Brexit update July 2016


This briefing covers:

1.    The context – impact of the ‘leave’ vote on the financial markets  
2.    Trade and investment – impact of restricted access to the single market on trade and investment, and the role of EU regulations  
3.    The labour market – free movement and visa regulations and the impact on skills, and workers’ rights and wages  
4.    The role of the Mayor – in the EU exit negotiations and in strengthening London’s position  
5.    Background information – including the Brexit process and timeline, the four fundamental freedoms of the EU  



Key references

In brief: UK-EU economic relations, House of Commons briefing paper no. 06091, June 2016

Leaving the EU: Implications for the UK economy, PWC, March 2016

What if…? The consequences, challenges & opportunities facing Britain outside EU, Open Europe, March 2015

the TUC post-referendum national action plan

Guardian –



  • The economic context


       The impact on the financial markets


      1. Financial markets have experienced extreme volatility following the announcement of the result of the EU referendum. The pound fell to its lowest level in 31 years against the dollar, and while UK shares and the pound regained some of the ground lost in subsequent days, sterling still remains well below levels reached before the referendum and continues to look vulnerable to changing market sentiment.[1]
  • Both Mark Carney, Governor of the Bank of England[2] and Chancellor George Osbourne,[3] issued statements of reassurance to domestic and international audiences, in a bid to reinstate calm. Both were emphatic that the UK financial system is in its best position yet to ride out the turmoil. Mark Carney said “… we are well prepared for this. The Bank will not hesitate to take additional measures as required as … markets adjust and the UK economy moves forward…supported by a resilient UK financial system. …consistently strengthened over the last seven years.


      1. The Chancellor confirmed “You should not underestimate our resolve. We were prepared for the unexpected. We are equipped for whatever happens.” However, the Chancellor has previously been reported as stating that a vote to leave the EU would spark a year-long recession, with close to a million jobs lost within two years.[4] The Government also signaled that a ‘leave’ vote could result in 10 years or more of uncertainty as the UK unpicks its relationship with the EU and negotiates new arrangements with the EU and other world countries.[5]
  • The Mayor too sought to reassure the British public, EU nationals residing and working in London, and the many businesses and investors contributing to the capital’s economy. In an early response to the EU referendum result, he emphasised London’s unique position nationally and globally, confirming that there is no doubt that London will continue to be the successful city it is today… (and) the best place in the world to do business.” He signaled a continued inclusive approach to trading and engagement with world partners and appreciation for the important contribution of EU nationals, and urged all parties to come together to heal the divisions that had developed during the pre-referendum period, and “to focus on that which unites us, rather than that which divides us”.



The impact on the wider economy


    1. The Governor of the Bank of England has warned that an economic downturn is on its way and that the Bank was preparing for further easing of interest rates and/or more quantitative easing. Pre-referendum analyses on the impact of a Brexit vote have pointed to a reduction in GDP (based on a series of alternative scenarios relating to trading relationships, free movement etc). HM Treasury analysis published in April, suggested that exiting the EU could result in the economy being over seven percent smaller over the long term than it would otherwise have been.[6] Other studies, by Open Europe[7] and PricewaterhouseCoopers[8] for example also estimate, albeit more conservatively, a contracted GDP over time – Open Europe suggests that the economy will be over two percent smaller than it would otherwise be in 2030, based on a worst case scenario, and PWC 3.5 percent. Even the best case scenarios also point to reduced GDP.

Article 50 and exit negotiations


    1. Formal exit negotiations must be triggered by the Prime Minister invoking Article 50 of the Lisbon Treaty. The UK then has up to two years to negotiate the terms for an EU exit. The serving Prime Minister has given notice that he will not step down until September. It is therefore unlikely that Article 50 will be invoked before the autumn, and until the new Prime Minister is in place.
    2. The time lag has been welcomed by most politicians as ‘breathing space’ to properly think through what the exit package should look like, but there is pressure from other EU members for the UK to invoke Article 50 sooner, rather than later. Speaking to the European Parliament last week, the Commission president, Jean-Claude Juncker called on the UK to clarify urgently the nature of its future relationship with the EU, saying “Not by 9am tomorrow, but quickly…”, but ruled out any opportunity to enter into talks before Article 50 is invoked.[9]
    3. Reports have emerged that lawyers acting on behalf of a business and academic consortium have launched legal action to ensure a Commons vote on triggering Article 50.[10]


