How Much Will Brexit Hurt the UK Economy?

Allen Smith, J.D. By Allen Smith, J.D. October 29, 2019
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PHOENIX—The United Kingdom (U.K.) escaped a no-deal Brexit once again, getting an extension to Jan. 31, 2020, to work out the details of its exit from the European Union (EU). Politicians may be nearing an agreement on how trade between the U.K. and the rest of the EU will be conducted afterwards, but, with or without a trade deal, Brexit may be tough on the U.K. economy.

Rollercoaster Ride

A few weeks ago, the U.K. seemed on the verge of crashing out of the EU by the Oct. 31 deadline without a plan to regulate trade with the other EU countries. On Oct. 17,  EU leaders endorsed U.K. Prime Minister Boris Johnson's proposed deal. But there wasn't time to get the deal through Parliament by the Oct. 31 deadline, and the EU granted the U.K. the extension.

Welcome to the rollercoaster that is Brexit, said Georgie Collins, head of intellectual property and media with Irwin Mitchell in London, who spoke Oct. 28 at the Association of Corporate Counsel Annual Meeting. "No doubt there will be more twists and turns," she predicted.

Maggie Warren, vice president and assistant general counsel of insurance technology company Vertafore Inc. in Denver, said her company had a U.K. subsidiary but chose to close it due to Brexit and the challenges of dealing with the General Data Protection Regulation. Even if there is a deal, Brexit's effect on the British economy—the world's fifth largest—is likely to be negative, Warren said.

She recommended that companies find a new country of choice as their gateway into the EU. Vertafore had originally chosen the U.K. as the company's main partner into the EU because it has a similar language to the United States' and similar legal system.

Warren predicted that Ireland would become a top choice because of its similar language. Session attendees were asked what they thought and many said they thought Germany would gain prominence among U.S. companies as a result of Brexit. Others said Amsterdam stood to benefit.

Collins said that within the U.K., certain sectors are likely to be impacted more than others. Manufacturing and retail are likely to be hit hard, she said.

So are the agricultural market and financial sector, Warren added. London is a banking hub but might lose new business to other financial centers, such as New York City.

What if the British pound falls and prices rise, she asked. What happens to the global economy if the U.K. economy enters a recession?

Collins answered that the pound has increased recently and said business in some sectors of the U.K. economy is booming despite Brexit.

The U.K. has a transitional period to leave the EU, which ends at the end of next year, to give the country time to disentangle itself from EU trade agreements, Collins explained. The U.K. may want an extension of the transitional period for up to two years, she said, noting that sometimes trade deals take years to work out.

The U.K.'s departure isn't cheap for the country. It must pay the EU at least 33 billion pounds to leave, which is the so-called divorce debt.

Collins said that despite all the U.K. has been through and the challenges Brexit poses, there is some cause for optimism, as the country has moved away, at least for now, from the precipice of a no-deal Brexit.

[SHRM members-only toolkit: Introduction to the Global Human Resources Discipline]

Brexit Clause in Contracts

To account for some of Brexit's uncertainties, companies that do business in the U.K. probably should have "Brexit clauses" when they draft their contracts, according to Pamela Labaj, associate general counsel with Spirent Communications in Holmdel, N.J.

Brexit clauses might establish procedures for opening discussions when Brexit is implemented and allowing for the renegotiation of the contract as a result of what happened with Brexit.

Dispute Resolution

Victoria Sahani, a professor of law at the Sandra Day O'Connor College of Law at Arizona State University in Phoenix, recommended that companies also review their contracts' dispute resolution clauses.

Arbitration will be safer for companies than litigation, if they have a choice, she said.

But even with dispute resolution there may be questions of law that must be decided. Suppose a contract says that EU law or U.K. law will govern. Will Brexit affect which law winds up applying? This question might be litigated and a judge or arbitrator may have to wind up deciding it.


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