As the UK formally leaves the European Union at midnight on January 31, 2020, the future for both divorcing parties is uncertain, pending a trade deal the two sides hope to strike by the end of the year, when the transition period during which the UK will remain in the customs union and single market is due to expire. Despite their geographic distance from the UK, negative consequences are anticipated in the new EU member states of Central and Southeast Europe in terms of disrupted trade and job losses — but the extent of these is impossible to predict.
The most immediate impact is the return of at least some of the hundreds of thousands of nationals of Central and Southeast European countries from the UK, a phenomenon that started after the 2016 Brexit referendum.
Data from the UK’s Office of National Statistics (ONS) shows there has been a fall in migration from EU countries to the UK since mid-2016. And while overall migration from EU countries remains positive, there has been a shift to net emigration from the EU8 countries that joined in 2004.
The EU8 countries saw net migration of -5,000 (37,000 arrivals vs 42,000 departures) in the year ending June 2019. This was in contrast to the positive 26,000 from later entrants Romania and Bulgaria (49,000 arrivals vs 23,000 departures) and a net positive migration of 26,000 from the older 15 member states.
As bne IntelliNews has previously reported, the decisions to migrate for work and to make a permanent home in another country do not rest solely on economic factors. In many cases, migrants initially plan to work abroad only in the short term to earn more money than they can at home, but later resolve to stay on after they experience living in a better functioning society with, for example, a higher standard of living, less corruption, and better health and education systems.
The differences in income per capita and living standards within the Central and Southeast Europe regions help to explain why migrants from some eastern EU countries are returning home, while others are either looking to stay in the UK or move to another Western country, with the most popular destination reportedly being Germany.
bne IntelliNews’ correspondent in Sofia reports there are few expectations of returning migrants from the UK; Bulgaria is not only the poorest country in the EU; it is also rated the most corrupt by international watchdog Transparency International and has the worst record on media freedom. In recent months Bulgaria has been wracked by a series of corruption scandals, “Apartmentgate”, that concerned suspect property purchases by top officials, including the head of the anti-corruption body, violations of environmental laws that left a major industrial town short of water and Bulgarians choking on air pollution, and — most recently — a suspected smear attempt by the chief prosecutor against President Rumen Radev.
There is a similar view on the lack of opportunities back home among Romanians. From a Romanian perspective, Brexit is viewed mostly in regard to the 470,000 Romanians living in the UK. Many of them have already applied for permanent residency and the rest will perhaps attempt to find a way to remain as well. Finding jobs back home would not be a problem given the low unemployment rate and the tight labour market in Romania (this applies to most countries in the region) — but their expectations would not be met by local employers. Not many of them are expected to start their own businesses in Romania either, despite the authorities’ constant rhetoric about such opportunities. The economic growth in recent years in Romania has not been driven by small and medium-sized enterprises, but by large companies (mostly part of foreign groups). Overall, Brexit is unlikely to bring back home many Romanians, who would prefer to migrate to other Western European countries.
But it’s a different picture in some of the richer Visegrad states, where steadily rising incomes and improving living conditions have the potential to entice people back home.
Perhaps the biggest question mark at the moment is the status of Poles — the largest non-British nationality in the UK since 2007. Out of nearly 1mn Polish people currently living in the UK, some 400,000 have not applied for settled person status yet. They have until June 2021 to do so but it cannot be ruled out that some, or many, of those people will head back to Poland.
There are mixed views on the benefits of this. On the one hand, transfers from expatriates represent a substantial flow of capital to their home countries.
The financial contribution of Hungarians living in the UK to the Hungarian economy is huge. Transfers from Hungarians living abroad (total figure) came to HUF1.4tn (€4.1bn) in 2018, according to figures from the World Bank, which accounts for some 2.5% of the country's GDP. There are no specific figures for the UK, but it is substantial given the large number of Hungarians working there.
After Hungary's accession to the EU in 2004, the UK became one of the favourite destinations for its citizens. Recent figures released by the Home Office show that some 50,000 Hungarians have applied to the British authorities for settled status so far. There are varying figures on the number of Hungarians actually living in the UK, from the ONS’ official figure of 80,000 to estimates as high as 180,000-200,000, which would give the UK the biggest Hungarian-born population outside the Carpathian Basin.
On the other hand, all these countries are suffering from labour shortages, and the return of thousands of workers, many of them skilled and educated, would offer some welcome relief to the tightened labour markets.
The Hungarian government is not preparing for the mass return of the workforce from the UK but hopes that the chronic labour supply could be eased by rising wages and trained and skilled workers choosing to return, writes bne IntelliNews’ correspondent in Budapest.