  • Trade and investment



The UK’s current trading relationship with the EU


  1. UK businesses are currently able to export goods tariff-free to other EU Member States, via the Single Market. Similarly, businesses in other EU countries can export goods to the UK tariff-free. The EU is the largest export market for UK goods and services. In 2015, the UK exported £223 billion of goods and services to other EU member states. This is equivalent to 43.7% of total UK exports. Goods and services imports from the EU were worth £291 billion (53.1% of the total) in 2015. The UK had a trade deficit of £68 billion with the EU in 2015 but a surplus of £31 billion with non-EU countries.
  2. London also has a long standing trade deficit with the EU with exports of goods amounting to around £14 billion of goods to the EU and imports £22 billion – a deficit of £8 billion.[11] Conversely, the UK’s services trade balance with the EU is favourable, running a surplus in each year since 2005, and currently at £19.9 billion.[12] London’s role in service sector trade is a distinct advantage to the UK as a whole, accounting for a third of the UK’s exports of services i.e., just over £20 billion.
  3. EY’s European Investment Monitor data (2014)[13] indicates that the UK is the most popular destination in Europe for new foreign direct investment (FDI). The UK attracts over 30 percent of all new investments into Europe from the US and is the largest European recipient of investment from Japan and France.
  4. London attracted over 40 percent of all FDI into the UK in 2014.[14] Between 2010/11 and 2014/15, over 35 percent of all inward investments to London originated from Europe, and over a quarter of FDI projects which originated from London went to the European Union.


Impact on capital investment


  1. Brexit will be a protracted process, lasting at least two years, and possibly longer. The endpoint for the UK-EU relationship would be, as noted previously, is subject to negotiation. Businesses would face high and increasing levels of uncertainty during this extended process, and this will impact on capital investment decisions, as well as having implications for the economy more widely, including on employment and the rate of growth.


Impact of an exit from the Single Market


  1. The UK could face an increase in tariffs and/or non-tariff barriers[15] to trade with the EU following an exit, depending on the nature of the post-exit negotiated arrangement. According to analysis by PWC, an increase in trade barriers would be likely to have a knock-on impact on investment and, in particular, foreign direct investment, as EU market access restrictions may lower the returns to investment in the UK.[16] Research by Open Europe suggests that opening up the UK economy to trade with the rest of the world – including the USA, India, China and Indonesia – is essential, but that it could mean exposing UK firms and workers to whole new levels of competition from low-cost countries.[17]
  2. Financial services are the most exposed sector. Loss of single market status would mean that UK-based banks and other financial firms could lose cross-border access to EU markets and may be forced to establish new subsidiaries in the EU in order to maintain their access, which would substantially increase their costs. Just under half of the UK’s inflow of FDI is in financial services. Also, given the mobility of the sector there is a higher risk of businesses relocating. For example, HSBC has already indicated that it may relocate up to 1,000 staff to Paris in the wake of a ‘leave’ vote, and Vodafone is considering relocating its global headquarters. However, pro-Leave campaigners argue that outside the EU, the UK would have more flexibility in reducing or better tailoring regulation so as to increase the sector’s competitiveness in global markets.[18]
  3. The Mayor has stated that the UK should remain a member of the single market, and that this should be “the cornerstone of the negotiations with the EU”. However, German Chancellor, Angela Merkel, appears to have ruled out continued access to the single market, in the absence of free movement of people – a key tenet of the argument of the case for leaving the EU. She said “Whoever wants to leave this family cannot expect to have no more obligations but to keep privileges.”
  4. The Mayor has also made clear his intentions to lobby the Government for devolved fiscal responsibility, including tax raising powers, as well as more control over business and skills, housing and planning, transport, health and policing and criminal justice. This additional autonomy, he argues, is necessary to protect London’s economy from the uncertainty ahead, to protect the businesses from around the world who trade in the capital, and to protect jobs, wealth and prosperity.


Businesses’ frustrations with EU regulation


  1. A Confederation of British Industry (CBI) report, noted that businesses recognise the need for, and benefits of commonly agreed rules in the Single Market to allow full access to the market on equal terms – over half of CBI member companies (52 percent) felt they had directly benefitted from the introduction of common standards, but that frustrations remained over “… the impact of poorly thought-out and costly EU legislation”. Over half believed that an EU exit would reduce the overall burden of regulation on their business. Areas where UK firms are frustrated with EU regulation include labour market regulation, with particular frustrations around the Temporary Agency Workers Directive and Working Time Directive.[19]






