WTF is Brexit?

At 10pm on June 23, 2016, the polls closed on a UK referendum on EU membership and the counting began.

The next morning Europeans woke to the news that the British public had voted to leave the 28 Member State bloc called the European Union. The result was 52 per cent to leave, 48 per cent to remain. The ugly word Brexit — coined ahead of the referendum as a shorthand conflation for ‘British exit’ — was apparently now lodged in the lexicon for good. But what is Brexit? And what does it mean for startups in the UK and Europe?

Firstly it’s necessary to consider what the European Union is. The challenge of understanding the European project, as it’s sometimes called, is inextricably bound up with any explanation of the vote to leave the EU. Even supporters of the EU can have trouble articulating the scope and direction of a political, economic and fiscal union that has undoubtedly swelled in size and intent over time. But at its most basic level the EU is a group of countries seeking to collaborate on things like trade for mutual economic benefit, with the founding aim of avoiding any catastrophic reruns of the region’s combative history.

Another relevant shorthand here is the word ‘Brussels’: the political seat of the European project in the capital city in Belgium where the Commission, the EU’s legislation proposing executive body, is based. It’s also the nickname of choice used to badge the EU by anti-EU media. Headlines in UK media railing against the latest ‘diktat from Brussels’ have long conveyed a narrative of national sovereignty being battered and bruised from afar — implying this is one of the principal ingredients of being a member of the EU, rather than flagging the potential and actual benefits of erasing some of the barriers that divide up a region of some 500 million people.

Enter then, the Brexit campaigners’ mantra of ‘taking back control’, and with hindsight it was perfectly pitched to exploit a populist narrative of faceless Brussels bureaucrats meddling in national matters — and turn the in/out referendum into a bloody nose for establishment expectations. The truth of the EU is a lot more long-winded and difficult to digest than the alternative and over-simplistic clarion call to ‘cut and run’. But some 17.4 million people voted for Brexit vs 16.1M voting to remain (turnout was just over 72 per cent) so the UK now faces the unprecedented challenge of having to extricate itself from more than 40 years of EU involvement — detangling and understanding a massive body of law and regulations — and, likely, also forging its own set of bilateral trading relationships thereafter, all while carrying the massive burden of uncertainty that Brexit inexorably brings.

Why does Brexit mean uncertainty? Because the UK government has yet to set out a detailed plan or strategy for Brexit. Although it is under growing pressure to do so. Nor can we know for sure what kind of deal the other side in this divorce, the EU, will be willing to offer the UK. And in the same way that breakfast can mean many different things to many different people, there are many different possible Brexits — so the £59 billion question at this point on the UK’s long and torturously winding road towards leaving the EU is what Brexit will actually mean?

Hard or soft?

The early signs are that the UK government — led by post-Brexit PM Theresa May — is heading for a so-called ‘hard Brexit’, as it looks set on prioritizing putting caps on EU immigration — which would mean, in all likelihood, being cut off from access to the EU Single Market: the keystone principal of the European project which erases barriers on the movement of goods, capital, services and people across the region in order to turn a series of discrete countries into a single trading bloc. If the UK decides to put a red line on the free movement of people it can’t realistically expect the EU to allow it to retain access to the Single Market. The EU’s own priorities in seeking to preserve the wider Union kick in. So offering the UK a sweet pick’n’mix deal would be seen as encouraging other Member States to break ranks. And the EU has already been warning Switzerland of its red line on freedom of movement.

In the wake of the Brexit vote, the UK government also established a new department for International Trade — which heavily implies it’s envisaging a future outside the Single Market, i.e. where it’s cutting its own trade deals, rather than being part of the EU trading bloc.

Without access to the Single Market, UK companies selling goods or services to the EU would be treated like any other country outside the EU that also does not have a trade or other treaty with the bloc — meaning tariffs, non-tariff barriers and long-since-mothballed customs checks and administration coming into sudden, unwelcome force. So, in other words, an overnight end to how UK businesses currently trade freely with the EU (and the bloc’s many trading partners).

Add to that, negotiating a new trade treaty with the EU is not widely considered credibly possible in the less than two-year timeframe afforded for the Article 50 EU exit process. Nor has the EU signaled it is willing to talk trade treaties during this period. Au contraire; it’s likely no trade talks could happen until Brexit had first been completed. So unless some kind of transitionary period can be negotiated by the UK government — and that’s starting to look like more of a possibility at this point, with key Brexit ministers at least now willing to countenance it — we have only the prospect of deepening business uncertainty in the short term.