In the past year a number of job fairs were held in London and other cities across the UK organised by Budapest informing Hungarians of the work possibilities back home. A prime example for this is BlackRock, which opened an innovation centre in Budapest in October 2018. Budapest became the investment manager’s second-largest European office. Dozens of highly skilled staff came back to Hungary.
On the other hand, writes bne IntelliNews’ correspondent in Prague, Brexit is not anticipated to have an immediate impact on the lives of Czechs in Britain or the British in the Czech Republic. Their rights will be retained even after the end of the transitional period, but they will have to be officially registered in the country where they live, said the British Ambassador to the Czech Republic Nick Archer in an interview with the Czech News Agency.
The ambassador also noted that he had not recorded any cases of Czech or British citizens returning to their homeland due to Brexit. “We don't see people leaving in any way. And that's because the relationship between Britain and the Czech Republic at the interpersonal level is not the same as Britain's relationship with other Central European countries. Czechs in Britain are professionals, at managerial levels, well integrated and they do not identify themselves as a community, so I expect them to stay,” he said.
In the Czech Republic, Brexit has increased the number of British people working in the country. Compared to June 2016, the number of British employees rose by more than a third. Also an increase in the number of British people getting permanent residency in the Czech Republic has been posted, up by 55%, according to statistics from the Labour Office and the Ministry of Interior.
Solid data on companies relocating their operations from the UK to other EU countries, another anticipated consequence of Brexit, is harder to come by.
The relocations of banks’ back office operations from London to other European cities has been seen, though Paris and Frankfurt have been the top destinations rather than cities in the eastern part of the EU.
However, according to Go Vilnius, the Lithuanian capital’s tourism and business development agency, an increasing number of fintechs have been looking for alternatives to London ever since the Brexit referendum, and Vilnius has become one of the destinations to relocate to. It quotes data showing that Lithuania is now second only to the UK in the number of licences it has processed and issued, and in 2018 alone, about 100 UK fintech companies reached out to the Bank of Lithuania, seeking information on investing in Vilnius. Fintech companies such as Revolut, Transfer Go, Instarem and Revel Systems chose to obtain licences in Lithuania.
“After Brexit, Lithuania would become a leading country in the European Union in the number of non-bank FinTech licences issued, mostly due to a large number of local electronic money and payment institutions,” said Titas Budrys, chairman of the board of the Fintech Hub LT association.
Outside the financial sector, there have been a handful of examples of companies relocating their operations eastwards.
British-based veterinary medicine producer Dechra announced last year it had moved all its analytical testing methods for products made at its site in Skipton to laboratories in Croatia and the Netherlands as it seeks to protect its business from a potential hard Brexit.
“In preparation for a potential hard Brexit, we have changed the ownership of all UK marketing authorisations to a newly established subsidiary in the Netherlands. We have also transferred all the analytical testing methods for products manufactured at our Skipton site to a new laboratory in Zagreb, Croatia, and to our existing laboratory at our Bladel manufacturing site; this will allow us to perform batch release within the EU in the likely event that there will be no mutual recognition of quality standards,” the company said.
“The decision by the UK to leave the European Union has created volatility in markets and uncertainty about how future trading relationships, regulatory processes and supply chains will operate. Our priority is to maintain continuity of supply of our products to our customers in the UK and the EU, and we have increased inventory accordingly,” the company said.
Dechra has a long history in Britain, as it started out two centuries ago in London as Arnolds & Son. The company originally manufactured prosthetic limbs, but turned to veterinary medicine during the Crimean War.
Other companies have relocated from the UK to Central and Southeast Europe, but have not linked the move directly to Brexit — other factors such as the lower costs in the eastern part of the EU create incentives for firms to migrate eastwards.
Germany’s Bosch, for example, has moved its garden tools manufacturing from Stowmarket to Hungary, though it said at the time the decision was not related to Brexit. In addition, Delphi Technologies is transferring some of the operations of its Sudbury factory to Iasi, Romania, a move that it attributed to the lower costs in Romania. Delphi has been active in Romania since 1997 and opened a new IT centre in Bucharest in 2018.
Automotive supply chains threatened
In another decision that caused consternation in the UK, the new version of the Land Rover Defender will be built in Slovakia rather than the UK. The decision was helped by the European Commission’s approval of the Slovak Republic’s planned state aid to British car manufacturer Jaguar Land Rover to build a plant near Nitra. The new Nitra factory aims to produce 150,000 cars per year, with the total investment set to reach €1.4bn. It will create about 3,000 new jobs.
