Brexit Guest Blog – Point/Counterpoint

Note: Capital Alliance is pleased to offer the following two personal perspectives on Brexit, as observed by principals of M&A International firms in the UK and Germany.
Dr. Florian von Alten, president of M&A International and an executive board member of Germany’s oldest M&A firm, shared his comments at a recent meeting in Dallas of the Americas group of M&A International, of which Capital Alliance is a member.
Howard Leigh, Lord Leigh of Hurley, has been a Conservative Party member of the House of Lords since 2013. He is co-founder and senior partner of London-based Cavendish Corporate Finance, a mid-market M&A firm that is also a member of M&A International.

Pro: Cautious optimism prevails after Brexit passage

By Howard Leigh

The referendum to leave the European Union was a commitment by the Conservative Party during the 2015 general election. Conservatives believed the public didn’t have much say about the original entry into what was then the Common Market, and considerable pressure existed for the issue to be reconsidered.

The Leave campaign’s focus on sovereignty and “take back control” proved to be very attractive to the populace, which was also concerned about immigration. Voters rejected the Remain campaign’s thesis that the country would be worse off outside the EU.

Leave was also successful as citizens in the UK used their vote to express their opposition to the rate of immigration that has occurred in recent years. Under the EU, citizens of other EU countries had the right to live and work in other EU countries such as Britain, but there likely will be new rules and limitations formulated under Brexit. There was resentment of the perceived arrogance of the EU, which refused to enter into meaningful negotiations on this issue.

Doomsday after Brexit passage hasn’t occurred

Some of the scary predictions of what might happen if Brexit passed have not occurred. The FTSE 100 — an index composed of the 100 largest companies listed on the London Stock Exchange — is at a higher level than before the referendum, and the emergency budget which was promised straight after the referendum, with an increase in taxes and cuts to public spending, has been scrapped.

The merger between the Deutsche Bourse and the London Stock Exchange also appears to be moving forward, even though some questioned whether it would collapse if Brexit passed.

Recession could be looming but optimism remains

There are growing signs of a downturn in consumer spending and general economic uncertainty. To some extent, this was evident before the referendum and clearly signposted by the downturn in economic activity in China.

Despite this, I remain cautiously optimistic. I believe the UK will be in a much better position to negotiate trade deals outside of the EU framework. The EU had proved itself incapable of negotiating trade deals with important partners where agreement was required with 28 countries.

To be sure, it will be a challenge, as we have limited experienced negotiators in this field. However, the driver is that our trade with the EU has been significantly declining, whereas our trade with the rest of the world has been growing. Only time will tell, but the UK economy is strong and people knew that when voting.

My belief is that we will end up with a negotiated position — either a bilateral trade agreement with the EU, or an agreement that allows us access to the single market. We may need to concede some flexibility about free movement of labor, but not free movement of people.

Trade implications and the upside to the falling pound

The movement in currency has provided an unparalleled buying opportunity for overseas businesses to enter the UK. At Cavendish we have already closed one transaction post-Brexit and are firming up a number of other transactions, many of which are with overseas purchasers.

Likewise, there is still a huge fiscal incentive for UK owners of businesses to sell, as the tax rate is around 10%, as opposed to over 50% for income extraction.

I have no idea as to the implications for other EU countries, but it seems clear to me that if the EU is not more flexible, there will be unhappiness throughout the continent. I suspect German Chancellor Angela Merkel recognizes this and will take action accordingly.

My hope is that the EU will want to continue to trade products with England, where there is an import deficit of 50 billion pounds and that the EU will be persuaded to open its market to services, an area where we have a huge surplus, as part of the package.


Con: Western World in disorder – lessons learnt from the Brexit

By Florian von Alten

Something is going wrong in the Western World.

How is it that the small country of Iceland, with an unheralded soccer team, can humiliate soccer powerhouse England, knocking it out of the European Soccer Championship during the quarterfinals? And how is it that the American people will essentially cast their votes against the worst candidate for president this year rather than in favor of the best?

And how is it that the British people decided June 23 to exit the European Union? The reason for these headline grabbing news stories appears to be — at least in the case of the last two — that clear goals are missing in our societies today. A disconnect has formed between the establishment and the people.

Support of Brexit was seen as an unlikely outcome

When Britain’s Prime Minister David Cameron supported a referendum two years ago on whether to leave the European Union, he never believed that Brexit would become reality. Instead, he sought to calm the continuously arguing members of his party.

When the former major of London and current member of Parliament, Boris Johnson, started his Brexit campaign, it was outside his expectations that it would get a majority vote. Johnson is a populist politician, an opportunist who enjoyed his time in front of the camera, but he did not have a well-thought-out concept.

He was actually scared when he saw the results of the vote and recently dropped his race to succeed Cameron after one of his staunchest allies, Michael Gove, broke rank and declared Johnson unfit to lead the country.

So why did the majority of the voters favor Brexit? They simply wanted to give a strong notice to their politicians and the political establishment in Brussels, which serves as the capital of the EU, that they were fed up with the overregulation of the European government. It was not their intention to exit the EU, in my eyes.

Negative consequences for the UK and the EU

Within the EU government, the result of the vote was a big and unwelcomed surprise. Not only was the UK one of the few net contributors to the EU among the 28 member states, but the UK represented a more market economy approach compared to countries such as France, Spain or Greece.

Furthermore, without the UK, the economic power and consequently the political power of Germany within the EU will strengthen, a potentially negative development as the UK has always played a balance of power role in European history.

Brexit will have negative economic consequences for the UK

Without the UK’s fifth-largest economy in the world, the EU will lose economic and political power in the world. But the Brexit will have especially negative consequences for the UK.

For a period of up to two years, the EU government and the new government of the UK will negotiate the terms of the Brexit. During that period I believe the UK will go into a recession.

No one will be investing in the UK during this period of uncertainty. One can imagine that there will be little interest from the EU government to give UK a free ride, as the worst thing that can happen is that the whole EU will break apart as more and more member states will decide to leave the EU.

Nationalist parties in Poland, Hungary, France, Belgium and other countries are already opening this discussion. If more countries leave the EU, the economic development of Europe will stand still for a number of years, negatively impacting the world economy.

It is in our all interests to stop this trend and to ask our politicians to develop serious mid-term strategies and goals instead of snatching short-term attention.