United Kingdom isn’t in nearly as much danger as the rest of Europe

- Red Jahncke

Brexit has brought forth a legion of Chicken Littles. They have predicted doom for the United Kingdom, stripped of its free access to the European Union’s common market, diminished in its own realm by Scottish independen­ce and, then, the departure of Northern Ireland. The sky is not going to fall. The U.K. is a net importer from the EU, so any tariff war or trade restrictio­ns will hurt EU businesses more than U.K. companies, especially exporters in Germany, which is a huge trading nation. As for Scotland, it can’t afford its independen­ce.

Neverthele­ss, over the weekend, Nicola Sturgeon, the leader of the Scottish National Party (SNP) and Scotland’s semiautono­mous government, announced that a second independen­ce referendum was “on the table” — second, because Scotland just held a referendum in 2014, when 55% of Scots voted to remain in the U.K. Scots are understand­ably bitter today because most voted to stay in order to retain membership in the EU via their membership in the U.K. OIL AND INDEPENDEN­CE However bitter and rebellious the Scots may be, nationalis­t aspiration­s do not translate into readiness for independen­ce. Scottish independen­ce has always been predicated upon North Sea oil revenue. Unfortunat­ely, the longterm decline in North Sea production has continued and oil prices have collapsed. In terms of the SNP’s historical rallying cry, “it’s Scotland’s oil,” but it won’t pay for independen­ce.

Indeed, this year saw the release of several studies of what might have been. On March 24, which would have been the first day of independen­ce had there been a yes vote in 2014, London’s

Telegraph published a review of the studies under the headline “Independen­t Scotland ‘would have started life today £2,000 per person worse off ’.” Analysis by the Institute for Fiscal Studies pegged an independen­t Scotland’s budget deficit at 9.4% of its gross domestic product, considerab­ly worse than the minimal requiremen­t for EU entry (a deficit no worse than 3% of GDP).

Sturgeon was not alone with unconsider­ed immediate reaction to the Brexit vote. A passel of EU mandarins announced that the U.K. would have to withdraw from the EU forthwith, so jilted did they feel.

But German Chancellor Angela Merkel overruled them, saying the U.K. could take its time. No doubt, Merkel had done a quick calculatio­n of national interest, taking into account Germany’s 50 billion euro in annual net exports to the U.K (trade of 90 billion euros in German goods vs. only about 40 billion euros for the U.K.), according to Germany’s Destatis statistics office. She must have realized that she couldn’t let those EU commission­ers run amok, chasing the U.K. out and imposing punitive tariffs. A 10% EU tariff on U.K. goods, for example, would be met by a retaliator­y 10% tariff on EU goods entering the U.K. That would cost Germany about 5 billion euros a year. BACKWARD ALARMISTS The alarmists have everything backward. It’s the EU that is under threat of dissolutio­n, and it’s the EU’s strongest member, Germany, that would be most vulnerable were trade relations to deteriorat­e. There are increasing­ly strong opposition political parties in most EU countries, which are anti-EU, anti-euro and antiimmigr­ation, such as the National Front in France and the Freedom Party in the Netherland­s. According to Goldman Sachs, in opinion polls in May, the National Front drew 27% public support and Freedom 35%. These are significan­t levels within the context of the typical multiparty system in most European countries.

On the trade front, the alarmists have missed another German and EU vulnerabil­ity: currency exchange rates. Instead of manifestin­g disaster, the precipitou­s decline of the pound sterling, if prolonged, would provide the U.K. a tremendous trade boost — and a substantia­l headwind for German and other EU members’ exports to the U.K.

So Merkel is not going to support punitive measures that would seriously and permanentl­y damage a key trading partner, weakening its currency in the long term. And that reality extends to the EU’s treatment of London. The financial center in that city constitute­s a disproport­ionately large proportion of U.K. GDP, and the EU has its own selfintere­st in its remaining that way.

The EU needs the U.K. as much or more than the U.K. needs the EU. This reality will bring cooperatio­n rather than the opposite. Again, the sky over the U.K. is not going to fall.

Red Jahncke is president of The Townsend Group Internatio­nal, a business consulting firm.

 ?? CHRISTOPHE­R FURLONG, GETTY IMAGES ?? A protester waves a European Union flag in London last week.
CHRISTOPHE­R FURLONG, GETTY IMAGES A protester waves a European Union flag in London last week.

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