There is another option: a soft Brexit, where the UK leaves the EU yet retains access to the Single Market (e.g., for example, a Swiss style model. Or by staying in the European Economic Area, like Norway). Which could mean business as nearly usual. The problem with this scenario is, as noted above, it would still mean agreeing to the free movement of people — and that flies in the face of the populist politics that delivered the Brexit vote. ‘Taking back control’ was not just about national sovereignty; there was a distinct, not-so-undercurrent of xenophobia during the campaign. And — for whatever reason — the UK government’s current trajectory looks to be being plotted by the hardest of hard Brexiteers. Which means the UK now suddenly seems to have adopted its own red line on EU immigration.

In October, the Prime Minister herself said: “I want [Brexit] to give British companies the maximum freedom to trade with and operate in the Single Market — and let European businesses do the same here. But let me be clear.  We are not leaving the European Union only to give up control of immigration again.  And we are not leaving only to return to the jurisdiction of the European Court of Justice.”

So we return, inexorably, to the prospect of hard Brexit: the UK both exiting the EU and leaving the Single Market, pulling UK companies out of their established processes in the process — however much the PM claims she would like to retain access to the Single Market. (As Donald Trump might put it, you can’t always get what you want.)

Brexit and tech

But why is Brexit relevant for tech? Firstly because startups are businesses with an above average likelihood of selling services outside the domestic UK market, given the global reach of the Internet. So the future of how UK startups scale is at stake — along with the future of London and the UK as a European startup hub.

If, as is a distinct possibility, UK fintech companies lose access to financial passporting — the system that allows EU companies to sell services across the region without needing to be regulated in every country — it’s very likely we’ll see financial services companies shifting staff and even headquarters to other EU capitals. Indeed, we’re begining to see some of that starting to happen already — along with alarm bells sounding that the UK government really needs to secure a transitional period to prevent a mass Brexit exodus of fintech firms. Money, people and ideas moving elsewhere will change the balance of startup innovation in the region and beyond.

The huge drop in the value of the UK’s currency, pound sterling, since the Brexit vote is already impacting London’s competitiveness on the salary front vs other European cities — so where a London wage was a big pull factor before, because of the pound’s strength, UK startups are either having to offer higher wages or face stiffer competition on the hiring front from jobs in Berlin, Paris and elsewhere in Europe. Rising inflation in the UK is also pushing up the cost of living, which may in turn erode the attractiveness of setting up a business in London.

And while the UK has, up to now, punched above its European weight in terms of access to funding, as well as having the pull of a sizable domestic market; the ease of the English language; and the vibrant diversity and famed tolerance of its capital city to recommend it as a base for entrepreneurship, other European cities will undoubtedly take up the slack if the country makes a hard Brexit, throttling its all-important talent pipeline by clamping down on immigration and amping up unwelcoming nationalist rhetoric, as well as (in this hard scenario) losing financial passporting, bouncing out of the Single Market and having the bolster of access to the European Investment Fund removed. So whether it’s Dublin, Berlin, Paris or Stockholm, EU cities are already jockeying for position and to pitch themselves as an alternative, welcoming regional base for startup founders fearing what Brexit means for the future of London and the UK.

The EU is also consulting on policies aimed at supporting what it dubs a Digital Single Market — by trying to harmonize regulations that pertain to digital business to allow for a freer flow of digital services across the region, and build in support for relevant areas such as digital skills. While this is still a work in progress, and likely a lot less important in the near term than financial passporting, a UK that’s outside the EU would have to figure out its prioritizes vis-a-vis this Digital Single Market. Any UK businesses wishing to do business within the EU would still need to comply with, for example, EU data protection law. So the scope for Brexit affording UK companies the ability to ‘free’ themselves from EU regulation and do things differently is going to be limited to where they intend to sell services. If a startup is selling domestically it might be able to sidestep some EU regulation after the UK has Brexited. But as soon as it seeks to scale to sell within the EU it’s going to need to comply with EU law. So any potential ‘freedom’ offered by Brexit looks very limited indeed from a startup perspective.

The Brexit vote also fractured UK society along multiple lines, with UK entrepreneurs one of the groups voting massively in favor of remaining. So Brexit can feel like something of an anti-change, anti-technology vote. Some commentators have gone so far as to argue it is part of a larger populist movement that’s kicking against tech-enabled globalization and tech-powered automation — perhaps also helping to lift Trump to power in the US. Seen through that lens Brexit can look like a rejection of many of the new things startups are pushing for. And while history tells us that progress is not linear, a counter social movement against the thrust of software-enabled disruption feels like something of a wake up call. If the benefits of startup disruption are not being equally distributed then technology itself looks vulnerable to being rocked by populist movements channeled via existing political systems.

Similarly, the Brexit vote could be a portent that the entire European project is also far more vulnerable to break up than its long years of collaboration and consensus-based rulemaking might suggest. And a wider break up of the European Union would make Brexit’s sinkhole of uncertainty seem like a drop in the ocean.