Goodbye and good luck

Image: shutterstock
Image: shutterstock

After being a member of the European Union for 43 years, the United Kingdom has decided that it would be better off on its own. WBJ Observer investigates how the unprecedented move by the British will impact Poland

by Wojciech Rylukowski

Half an hour after the final result of the Brexit referendum came in, I was in a taxi going for an interview with the head of one Polish defense company. Contrary to my previous experiences with more often than not EU-skeptic taxi drivers, this time I could sense concern in the voice of the driver when we touched upon the British matter. He was uncertain about the future of the Polish community and was considering the potential return of fellow-countrymen as a threat, fearing that they could take up jobs and drive up unemployment. The feeling of dismay over the decision of the British was common that day, even among critics of the EU, who never miss the opportunity to bash the bloc for (mis)handling matters. The ritualized critique bears no immediate consequences whatsoever, unlike the historical decision made by voters on that summer day. What seemed highly unlikely came true in the early morning of June 24, when Europe woke up to the news that the UK will be leaving the European Union. The referendum itself was called by then Prime Minister David Cameron as a bid to strengthen his position within the divided Conservative party, as well as to challenge the anti-migrant, populist UKIP party led by Nigel Farage. His reasoning might have seemed correct – in 2014, he successfully overcame Scotland’s independence pressure by calling for a referendum on its secession and won the 2015 elections by a landslide vote.

This time, with a fresh deal on curbing benefits for newly arrived EU migrants, it appeared it would be an easy win again. But the former UK Prime Minister underestimated the negative mood over the inflow of workers from the EU, the Screen shot 2016-10-19 at 11.45.43 AM disenchantment with the UK and EU elites, and a historical sentiment of standing apart from the continent. In addition, the populist Leave campaign turned out to be much more effective than a sober message conveyed by Remainers about the economic risks associated with exiting the EU.  “People in this country have had enough of experts,” said Michael Gove, then Justice Secretary and prominent Leave figure, when asked about the names of economists supporting Brexit. And he was right. People didn’t trust experts and decided to go on a journey into the unknown. The very next day after the referendum, the Leave camp backtracked on some of its promises, the most spectacular was the abandoned pledge to give the National Health Service the £350 million “the EU takes every week.” Some of the voters who cast their vote for leave shockingly admitted that they wanted the UK to stay in the EU, but thought their vote had no meaning. Nonetheless, the genie was out of the bottle.

First to feel the consequences

When looking at the UK’s divorce from the EU from the Polish perspective, the first question which comes to mind is how it will affect the nearly 800,000 strong minority living and working there. The direct consequence of an anti-migrant discourse present in the mainstream came quickly. For the first time in its nearly 75-year history, the doors of the Polish Social and Cultural Association (POSK) in London were scrawled with xenophobic graffiti. In Cambridgeshire, leaflets which read “Leave the EU. No more Polish vermin” were posted through letterboxes and left on car windows. According to a poll, as much as 12 percent of Poles living in the UK said after the Brexit referendum that they had been a victim of ethnically-Screen shot 2016-10-19 at 11.45.53 AMmotivated attacks, mainly verbal abuse, and 74 percent of them feared negative attitudes toward migrants. When Poland joined the EU in 2004, the United Kingdom was one of the first countries to open its doors to migrants from Eastern Europe. Since Great Britain has one of the strongest economies in Europe and a widely spoken language, the island has become the most popular destination for Poles seeking a better life in the West.

In the year of accession, the unemployment rate in Poland stood at a staggering 20 percent, hence the massive outflow of badly paid or unemployed from the ailing economy. Over time, the Polish community in the UK has grown to become the largest in the UK (according to the Office for National Statistics). Their emigration helped in driving unemployment down, while money transfers added to the Polish GDP. The question therefore looms: how would their potential return affect the economy?

Beneficial return?

Poland is in a different situation than it was 12 years ago. Unemployment is at a 25-year low, the population is aging and the country will soon face labor shortages. The government is making efforts to turn around the demographic trend by launching expansive social programs, but their effects will be visible within several years at the earliest. Instead of being a headache, the return of workers might solve some of Poland’s problems. Stanisław Gomułka, a former professor at the London School of Economics and a former adviser to the minister of finance, said that their repatriation might be positive for the economy.

“The return of between 100,000 and 300,000 people who have experience in working in foreign companies and can speak languages would drive entrepreneurship up,” he said. Gomułka added that their arrival would be spread over time, therefore Poland shouldn’t have any problem accommodating them. Decreasing remittances wouldn’t be a big problem either. The central bank NBP said that in 2015. Their value corresponded to 0.25 percent of GDP and has been steadily falling since Poland’s accession to the EU. This is because emigration from Poland has assumed a long-term character. In the early days, it was Screen shot 2016-10-19 at 11.46.00 AMoften the sole breadwinner who would go to the UK and send money back to their family in Poland. With time, however, his relatives joined him in the new homeland and the volume of transfers diminished. With or without Brexit, the figure would keep falling. The number of Poles that would be forced to come back is still unknown, but it shouldn’t exceed 300,000.

Nonetheless, it’s not yet clear whether EU migrants will have to leave the UK at all. Firstly, a lot of them have been there for more than five years, meaning they are allowed to file for citizenship. Secondly, the British government may propose some kind of arrangement enabling those EU migrants who are already there to stay. Thirdly, the UK negotiations over exit conditions may end up with the UK retaining access to the single market, which encapsulates the freedom of movement of workers. But even if a part of the Polish community living in Britain is expelled, they may choose to settle in a different EU country rather than coming back to their homeland. Standard&Poor’s reassures that the “risks from having a large number of migrants in the UK may be overstated if one looks only at the numbers. Workers’ flexibility in adjusting to instability in their host countries by moving to new markets could make a difference. For instance, in the wake of the crisis in Ireland in 2008 and the fall-off in construction activity, Polish immigrants moved quickly to other markets, such as Norway.”