  • The labour market



Curbing free movement of labour


    1. Free movement of labour is one of the four fundamental freedoms of the EU (see p14), allowing EU nationals to move between and reside freely in other member states. The inflow of EU nationals into the UK has more than doubled since 2004,[20] and individuals born in other EU member states now account for around six percent of people (approximately three million) in the UK.[21] At 78 percent, the employment rate of EU nationals is higher than UK nationals – 72 percent.[22]
    2. Close to one million Europeans live in London, accounting for around 11 percent of London’s population and a third of all EU-born residents in the UK. Top EU countries of birth are Poland, Ireland, France, Italy and Germany.
    3. As previously noted, a key argument of the Leave campaign was that Brexit would allow more control over the flow of immigrants to the UK from the rest of the EU. Angela Merkel has made it clear that any restriction on migration from other EU countries could jeopardise a UK bid for continued access to the single market.
  • One possible negotiating position is to argue for a job-based interpretation of freedom of movement. This approach is not wholly dissimilar to Canada’s Federal Skilled Workers programme which scores potential applicants based on language skills, education, work experience and whether they have a valid job offer in a skilled occupation. It is argued that an immigration policy that focusses on skills rather than say salary could be less prohibitive.[23]



Impact of migration on wages (low-skilled jobs)


    1. There is some evidence EU migration has had a negative impact on the wages of low-skilled workers. Research by the Bank of England found that a ten percentage point increase in the immigrant share of the workforce leads to approximately a 1.5 percent reduction in wages for established residents in a country in the semi/unskilled sector.[24] Based on inward migration trends since 2004, this would mean wages for workers with UK citizenship (UK nationals) in that sector would have reduced by one percent. However, given that median real wages continued to grow during the late 1990s when EU migration was also rising, clear evidence of a negative effect on wages is lacking.
    2. While less skilled workers may have experienced downward pressure on wages and greater completion for jobs, the effect appears to have been small. Since 2008, wage levels of UK workers in the bottom tenth percentile have held up better than wages elsewhere in the pay distribution (largely due to the introduction of the minimum wage). The sharp fall in real wages since the recession has hit everyone, leaving most people equally worse off.[25]
    3. There is also some evidence certain types of workers have lost out because of competition from EU migrants, and there is concern that less skilled UK workers could be hurt if more educated immigrants are willing to accept low paying jobs.[26] Data show 17 percent of EU nationals are in the relatively low skilled ‘elementary occupations’ in London, compared with six per cent of UK nationals.[27] The needs of employers in low-skilled sectors have been well-matched with migrants willing to take low-skilled jobs as an easy route into the UK labour market; while the offer of temporary work with flexible or ‘zero hours’ contracts is less attractive to UK workers and problematic for those coming off benefits.
  • Impact of Brexit on workers’ rights and poverty



The following is taken from Joseph Rowntree Foundation Briefing on the EU referendum and UK poverty:

The EU is Britain’s largest trading partner, accounting for nearly 45% of UK exports of goods and services, and is the largest source of foreign direct investment. Disruption in the UKs relationship with the EU is likely to negatively affect UK growth in the short-term, with adverse consequences for poverty reduction.

If Brexit reduces the overall volume of EU migration to the UK, we can expect a slight effect on wages and employment overall. There is no evidence that EU migration increases unemployment for low skilled UK born workers, and analysis suggests that the impacts on wages for low paid workers are very small or non-existent.

Withdrawal from the EU may affect some of the poorest regions of the country, including London and the North East.

Leaving the EU is likely to return the UK to lighter employment regulation, with EU regulations overseeing working hours and equal treatment for part time and temporary staff least likely to survive Brexit.[28]


Migration and visa requirements


  • A large proportion of EU workers would not meet current visa requirements for non-EU workers.[29] Research by the Social Market Foundation shows only 12 percent of EU employees working in the UK would qualify under non-EU visa rules. In London, only a quarter of EU workers would meet visa requirements. Accommodation and food services would be the sectors most affected by the restriction. In addition, part-time workers would lose out, as only one percent of part-time EEA workers would meet the salary requirements compared to around 14 percent of full-time EEA workers (based on 2015 data).[30]
  • A general relaxation of controls on skilled migration could improve economic growth over the long term. There is evidence the current quota on non-EU migrants is preventing some companies from recruiting for skilled jobs. Relatively low-paid, but skilled, occupations in the public sector, such as nurses, are particularly affected. If a new system allowed more non-EU migrants the situation could improve.