Further relocations, however, are not seen as an inevitable consequence of Brexit: “Given the current outlook for the automotive industry, however, it is far from certain that the Japanese carmakers operating in the UK (Honda, Nissan and Toyota) or other manufacturers would consider moving production to economies in Central or Southeastern Europe,” says the European Bank for Reconstruction and Development’s (EBRD’s) latest Regional Economic Prospects report published in November.
Overall, the consequences for the automotive industry across the EU plus the UK are expected to be negative.
According to the executive director of the Czech Automotive Industry Association, Zdenek Petzl, the fact that Brexit negatively affects the automotive industry, and consequently all Czech car producers is obvious. “In 2018, our exports to Britain accounted for about 6.6% of total exports. It is undoubtedly less than our first export market, Germany, on the other hand, but it is not a negligible percentage and there is a noticeable drop.”
Analysts have also warned of the risks facing Hungary’s vehicle industry, as it depends heavily on the economic health of Germany, thus seeing an indirect impact from Brexit. The sector accounts for a third of industrial production with an estimated HUF10tn in production value in 2019.
Vehicle exports are close to 90% of the sector’s production and any setback would feed into local manufacturers and suppliers quickly. So far Hungary’s economy has shown great resilience to the weakening business activity in the Eurozone thanks to structural investments at its factories, which are producing at lower costs than in older EU member states.
Romania is also the location of two major car plants and numerous auto components producers, though few British companies have operations in Romania. As for Hungary, the impact on the automotive and other sectors is expected to be indirect, reverberating on Romania via any negative impact on the German economy The weight of bilateral trade with the UK (not high in the case of Romania) is not particularly important, since Romania’s industry is for instance exposed to Germany’s automobile industry, which in turn might lose momentum, thereby hitting indirectly Romanian car part producers. This applies to the whole region, points out bne IntelliNews’ correspondent in Bucharest.
For businesses and analysts across the region, the prevailing sentiment is uncertainty as the bloc waits for the outcome of this year’s trade talks.
“Large global companies will not open new branches here or invest in existing ones unless they are clear what it is to be here like in a few years. This is not yet clear. Predicting what impact will Britain's departure have on the Czech Republic is like divination from the magic globe,” said Raiffeisenbank macroeconomic analyst Eliska Jelinkova, as reported by investujeme.cz.
According to Ceska Sporitelna economist and member of the Committee on Budgetary Forecasts Michal Skorepa, it could take a year or so to feel the impact, but one year to negotiate a relationship between the EU and Great Britain is unlikely to be enough, so he thinks the transitional period is likely to be extended by several years.
“The uncertainty that is most toxic to investment and business development is likely to gradually decrease over this period as negotiations on individual areas of mutual economic relations progress. In the end, no major shock may occur. However, the next few years of uncertainty will keep demand for investment goods, which is focused on by German and Czech industries, at a weaker level,” said Skorepa, reported investujeme.cz.
On the other hand, Skorepa said that even if Brexit eventually led to a long-term increase in barriers to trade between the EU and Britain, it would be partly good news for the Czech Republic, as Czech firms would have a chance to fill the vacant positions. “It will be a bit similar to the process of breaking up with the RVHP (Council for Mutual Economic Assistance) when the suppliers from the West were given a chance to fill the vacant positions in the East. Much will therefore depend on the ability of Czech companies to seek out these new opportunities in continental Europe,” said Skorepa.
Trade woes loom
Highlighting the extent to which the UK is enmeshed in EU-wide supply chains after 40 years of membership of the bloc, the contract for the UK’s new post-Brexit blue passports was given to a French firm which is manufacturing them in Poland.
A 2019 report from the University of Leuven projects that the eastern EU members will not be immune to the fallout from Brexit — especially a hard Brexit — despite their geographic distance from the UK.
“The findings in this report clearly show that the perception that Brexit only affects Western-European countries that are geographically close to the UK is not true. Countries like Poland, Sweden, Slovakia, the Czech Republic, Romania and Hungary also show substantial job losses. This should not come as a surprise, given the presence of network effects in European global value chains. Therefore Brexit is an EU-wide story,” says the report.
“The losses that the EU27 face under a soft Brexit are significantly smaller than under a hard Brexit. A soft Brexit for the EU27 implies a loss of 0.38% of its GDP and around 280,000 jobs lost, while for the UK 1.2% of GDP and around 140,000 jobs would be lost. A hard Brexit for the EU27 implies a loss of 1.54% of its GDP and 1,200,000 jobs lost, while for the UK 4.4% of its GDP and around 525,000 jobs would be lost. Short-term losses will only be minimised if a soft Brexit future relationship is pursued like the one the EU has negotiated with Turkey or Norway.”
