Brexit’s Dilemma: Defeat of London or the End of an Era of Democracy
21-Jul-2016 / Products & Services Currently, the attention of all those who work and conduct business in a united Europe is being paid to the behaviour of British authorities after Brexit.
If the country withdraws from the EU, many thousands of companies incorporated in Britain are very likely to leave their legal motherland. And a certain share of this business can be bid for by Latvia.
Yaroslav Zamullo, Head of the Legal Department of Rietumu Bank
Results of the 23 June referendum came as a shock, not only for British politicians and their European counterparts, but also for financial experts. Being the business capital of Europe, London receives a considerable part of its revenue from a huge number of companies incorporated there, which use the advantages of the free flow of goods and services throughout the entire EU.
When focusing just on the financial area, these are banks as such, and also companies engaged in asset management, brokerage, payment structures, processing centres and other representatives of fintech services which are dynamically developing online. All of these businesses are transnational in nature, extremely mobile and maximally interested in favourable treatment in the EU territory. If the British jurisdiction loses its attraction for such businesses, it will be replaced with no delay by another jurisdiction – in any other state of the European Union.
People’s will and commercialism
From a legal viewpoint, Brexit will only become an accomplished fact following the official termination of the Lisbon agreement on the part of Great Britain. The procedure has not yet been started and we see lots of speculation on this subject. Thus, some lawyers, based on the ruling principle of precedence in the English law, assert that a decision on withdrawal from the EU can only be taken according to the results of voting in the British Parliament – similarly to the 1972 decision on accession to the European Union. Others state that such a decision is exclusively the royal prerogative.
Thus, theoretically, in the event that Great Britain does not succeed in getting advantageous resolutions from its “divorce” with the European Union, the process could theoretically be reverted. However, it seems to be most unlikely in a country with such deep-rooted democratic traditions. Ignoring the opinion of the people, no matter how minimal the gap is between yeas and nays, would be a fundamental failure of European democratic values. Even with account of the fact that in the public space the blame for Brexit has been already passed on from voters to “bad” politicians who appealed to vote for termination of the agreement with the EU.
Meanwhile it is obvious that, in spite of requests of their EU counterparts to take a decision on the exit as soon as possible, British politicians do not intend to hurry. They still have some time. Moreover, as elections are due to be held shortly – next spring in France and next autumn in Germany, their results will show who the British will have to tackle further on.
Business is business, or when leaving – never look back
In the coming months we will observe a momentous fight of political forces, financial and business lobbies of London and Europe. It is in the interests of Britain to achieve an agreement on staying in the European Economic Area, when not being an EU member-state. In this case, Britain could continue using all of the advantages of free trade, being fully released from any obligations to the European Union.
Is it possible? I find it to be extremely doubtful. Yes, there are countries such as Iceland, Liechtenstein, Norway and Switzerland which have similar agreements with the European Union, but these countries have never been a part of the EU. Whereas in this case, any easing can be a signal for other members of the alliance that it can be withdrawn from painlessly, getting rid of social and political obligations and retaining only economic bonuses. Such a perspective, undoubtedly, will not only be a temptation for some member-states of the EU, but it will also strike a blow for the integrity of a united Europe. And this is a nightmare for the Brussels political elite, which will do everything possible for it not to become real.
We should also not forget about a very significant economic factor. Being the financial capital of Europe, London has a lot of competitors who always wanted to deprive it of its competitive edge. This place, with a different degree of supported ambitions, is claimed by Frankfurt am Main, Paris, Luxembourg, Amsterdam, Dublin, Madrid, and each of these candidates will win considerably, if the European authorities do not come to terms with Great Britain.
Thus, it is expedient for companies having a British licence and operating in the EU area, when planning their business in the long term, to think about changing their jurisdiction or receiving an additional licence in another country of the European Union.
And what shall we get from this?
One of the countries that international investors can pay attention to after the implementation of Brexit is Latvia. Our legislation is in full conformity with all EU principles and our tax system is quite liberal. For instance, they say that London, to attract businesses, can reduce the corporate income tax from 20% to 15%, but in Latvia it is already 15% in the conditions of a stable forecast for the EU and OECD membership. It is also of importance that Latvia is an undisputable financial centre of the Baltic states and its banks have rich experience in working with international clients.
All of these advantages can be used for attracting international investments. We have already succeeded in doing it during the Cyprus crisis of 2013, when the collapse of the local financial system and nationalisation of deposits had resulted in an outflow of capital from this country. Another successful experience was the introduction in 2010 of an attractive system for foreign investors to obtain a residence permit, which was later closed due to political reasons. And if political motives for changing the programme are a subject for discussion, the economic effect is obvious – by 2015 about EUR 1.1 billion has been invested in just the real estate sector of Latvia. This is a very impressive amount for this country, which, among other things, has also helped to mitigate the consequences of the economic crisis.
Very few things need to be done now, but they need to be done quickly and efficiently. We need to maximally adjust the practical process of obtaining licences for specific payment services, and increase, if required, the resources for supervising this growing sector, which is done by the Financial Capital and Market Commission. And, certainly, we need to create and support an atmosphere of openness and friendliness for foreign businesses, as well as advertise the attractiveness of Latvia.
If we act as quickly and efficiently now as we did in the situation with Cyprus and the residence permit programme, the result can be even more impressive. As Latvia is a small and open economy, the effect can be achieved very fast. For comparison: the budget revenue in Latvia in 2016 is planned in the amount of EUR 7.4 billion, in Great Britain – GBP 716 billion. So, if we succeed in attracting just a few percent from the British revenue which is provided by tax proceeds from transnational businesses, for our country, with a population of about two million people, it will be a big step forward.
Apart from the obvious economic benefit, such investments do not carry any political risks. These are promising fintech businesses, with a high added value that will continue gaining traction rapidly in the coming decades, hence, bringing more tax revenue to the Latvian budget.
This is a chance which must not be missed, as no other similar opportunities for market repartition in Europe are anticipated in the foreseeable future.
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