Brexit and Business: The EU Outlook
Brexit and business:
The EU outlook
Insight from 800 EU business leaders
In the two years since the UK voted to leave the European Union, negotiators on both sides of the channel have struggled to reach a consensus on a new basis for trade between the regions.
Amidst a cacophony of confusion, business leaders across Europe have attempted to prepare for the future, though progress towards a Brexit agreement has been halting at best. In the UK, the Brexit debate has had a myopic lens, focusing almost exclusively on the interests of British businesses and consumers.
At Baker McKenzie, we sought out the EU perspective. We spoke with 800 business leaders from six key markets of the 27 remaining EU Member States. We asked about the impact of Brexit to date, business preparedness for the future and sentiment towards the UK.
We also looked at the European business community's position in the Brexit negotiations, asking how well its views are represented and what would be the preferred outcome for EU27 companies.
Here, we present our findings from across the European Union, as well as considering their implications for the UK.
Baker McKenzie surveyed 800 respondents across six major EU27 markets: France; Germany; Spain; the Netherlands; Sweden and Ireland.
We spoke to senior in-house counsel, heads of strategy and finance directors in four sectors: Consumer Goods & Retail; Financial Services; Industrial, Manufacturing and Transportation; and Technology, Media and Telecommunications.
All respondents surveyed work at businesses with at least £250 million or equivalent annual turnover. 32% of respondents are from businesses with more than £1bn annual turnover.
The premature Brexit effect
The UK remains - for the moment -
a fully-fledged member of the European Union.
Yet ongoing uncertainty about the future of UK-EU relations is already having a significant impact on EU27 businesses, while the UK is seeing reduced trade and investment and fewer skills crossing the channel.
Britain will remain in the European Union until 11pm on 29 March 2019, at which point transitional arrangements will kick in to steer both parties on a smoother course until at least the end of 2020.
In the interim, the UK government will continue to wrestle with EU negotiators in a bid to secure the best possible outcome for the British business community and beyond. But while the discussions look to the future, companies on both sides of the channel are already reeling from the effects of the Brexit referendum.
46% of respondents from EU27 businesses say that their company has reduced investment in the UK
47% report reduced trade or operations
in the UK
46% have already seen disruption to their supply chains resulting from the Brexit vote
In terms of human resources, almost half the respondents to our survey report that Brexit has reduced the movement of people within their company. Although free movement of people will continue throughout the transition period, it seems that businesses are increasingly unwilling to place employees in the UK when their right to remain beyond 2020 is uncertain.
Jennifer Revis, Baker McKenzie partner in London, notes the psychological impact of the referendum, which has prompted many EU nationals to reconsider their future in the UK.
EU27 nationals infographic
Of course, Brexit is a major consideration for EU27 companies, but it is not the only geopolitical event shaping the business landscape. Cecilia Pastor, partner at Baker McKenzie in Madrid, notes that since the recession in Spain, for example, companies had already begun to diversify their markets rather than focusing on a single jurisdiction. That need for diversification has only become more pressing since the referendum.
And yet, despite the impact of the Brexit referendum, EU27 businesses are eager to find a way through the uncertainty because of the significance of the UK market…
A third of EU companies believe that the terms of any Brexit deal should punish the UK for leaving the EU.
But despite the sentiment, respondents overwhelmingly agreed that business considerations trump retaliation. In fact, they would go so far as to give concessions to the UK in the Brexit negotiations - if that meant securing a strong basis for future trade.
The UK is highly dependent on Europe as an export market. Last year, research by Baker McKenzie highlighted its particular reliance in four key manufacturing sectors.
However, new findings show the extent to which the EU is invested in the UK, with 95% of respondents saying that the market is of at least some importance their businesses. Furthermore, 67% of EU27 businesses described the UK market as 'important' or 'extremely important'.
In fact, 78% of EU27 respondents said that their business would be the same or better off if the UK were to remain as part of the European Union. In Ireland, that percentage jumps as high as 97%.
But beneath the business considerations, there is a current of vengeance towards the UK for its decision to leave the EU: over a third of respondents would like to see the UK punished under the terms of any future trade deal.
In the EU centres of power, there is even more hostility: 41% of French and 45% of German respondents support punitive action.
Eric Lasry, Paris-based partner at Baker McKenzie, believes the findings reflect the strength of emotion in the EU27 business community:
Indeed, our survey found business considerations overwhelmingly outweigh the desire for retaliation against the UK…
Despite the negative sentiment around Brexit, 96% of EU27 respondents to our survey said that continuing to trade with the UK on preferable terms for their business was more important than teaching the British a lesson.
In fact, almost three quarters of respondents believe that the EU should make concessions to the UK to secure a better trading relationship for EU27 businesses, with support for concessions in Spain and the Netherlands significantly higher still.
Despite the pragmatism of the business community, there is an inherent conflict facing EU negotiators, as Mattias Hedwall, Head of Baker McKenzie's Global International Commercial & Trade Group in Stockholm, explains.
But while EU27 business people may be hankering for a Brexit solution, findings suggest that their views may not be well represented in the negotiations…
Finding a voice
The EU27 business community is largely unified in its view that a smooth post-Brexit trading relationship will be pivotal for companies on both sides of the channel. But when it comes to the negotiation process, EU27 businesses clearly fear that they are being disenfranchised.
More than half the respondents surveyed feel that the views of EU business are not well represented in the negotiations.
The European Union has failed to convince businesses in its Member States that their views are being duly considered in the Brexit negotiations. Only 46% of respondents feel that their business or industry has been substantively consulted by the EU or by their national government with regards to Brexit. Individuals in Ireland were particularly negative; fewer than one third of those surveyed said their industry had been consulted.