Among the states expected to be hard hit, relative to the size of their economies and workforces, are Ireland, the Netherlands, Denmark, France, Germany, Sweden, Portugal, Poland, the Czech Republic, Cyprus, Malta and Hungary. “With a job loss of 526,830 the United Kingdom is hit the hardest in relative as well as in absolute terms,” says the report.
Similarly, the EBRD’s November Regional Economic Prospects report says that "The direct impact of a ‘soft’ Brexit (which assumes a relatively smooth exit for the UK, with trade relationships being kept close to their present levels) on most of economies in the EBRD regions is expected to be limited … Indirect effects – through weaker growth in the eurozone – are estimated to be much larger, in particular in the event of a ‘hard’ Brexit, where the existing value chains encompassing the UK and the rest of the EU are significantly disrupted, while progress on new trade agreements between the UK and its trading partners is slow.
“Cumulatively, the economic impact of a ’hard’ Brexit of this kind is projected to be largest in southeastern Europe, mainly through disruption to trade linkages encompassing the UK and other advanced economies in Europe and through lower reform momentum on account of more uncertain prospects for EU membership, which could have a negative effect on investor sentiment and growth.”
The prospective EU members from the Western Balkans, closely linked as they are to the EU as their main trading partner, are also expected to feel the impact.
The EBRD report singles out EU candidate country North Macedonia as one of the states with a particularly close trading relationship with the UK; the UK is one of the five biggest trading partners of this country, which has put a lot of effort into attracting exporters to its free economic zones.
World-leading catalyst manufacturer British company Johnson Matthey has a factory near Skopje and is one of the biggest exporters. Johnson Matthey officials said in 2019 that the company had a working group which has developed plans for a range of Brexit scenarios to avoid uncertainties.
Czech beer and Polish food
In terms of sector, the University of Leuven report singles out the food and beverage, textiles and pharmaceuticals, chemical and petroleum products industries.
Poland will be among the EU countries most affected by Brexit (regardless of variant), says an October report by the Polish Economic Institute on Brexit impact on Polish economy. The drop in exports as a result of Brexit with a trade deal will reduce GDP in Poland by 0.14% (about PLN3bn). In the case of a hard Brexit it will be 0.24% (about PLN5bn). The number of jobs may decrease by 0.13% (20,000) in the Brexit scenario with a deal and by 0.23% (35,000) in the hard Brexit scenario.
The food-agri sector is particularly vulnerable because its exports make up 20% of Poland's overall exports to the UK, the report said.
Meanwhile, the share of Czech exports to the UK is between 4.5 and 5.2% of total exports.
For Czech beer companies, including Pilsner, Budweiser Budvar and Staropramen, the UK is one of the largest markets, therefore they are closely following what is happening there, reported iRozhlas. For Budweiser it is one of the five most important markets. While Staropramen already brews beer in the UK, the other two do not plan to set up breweries there to avoid delays at the border.
“We have always declared that Budweiser Budvar comes from Ceske Budejovice. It has always been and will always be like this,” explained Budweiser Budvar CEO Petr Dvorak.
All major Czech beer companies agree that the worst is the uncertainty. They claim they lost more than half a million crowns due to Brexit date changes. Budweiser complained that the company filled its stocks twice before (two) Brexit dates and then had to sell its stock out quickly, with an extra cost of more than GBP50,000.
There are also worries at the Bohemia House Restaurant located in the Czech-Slovak National House in London's West Hamstead district. It is the only company in the UK that offers only Czech and Slovak dishes and thus is dependent on imported ingredients from the Czech Republic. “We cook authentic Czech and Slovak cuisine, most of Czechoslovak ingredients … We import ingredients such as flour, cabbage, tartar sauce, mustard from the Czech Republic. Just all the raw materials that can be imported and preserved. … Brexit can mean that the availability of most of the ingredients we use will decrease. Their price may rise,” said the manager Zdenek Kudr, as reported by iRozhlas.
Trade with the UK is also important to Hungary. The UK is currently the sixth-largest foreign investor in Hungary and retail chain Tesco is Hungary’s largest private sector employer, with close to 20,000 employees, and sources their products from 1,650 SMEs. Britain will become Hungary’s biggest non-EU trading partner after Brexit. The share of UK trade, including services, is less than 5% of Hungary’s total exports, which are set to reach a record €105bn in 2019.
The impact of Brexit on Hungary’s economy will be indirect thanks to the relatively low trading volume. Economists estimate that the country will feel the pain if Germany, Hungary’s biggest trade partner, is hit by the financial and economic impact of the UK leaving the bloc.
With contributions from Valentina Dimitrievska in Skopje, Iulian Ernst in Bucharest, Wojciech Kosc in Warsaw, Denitsa Koseva in Sofia, Clare Nuttall in Glasgow and Tamas Szilagyi in Budapest.