29 Jan Companies accelerate their defense plans against a hard brexit
Government admits the real problem is among SMEs exposed to abrupt exit from the UK from the EU
Although the two sides are going to lose, Spain is much more interested in the fact that the United Kingdom’s exit from the European Union is done in an orderly manner – with an agreement that the British Parliament initially rejected this week – than in a brave manner. Because the Spanish economy is much more at stake in that territory than the British can lose if the separation is not agreed.
The United Kingdom is the third market for exports of goods and services after France and Germany, according to the latest complete data, corresponding to 2017. More than half of those sales were of goods, and another third corresponded to services, especially tourism.
The main risk faced by companies with a presence in the UK is a ‘brexit’ without an agreement. Large businesses have already prepared their contingency plans to avoid a greater evil in the worst case. There have been many years of enormous investments in that country, where multinationals have found an appetizing market in sectors ranging from banking to electricity, through construction and services. And now they cannot risk losing part of what has been achieved by this situation.
However, this is not the case for SMEs operating in the United Kingdom. The president of the Circle of Entrepreneurs, John de Zulueta, revealed that these firms “are not prepared” for a hard brexit. The English are,” he said, “but we are not. He himself acknowledged that most companies had thought that the exit was going to be ordered. And they have not acted accordingly.
The greatest uncertainty that the government has right now is the possibility that the separation will be traumatic. If it were not, the Executive trusts that the different bilateral treaties that Spain has already signed with the United Kingdom in all types of matters would serve to cushion any uncertainty, say sources in Moncloa. But without agreement between the parties, the effects would run along completely unknown roads, they acknowledge those sources.
At the bilateral level, the main agreements focus on matters such as taxation, justice, health and social security. In the field of taxation, a text was signed in 2013 to avoid double taxation and prevent tax evasion in the area of Income and Wealth Taxes, which repealed the one signed on October 21, 1975. This text resolves the treatment of residents not domiciled in the United Kingdom and implies a reduction in taxation at source, establishing exclusive taxation at residence for dividends derived from majority shareholdings, as well as for interest and royalties. In addition, it includes an arbitration clause to resolve conflicts that may arise from the application of all such treaties.
The Minister of Industry, Reyes Maroto, has already pointed out the possibility of authorising a ‘cheque-brexit’ to help firms in need. In addition, last week the Council of Ministers approved the Report on contingency planning for the UK’s exit from the EU without agreement. It is a plan containing legislative, logistical and communication measures to deal with the worst-case scenario. In addition, yesterday Maroto announced that the Government will approve a Royal Decree in February with new measures to minimize the possible effects on the tourism and business sectors.
Among the key points that the European Union recommends entrepreneurs to take into account to prepare are those related to the responsibility of SMEs in the event that they receive products from the United Kingdom to determine responsibilities in accordance with Community law, processing certificates, licenses or authorizations issued in that country to obtain new ones; the knowledge of how the new customs rule will affect you, as well as that related to Value Added Tax (VAT), of a harmonised nature in the EU, or Excise Duties; attending to the rules of origin, bearing in mind that the United Kingdom will no longer be a member of the EU; the prohibition on trading in certain goods outside the EU; or the processing of personal data, one of the most sensitive issues for many businesses.
In recent months, large companies have developed all sorts of strategies to avoid an impact on their businesses. Until the British opted for ‘brexit’ in the June 2016 referendum, the UK had become one of the most attractive markets for Spanish companies to expand business.
Santander and Sabadell are the large financial corporations with interests in the UK. The entity chaired by Ana Botín obtains 14% of its ordinary gross profit (according to the group’s latest quarterly report, until September 2018), making it the third largest market after Brazil and Spain. It is the product of the acquisition of Abbey National, although for years it has operated as Santander UK. Sabadell’s position is much more relevant after the acquisition of TSB. In both cases, they have taken action. For example, Santander has moved its investment banking and services for large companies out of the British market. And Sabadell has a plan prepared for a ‘brexit’ that could harm it. This was anticipated before Christmas by the CEO, Jaime Guardiola, who also clarified that Sabadell “is a little out of the mess” in the sense that it is focused on the mortgage market outside the capital, so his concern is linked to how much the economy of the British country will be affected.
Iberia is at the centre of much of the government’s concern that it may have to stop operating within the EU. Executive officers, the European Commission and IAG (the parent company of the UK-based group) have already held meetings to seek a formula to define Iberia as a Spanish company, provided that it exceeds 51% of the shareholders. The firm argues that although IAG holds 86% of the financial rights over Iberia, 50.1% of the decision-making rights are controlled by the firm Garanair, owned by El Corte Inglés.
Construction and electrical
One of the greatest treasures included in Ferrovial’s income statement is the group company that manages Heathrow airport, the main airport in the United Kingdom. In order to avoid risks, the company chaired by Rafael del Pino has put its services division up for sale, which reduces its exposure to a business which, in the territories where it operates, contributes some 7,000 million euros. In the case of Iberdrola, the main question lies in clarifying what will happen to the guarantees of origin of the electricity generated by its renewable plants in that country within the framework of EU legislation.
Tourism already notes the fall of the British market, the first for Spain
Of all the economic issues that most concern Britain’s exit from the EU – whether abruptly or mildly – tourism is key to a country like Spain. In 2018 alone it received more than 18.3 million visitors from the British Isles, remaining the first point of origin in the world. It is one of the pillars of sun and beach tourism offered by the coasts.
However, there are already threats looming over a sector that is the mainstay of GDP growth. For example, increased competition from areas of the Mediterranean that in recent years have been involved in conflicts – Egypt, Tunisia, Turkey, etc. – has begun to affect the arrival of British tourists. Specifically, 2% fewer Spanish citizens have visited Spain, and their overnight stays have also fallen at a rate of 3.4%.
For this reason, the employers Exceltur warn the Executive that should have a national emergency tourism plan to ensure air connectivity between the United Kingdom and Spanish destinations “key to maintaining the influx in a strategic market such as the British. Because the ‘brexit’ hard involves two threats that already have the Spanish hoteliers. On the one hand, a strong devaluation of the pound sterling and, therefore, a limitation on the purchasing power of the British. If your pocketbook suffers, tourism spending may be one of the first to be paralysed in the expectation that the economy will improve in the future.
On the other hand, there is a risk that airlines operating between the British Isles and the Iberian Peninsula and the Canary and Balearic Islands will cease to do so in the face of a ban on licensing at Community level. This would be another measure which would be harmful to the sector.
The rules of the European Parliament, in suspense if there is an extension
The upcoming European elections also take into account what London decides about Britain’s exit from the European Union. The final farewell is scheduled for 29 March. But in view of the British Parliament’s refusal to accept the agreement reached between Theresa May’s government and the EU executive, the alarms have been set off in another of the seats, the European Parliament.
With the European elections in sight – they will be on May 26 – the EU already counted on distributing among the rest of the member states the 73 deputies that until now corresponded to the United Kingdom, out of the 751 that the chamber has. If at last there is no ‘brexit’ before the convocation, there will also be elections in the United Kingdom.
And that’s where the problem arises.
If the European Parliament is formed with the elected British MEPs, it can start taking decisions on rules and directives that usually affect the economic, environmental or social spheres. In that case, if the United Kingdom then leaves the Community club, all that legislation could be called into question in the face of any request to the EU Court of Justice and its adaptation. That is the other big issue that is being studied by the Executives of the 27 to avoid a greater evil.