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Hard Brexit and its Impacts on Central and Eastern Europe

By Katarzyna Mirecka, Economist, CASE

Discussions about Brexit — Great Britain’s exit from the EU voted in June — seem to be endless. As Britain does not have a written constitution, we do not know yet whether it can use article 50 of the EU Treaty with or without a parliamentary vote. In any case, two possible scenarios seem to be emerging that illustrate what is at stake for the future of EU-UK ties: a soft and a hard Brexit. In general, a soft Brexit would mean maintaining some tariff-free access to the EU’s single market, while a hard Brexit would pull Britain entirely out of the single market and customs union, meaning that companies would be subjected to WTO rules.

A hard Brexit would have profound impacts on the entire EU. But the impacts on CEE countries might be particularly hard hitting. Should the UK gain full control of its borders and immigration policies, as the new Prime Minister Theresa May promoted on Oct.2, the future of numerous migrants from CEE and the remittances they are sending home remains unclear. What is more, the UK is a big contributor to the EU budget (4–9%), of which Hungary, Poland and Romania are the largest recipients. It is also not yet clear whether or not the Multiannual Financial Framework 2014–2020 will be renegotiated.

On the other hand, a hard Brexit might mark the beginning of an important increase in investment opportunities for CEE countries. For instance, Hungary is already thinking about ways to attract companies leaving the UK. A big question also concerns the financial sector — London will certainly suffer from a hard Brexit and some banks might leave the capital to move to cities like Frankfurt or Dublin, but specialists are also adding Warsaw’s name to the list. There is also a possibility that a hard Brexit would be followed by a shift of the UK’s car industry to central and south-eastern Europe. On the export side, Brexit does not seem to be much a threat to CEE, with exports to UK representing roughly 4.4% of the region’s total exports, (as opposed e.g. to 23% of total CEE exports destined for Germany). CEE countries also have minimal exposure to UK FDI, that doesn’t exceed 2% of GDP in any of the CEE countries.

Looking forward, the most uncertain factor remaining is the political impact of Brexit: CEE countries fear that with Britain gone, Germany’s EU influence could increase further but the overall influence of the Union could fall, a reality which might be especially welcomed by Russia. Even though specialists’ opinions in this matter differ, the reality of Brexit is becoming more apparent daily and it will have implications for the future of Europe in ways which will be hard to ignore.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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