Relations between the UK and the European Union (EU) have been tumultuous and complex from the beginning of the Union’s formation. However, cooperation between the UK and other European countries has always been close and has a long history.
The close collaboration of the European troika, including the UK, France, and Germany, was evident in various cases, including the European financial crisis. This complex relationship eventually led to a referendum holding and supporters’ victory, leaving the EU with a slight difference of votes. Of course, this is not the whole story, and the referendum opened a new chapter in the relationship.
The UK and EU finally reached a post-Brexit trade agreement on 24 December 2020, which was finally approved by the Parliament on 30 December, one day before the final deadline, despite opposition from the Scottish National Party. By examining the impact of Brexit on the UK and the EU’s competitive vulnerability, it can be verified that Brexit was more in the UK’s favor.
The importance of the UK’s financial services sector is undeniable, and its dependence on this sector is significant. According to a 2018 report, about 11 percent of the UK gross domestic product comes from financial services revenue. 7.3 percent of the British workforce (a fourteenth of the working population) is employed in this sector. Jobs in this field are often high-paying, with an average annual income of 62,500. This means that a large part of the country’s tax revenue is related to this field’s employees. Overall, the financial services industry generated more than 75 billion in tax revenue in fiscal 2017/2018, accounting for 11 percent of the country’s total revenue. More importantly, 23 percent of the sector’s revenue for the UK (about 45 billion) comes from its financial transactions to EU accounts.
In London’s financial district, thousands of meters of fiber-optic cable are laid submarines, connecting the east coast of London to New York and enabling the exchange of information. This feature has dramatically increased London’s competitive advantage over other European financial markets. The vital Internet infrastructure in London has led to a sharp increase in foreign exchange. Building such an infrastructure, according to the European Central Bank, is very costly and time-consuming. The language factor must also be considered. The UK is one of the two European countries whose official language is English, which increases its ability to establish relations with other countries and global financial exchanges. London controls 35 percent (8.1 trillion) of the EU market share in terms of capital management. After the UK, France has only 17 percent and Germany only 9 percent.
The UK’s competitiveness in terms of financial services is an issue that many have attributed to Brexit, but now, given the EU-UK Brexit agreement, it does not seem to have suffered much. Another point is that the agreement does not talk much about the details of financial services at all. Therefore, the companies hope that Brexit will not severely impact the UK’s competitive advantage. The reasons why the UK can continue to lead the way as an essential hub for financial services can be divided into four sections: First, if the EU wants to turn a new hub into the EU’s economic hub, all members of the EU and the European Commission must agree on it. The second is the prolonged process of bureaucracy in the European Union. Since there is no single decision-making body in this Union, everything has to be decided after the dialogue and voting periods.
London is still the most significant financial market in the world after New York. When it comes to international stock exchanges and financial transactions, London is ahead of Frankfurt, Milan, and Paris’s financial demands. Brexit will have far-reaching economic, political, social, and security consequences. However, what is certain is that after Brexit, the UK can no longer be as influential in the EU decision-making process as it once was. EU countries, especially Germany and France, seek to create and strengthen a new financial hub in the EU and replace it with the UK. However, this issue does not seem practical, at least in the short and medium terms. In general, after the referendum on Britain’s exit from the European Union, little change has taken place in the financial services sector. But, the growth trend of the United Kingdom in this sector has almost continued.