Limited economic impact

Apart from affecting the Polish community, the greatest economic risks following Brexit come from uncertainty, as the UK will be the first country in history to leave the EU. This scenario has never been tested and the outcome is a mystery. In the coming years, a worsening investors’ sentiment is expected, in addition to perturbations on the financial markets. In Poland, the FX volatility is a headache to those who hold mortgages in Swiss currency. Should the franc’s value grow against the złoty, part of the loans may become unpayable. Moreover, Brexit will harm Polish exports to the UK in the short-term, but in the long run its effect on trade links with Britain should be limited. Despite the fact that the UK is Poland’s second trading partner after the euro zone, its share of imports and exports is not significant and stands at 2.9 percent and 6.8 percent respectively. The appearance of tariff and non-tariff barriers following UK’s exit will likely have an circumscribed effect as Polish business proved that it is able to find new export routes when conditions change. Following Russia’s sanctions on importing food from Poland, the decline in exports was temporary and the producers quickly jumped on new markets. The economies of this part of the region might also be harmed by cuts to EU structural funds.

shutterstock_442100917Great Britain has been one of the major contributors to the common budget and Poland is the biggest net receiver in the union. If the UK triggers article 50, that is a formal notification that it wants to leave the EU at the beginning of 2017 as it is expected, negotiations over the final shape of an exit deal would take around two years. The likely date of Brexit is 2019, hence it wouldn’t have much impact on the 2014-2020 EU financial perspective. Things will change, however, with the next budget and much will depend on the type of the deal UK can make. If it is to have a “Norwegian” model, which encompasses free access to the EU market, it would keep contributing to the common budget. But should Britain have another type of deal, then member countries would have to cover the money the UK doesn’t pay in. The German Finance Ministry calculated that its contribution would grow by €3 billion a year and if the burden is to be spread proportionally, Poland would to have to pay in around €300-500 million more annually (in 2016, Poland will contribute €3.1 billion). The other possibility is that the EU will decide to cut the budget value by the amount the UK was expected to contribute. There wouldn’t be a hike in expenses, but the funds obtained will be respectively lower. Either way, the upcoming financial perspective will not be as beneficial as the two previous were, which made Poland the biggest net recipient of EU funds. Irrespective of Brexit, after 2020, the budget available for countries which entered the bloc in 2004 will be significantly lower.

Although the economic consequences of Brexit for Poland seem to be limited, investment bank Morgan Stanley lowered Poland’s GDP growth forecast to 3.1 percent in 2016 and in 2017 amid concerns over economic slowdown in the euro zone following the referendum. A similar forecast was issued by JP Morgan, which also quoted Brexit as a reason. And in fact, the Q2 reading of Poland’s GDP at 3.1 percent shows that the full year growth would be much below the assumed 3.8 percent. According to Gomułka, the lower growth is not that much a result of the Brexit itself, but the ruling party’s way of handling domestic matters, particularly undermining the check and balances and democratic rule of law, thus increasing uncertainty among investors.

New Londons

Without doubt, the UK itself will be the worst hit by Brexit. A few weeks on from the referendum, the pound has plunged by 13 percent against the dollar and has not been at levels this low since the mid-1980s. Markit’s July PMI report showed that the UK economy is shrinking at its fastest rate since 2009. For the first time in more than seven years, the Bank of England has cut interest rates and plans to pump an additional £60 billion into the economy to reinvigorate it. But even with these stimuli, the bank forecasts slower earnings growth and 250,000 job losses. Gomułka estimates that recession in post-Brexit UK could reach up to 5 percent, particularly if it goes with “hard Brexit,” that is an exit deal that doesn’t include access to the common market. Someone else’s misery may turn out to be of benefit to others. Financial professionals and the press have already begun speculating on whether and where the companies from the city of London will move to after the UK leaves the European Union. In a search for a new financial center, US daily The New York Times ranked European cities based on answers from relocation experts at major firms, who described what they were looking for. Warsaw, which came in seventh, is among the “new Londons,” according to the newspaper. Despite the fact that it was ranked seventh on a par with Milan and ahead only of Barcelona, there are hopes, expressed by top officials that some big players will actually come to Poland. “Some of the financial operations will spread across continental Europe … I would like Warsaw to be one of the locations… I have meetings scheduled with financial institutions over these matters,” Deputy PM and Development Minister Morawiecki announced.

Security concerns

Should the economic impact of Brexit on Poland and the EU be limited, the same doesn’t apply to international affairs. Britain’s decision to leave may boost nationalistic and populist parties, which are already on the rise across Europe. Further blows to the union would significantly weaken Poland’s security, which is based on being a part of the strong EU and NATO. According to a report by the Center for Eastern Studies (OSW), Brexit strengthens Russia in relation to Europe by making the EU focused on domestic matters and more conducive towards lifting sanctions on Russia. Moscow may also seek to end the Ukrainian conflict on its terms – that is with the West formally accepting the seizure of Crimea and Russia’s control over Donbas. In the long-term perspective, the growing national sentiment in Europe may lead to loosening transatlantic ties and create a tendency to build bilateral relations with Russia, which would make Moscow stronger.

The referendum also showed the weakness of Poland’s ruling PiS foreign policy, which sought a strategic alliance with the UK to offset the German-French domination in the bloc. In conflict with the EU over the rule of law, Poland has lost its only serious partner in the union and now it may find it difficult to advance its strategic interests. All these developments critically threaten the security of Poland, so it should be a wake-up call for the ruling party and the governments of Europe to make every effort to put a stop to growing anti-EU sentiment and avoid the domino effect.

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