laws may become a little more employer friendly. However, none of these changes are going to be immediate and the scale of issues that need to be considered to affect the exit is so huge that many issues will take several years to be reviewed and debated.
For US businesses expanding into Europe, the reasons that the UK has always been so popular as a starting point for their European operations will remain the same. First and foremost, the language is pretty similar! Secondly, many of the laws have been seen as middle of the road between the US and some other European laws (particularly relating to employment) and we expect that to continue. Thirdly, the UK offers a relatively wealthy consumer market, full of early adopters of technology. Finally, the UK has a very skilled and talented workforce, particularly in the tech sector, and has been at the forefront of many innovations and developments in the digital economy. The UK as a stand-alone market therefore still makes sense.
As a starting point for a pan-European operation, the UK can definitely still work and geographically it remains well situated. The detail of its trade agreements with the EU and with the US need to be finalized (actually, need to be started) before any comment can be made on the ease of trade from the UK. However, as noted above, it is in everyone’s interest to have a level of co-operation that will allow ongoing business to be done intra-Europe (the UK still remains part of Europe, even outside of the EU). Norway, Iceland and Switzerland are well-known for not being part of the EU but clearly still successfully do business with their neighbors.
Establishing a subsidiary in an EU Member State could be an additional step that businesses choose to take. Many clients we advise already do this – partly because local customers prefer to do business with a local subsidiary and workforce. The establishment of subsidiaries and structuring the group on a tax efficient basis is straightforward and allows a US operation to reach further within its European market. Our colleagues in Amsterdam, Berlin and Paris (amongst others) have been supporting these sorts of structures for many years before a Brexit was even contemplated.
Keep Calm and Carry On
So, for now we all need to adopt the stiff upper lip that Brits are so well known for and keep calm and carry on. Nothing has changed, emotions are running high, political games are being played, but the market opportunity remains significant, as does the UK’s position within Europe. We all believe that sense will prevail and when the US elects its new President in November, he or she can help build relationships with both the EU and the UK, which will always retain its “special relationship” with the US.