  1. A business lobby group has also argued that skilled workers from the EU should be allowed to stay in London. The chief executive of the London Chamber of Commerce, Colin Stanbridge, has said the Mayor should set up a London visa system to allow EU skilled workers to remain in the capital. The Mayor said he was seeking “urgent clarity” over the 850,000 EU citizens living and working in the capital.[31]

Reaction from business


  1. Some businesses have reacted negatively to a ‘leave’ outcome by freezing recruitment and suggesting that they may look to relocate jobs out of the UK (HSBC and Vodafone for example), though others such as Barclays say they have no intention at present to re-locate workers. A post-Brexit survey by the Institute of Directors of 1,000 of its members, found a quarter of respondents planned to put their recruitment drive on hold, with five percent planning to cut jobs. However, a third said they would keep hiring at the same pace.[32] The same survey also found one fifth of British business leaders were considering moving some operations abroad.[33]

Impact on skills


3.13 There is already a shortage of appropriate level skills in the London economy, of which in London tend to be at the higher end of the skills range than the rest of the country.[34] Most jobs created in the decade to 2022 will be high skilled ones[35] yet, 55% of employers surveyed are “not confident of being able to recruit sufficient high-skilled employees in future.”[36] 69 per cent of apprenticeships created since 2012 were at an Intermediate (GCSE) level.[37]


3.14 London is falling behind all regions except the North East when it comes to apprenticeship starts and 22% of the higher-level skilled jobs are vacant and is affecting businesses’ ability to be productive and deliver.[38] The biggest shortages are in the construction and engineering industries, crucial for London which is in the middle of a housing crisis.[39] The new Mayor has acknowledged this issue in his manifesto with a section on Skills for Londoners.[40]


3.15 The LEP has been notionally allocated London €745.4 million/ £584 million of funding[41] European Social Fund (ESF) and European Regional Development Fund (ERDF) to create jobs and support business growth in London.[42] The aim of ESF is to increase labour market participation, promote social inclusion and develop the skills of the future and existing workforce. The ESF CFOs (also known as Opt-in Organisations) for 2014-20 are the Skills Funding Agency, Big Lottery Fund and Department for Work and Pensions.[43]



3.16 Following Brexit, the possible impact on skills policy in the UK could include:


  • Upon invocation of relevant Lisbon Treaty articles, there will be a 2 year period before the UK ‘officially’ leaves the EU in which government departments will spend this period working out the legislative and financial impacts on their relevant areas.
  • It’s possible that the 3 million apprenticeship target, FE and skills may disappear off the agenda (at least in the short term) due to the uncertainty around negotiating the exit from the EU.
  • FE and Skills may be displaced on parliamentary agendas by higher profile actions the government wishes to undertake – decisions in Skills Policy may be placed in ‘stasis’ for 2 years.
  • The UK could possibly lose access to EU research funding (of which The UK does disproportionately well in securing 15.5% of the funding allocated) and students from the EU may be discouraged from attending university in the Capital, putting Higher Education institutions into financial difficulty.
  • The loss of further funding from the ESF to support employment schemes in the Capital furthering the skills gap in London.


  • The role of the Mayor


  1. In his statement to the House of Commons, (on 27 June), the Prime Minister confirmed the government’s intention to consult with (amongst others), all regional centers of power, including the Mayor and London Assembly. It is reported that the Mayor is already in talks with the government to argue the case for London, and press for continued access to the Single Market. He has also been in talks with the Scottish first minister, and it is reported that they have agreed on further co-operation aiming to protect relations with the EU.




  • Background information


The Brexit process and timeline


Article 50 of the Lisbon Treaty sets out how an EU country might voluntarily leave the union. Article 50 says: “Any member state may decide to withdraw from the union in accordance with its own constitutional requirements.”

It specifies that a leaver should notify the European council of its intention, negotiate a deal on its withdrawal and establish legal grounds for a future relationship with the EU. On the European side, the agreement needs a qualified majority of member states and consent of the European parliament.

The article gives a provision that allowing negotiators two years from the date of article 50 notification to conclude new arrangements. Failure to do so results in the exiting state falling out of the EU with no new provisions in place, unless every one of the remaining EU states agrees to extend the negotiations.[44]


The four fundamental freedoms of the EU

The four fundamental freedoms are:

  • Free movement of goods
  • Freedom of movement for workers
  • Right of establishment and freedom to provide services
  • Free movement of capital

Further information on the individual fundamental freedoms can be found here.