The onus then falls to companies to actively seek to influence the negotiations. Partners at Baker McKenzie say it is not too late for companies to promote their agenda and ensure a business-friendly outcome from the negotiations.
While the EU27 may be negotiating as a block, each Member State has its own interests and businesses to defend. As such, it is imperative that companies have regular contact with relevant trade associations, as well as engaging with key British and European stakeholders and with national government administrators, to assess the pulse of the negotiations and ensure that their interests are being properly conveyed.
So what would a Brexit deal look like, if it were placed in the hands of EU27 businesses to shape? Perhaps unsurprisingly, given the close ties to the UK market, respondents are broadly supportive of a Free Trade Deal, with 67% rating it as important.
However, despite ongoing speculation about a Customs Union - possibly one that is tailor-made for the UK - support for such a solution is much lower among EU businesses. Only 45% of respondents said a Customs Union was important.
Trade specialist Jenny Revis warns that there has been some misunderstanding, even amongst the business community, as to the differences between the different trade models.
Whatever the outcome of the negotiations, EU27 businesses are now readying themselves for the challenges - and opportunities - that may lie ahead...
Regardless of sentiment towards the Brexit referendum - or its impact to date - the business community must now prepare for the future.
Levels of preparedness vary considerably across markets and industries, but the vote has already prompted significant changes at more than three quarters of the companies we surveyed. Furthermore, despite ongoing uncertainty about the post-Brexit world, many business leaders see opportunity amidst the challenges.
The vast majority of companies are actively assessing Brexit-related risks: 88% of respondents across all markets are reviewing their position in the light of the referendum. Even more significantly, 78% of them have made changes to their operations or strategy as a result of their findings - putting paid to the notion that companies in EU27 markets are treading water whilst they await the outcome of the Brexit negotiations.
EU27 businesses are bracing for a loss of preferential trade terms with the UK: 55% of respondents overall are preparing for such a loss, though the level of preparedness varies considerably across markets. In Spain, more than two thirds of companies are considering this eventuality, but in Sweden, just 44% of businesses have taken this step.
Ross Denton believes there is a good deal of confidence that a deal will be reached, which may be a factor in the apparent lack of preparedness by certain businesses. However, he also points to a lack of appetite to engage in Brexit discussions among some EU27 companies.
Baker McKenzie trade group leader, Mattias Hedwall, says that more prepared organisations are planning for a different flow of products and services post-Brexit, and specifically, they are considering how best to optimise their supply chains.
Amongst the challenges, there is also some confidence in EU27 markets about a potential Brexit upside, suggesting that changes to strategy are not solely defensive manoeuvres.
Overall, 45% of respondents say that Brexit represents an opportunity for their company to attract future business away from the UK. Optimism is highest in Sweden and France, where more than half the respondents see some opportunities arising from Brexit. It was lowest in Ireland, where only 30% believe there could be an upside for their business.
International Trade Specialist Anahita Thoms, a partner in Baker McKenzie's Dusseldorf office, says that whether or not Brexit proves an opportunity for German business depends in part on production structures.
Of course, there are potential down sides, particularly for EU businesses with production sites in the UK, as they could see customs costs increase or be forced to close UK sites, as well as coping with high inflation and interest rates and the reduced purchasing power of UK consumers.
Over the border in France, partner Eric Lasry says that the majority of businesses see Brexit as a downside, but faced with the reality of the referendum result, they are now seeking to make the best of the opportunities that might be available.
"The Brexit decision may increase the attractiveness of France at a macroeconomic level, attracting more foreign direct investment. The political climate is also favourable to France, which can reassert itself as a global leader and demonstrate to businesses that France provides the right conditions for expansion and opportunity. And of course, the relative weakness of the pound also creates investment opportunities for those who wish to expand in the UK."
Eric Lasry, Partner, Baker McKenzie Paris
Here we present a snapshot of the findings specific to each market we surveyed: France; Spain; Germany; Sweden; the Netherlands and Ireland.
Whatever the shape of UK-EU trade after 2020, it is clear that companies across the EU27 are now taking their fate into their own hands. Whilst they bemoan continued Brexit uncertainty, the business community has recognised that it cannot afford to wait for the outcome of the negotiations and it has begun assessing risks and implementing change accordingly.
From investment decisions, to staffing, to supply chains, the 'Brexit effect' is permeating all layers of business. It is incumbent on companies on both sides of the channel to help shape the outcome of the EU-UK negotiations and to prepare and position themselves accordingly so that their interests are well served in a post-Brexit world. Ultimately, the ability to think strategically and to respond to change in an agile fashion will determine the businesses that suffer from Brexit - and those that prosper.
EU27 Business Poll
If you are based at an organisation in one of the remaining 27 European Union Member States, where has the Brexit referendum had the greatest impact on your business?
- It has reduced movement of people within my company
- It has reduced our trade or operations in the UK
- It has disrupted my supply chain
- It has reduced our investment in the UK
Find out more
Our Brexit contacts and
Our Brexit contacts
Sunny Mann, Partner, Baker McKenzie London
Jennifer Revis, Partner, Baker McKenzie London
Ross Denton, Partner, Baker McKenzie London
Cecilia Pastor, Partner, Baker McKenzie Madrid
Mattias Hedwall, Partner, Baker McKenzie Stockholm
Eric Lasry, Partner, Baker McKenzie Paris
Anahita Thoms, Partner, Baker McKenzie Dusseldorf
Erik Scheer, Partner, Baker McKenzie Amsterdam
Further Brexit reading
Baker McKenzie Brexit hub
The realities of trade after Brexit report
EU27 Brexit employment survey