[1] Global stock markets rally as Brexit fears abate, BBC News, 29 June 2016

[2] Statement from the Governor of the Bank of England following the EU referendum result, Bank of England, 24 June 2016

[3] Statement by the Chancellor following the EU referendum, 27 June 2016

[4] EU referendum: Brexit ‘would spark year-long recession’ – Treasury, BBC News, 23 May 2016

[5] HM Government public information leaflet, Why the Government believes that voting to remain in the EU is the best decision for the UK, May 2016

[6] The treasury’s analysis of the trade and investment impact of the WTO option shows that after 15 years Britain’s economy would be around 7.5% smaller; based on the Norway model, over 6% and the Canada free trade agreement up to 6%. Chancellor of the Exchequer’s speech, April 2016

[7] What if? The consequences, challenges & opportunities facing Britain outside EU, Open Europe, March 2015. Open Europe is a think tank with offices in London and Brussels and an independent partner organisation in Berlin, promoting ideas for economic and political reform of the European Union

[8] Leaving the EU: Implications for the UK economy, PWC, March 2016

[9] President Jean-Claude Juncker’ speech to plenary session, 28 June

[10] BBC News, 4 July 2016

[11] GLA Economics

[12] What if? The consequences, challenges & opportunities facing Britain outside EU, Open Europe, March 2015

[13] As reported by GLA Economics

[14] Ernst and Young attractiveness survey 2015

[15] A non-tariff barrier is a form of restrictive trade where barriers to trade are set up and take a form other than a tariff. Nontariff barriers include quotas, embargoes, sanctions, levies and other restrictions and are frequently used by large and developed economies.

[16] Leaving the EU: Implications for the UK economy, PWC, March 2016

[17] What if? The consequences, challenges & opportunities facing Britain outside EU, Open Europe, March 2015

[18] What if? The consequences, challenges & opportunities facing Britain outside EU, Open Europe, March 2015

[19] CBI, Our Global Future – The Business Vision for a reformed EU, November 2013

[20] 2004 saw a period of enlargement in the EU, with Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia becoming members

[21] Leaving the EU: Implications for the UK economy, PWC, March 2016

[22] UK Labour Market, June 2016, ONS

[23] Working Together? The impact of the EU referendum on UK employers, Social Market Foundation

[24] The impact of immigration on occupational wages: evidence from Britain, Bank of England, 2015

[25] Brexit and the impact of immigration on the UK, Centre for Economic Performance, June 2016

[26] Migrants in low-skilled work, Migrant Advisory Committee, 2014

[27] Annual Population Survey 2015, ONS

[28] Joseph Rowntree Foundation Briefing: The EU referendum and UK Poverty (6.16) (Accessed 5.7.16)

[29] Currently, for non-EU migrants wishing to work in the UK the main visa route is known as Tier 2 (General). Under Tier 2 there are two ways employers can recruit non-EU workers: the Resident Labour Market Test or the Shortage Occupation List. Under Tier 2 (General), migrants must earn at least £20,800 and be in a graduate-level role. Tier 2 visas are usually valid for six years, after this, to apply for settlement, the worker must earn at least £35,000.

[30] Working Together? The impact of the EU referendum on UK employers, Social Market Foundation

[31] Brexit: Business leader urges ‘London visa’ as Sadiq Khan tries to save City’s trading status, Evening Standard, 27 June 2016

[32] UK hiring freeze imminent as Brexit hits home says IoD, International Business Times, 27 June 2016.

[33] Brexit: One fifth of British businesses may move operations abroad, says a survey The Economic Times, 27 June 2016

[34] London Assembly Economy Committee, (October 2014), Trained in London: Creating more apprentices to support the London economy, pg. 12

[35] CBI, (Spring 2015),Inspiring growth CBI/Pearson education and skills survey 2015

[36] Economy Committee, (February 2016), The Hourglass Economy: An analysis of London’s labour market, page 11.

[37] Skills Funding Agency data, Apprenticeships geography age and level: starts 2005/06 to 2014/15, date accessed 22.06.2016

[38] Economy Committee, (February 2016), The Hourglass Economy: An analysis of London’s labour market, page 11.

[39] City A.M. (19.08.2016), UK housing: Skills shortages forcing construction firms to turn down building work, date accessed 08.03.2016

[40] Sadiq Khan for London: A manifesto for all Londoners, Skills for Londoners, date accessed 05.07.2016

[41] Department for Business, Innovation and Skills, Letter from Vince Cable on the European Regional Development Fund and European Social Fund: UK allocations 2014 to 2020, date accessed 01.07.2016

[42] London Enterprise Panel, European Structural and Investment Funds, date accessed 01.07.2016

[43] London Enterprise Panel, European Social Fund, date accessed 01.07.2016

[44] What is article 50 and why is it so central to the Brexit debate?, The Guardian, 25 June 2016