The Security and Resilience Implications of Brexit

The Security and Resilience Implications of Brexit

The Security and Resilience Implications of Brexit On the 21 July 2016 the Security & Resilience Network at London First held a breakfast briefing at which senior representatives from the City of London Corporation, the Canary Wharf Group, and Ernst & Young LLP discussed the Security and Resilience Implications of Britain s exit from the EU. In the wake of the UK s recent referendum, in which 52% of the British public voted for Britain to leave the EU, there has been a degree of uncertainty amongst individuals, businesses, and indeed within the government, as to what a future outside of the EU would look like. In a relationship which has spanned 43 years, the UK s position within the EU is deeply entrenched. As the EU s second largest economy, Britain is a major contributor to the European Single Market and has been subject to the EU s increasingly complex legal framework and regulatory environment. Therefore, Britain s decision to withdraw from the EU acts as a seismic disturbance to the success of the European project and one which looks to create greater shockwaves of uncertainty to global financial markets and to the way in which Britain conducts business with the European continent. More concerning, however, are the potentially negative implications that Brexit will have on international security and co-operation at a time when the security landscape is becoming increasingly critical and complex. At present, London and the wider UK face an unprecedented threat from terrorist entities across the globe. DAESH, Al Qaida, and their affiliate groups, list the UK amongst their key targets, prompting the UK s security agencies to maintain the national security threat level at SEVERE. With the span of attack methodologies continually widening, targets are becoming increasingly economic and commercial. This places businesses in centre stage. As Western powers confront terrorist entities in both Syria and Iraq, DAESH continues to react in a predictable fashion by targeting locations in perceived hostile nations. Indeed, recent weeks have seen the Islamist group claim responsibility for a number of attacks in the United States, Europe, North Africa, the Middle East, South Asia and the Far East. 1

As the security landscape presently contains a significant range of extremist groups with wide-ranging attack capabilities, Britain s decision to withdraw from the EU, and the security consequences that will inevitably follow, are unwelcome distractions from this increasingly menacing threat. London especially is a predominantly international city. With a forensic profile of threats which can only be characterised by globalisation and internationalism, London s most dangerous threats are therefore international in origin. As such, international and, more specifically, European security co-operation is not only an asset but also a necessity if the UK is to enhance its ability to monitor terrorist innovation. As businesses prepare for the fallout from Brexit, those responsible for corporate safety and security will need to consider their strategies going forward with a changed structure of European co-operation. Primarily, there will be an identified need to increase corporate self-help and selfreliance. This is not only good corporate social responsibility but also an insurance expectation, a defence against litigation, and acts as reassurance to shareholders of compliance to standards. Organisations will also need to engage more vigorously in business-tobusiness safety and security co-operation. This will apply not only to geographic locations such as Canary Wharf but also to business sectors. Activity will also need to be enhanced by the development of public and private partnerships to support the safety and security of London, especially in the area of information sharing. All of these actions will, of course, need to be supplemented by rigorous and ongoing analysis of the medium and short term security consequences of Brexit to help mitigate the risks. London as a Resilient City Over the course of London s 800-year history, the City has borne witness to a substantial sway of shocks and stresses. As September approaches, we are reminded of the unflappable resilience of the capital as we prepare to mark the 350-year anniversary of perhaps one of the most prolific shocks to have ever gripped the city the Great Fire of London. An entirely preventable disaster, the Great Fire of London consumed 13,200 houses, 87 parish churches, St Paul s Cathedral, and most of the buildings belonging to City authorities. With around 80% of London destroyed, 2

approximately 100,000 people spent the following two years living on Hampstead Heath while authorities were crippled with indecision as to how they should proceed in rebuilding London both physically and economically. Eventually, however, London rebuilt its infrastructure, making it a centre of commerce and the thriving metropolis that it is today. As such, we can be reassured by examples of past challenges that London has an exceptional capacity for resilience and that regeneration is entirely possible even when faced with challenges that have devastating consequences. Brexit, of course, is no exception. Perhaps, the biggest challenge conceivable to the prosperity of London and the UK as a whole, Britain s withdrawal from the EU is likely to pose a number of serious challenges that will need to be navigated and managed very carefully by both the public and private sectors. The ability for British businesses to continue to attract and secure the expertise that they need to fill vacancies is, most certainly, a pressing concern for London businesses. Access to talent is absolutely essential to sustainable economic growth and prosperity. In sectors such as healthcare, education, hospitality, construction and manufacturing, workers from the EU are vital and any change to the UK s immigration system needs to recognise this. Access to co-operation with the EU is also a key challenge that has raised concerns over the UK s ongoing ability to remain resilient in the face of existing and emerging security challenges. Membership to the EU has given Britain access to significant security resources including the European Arrest Warrant, Europol, Eurojust, and co-operation through collective information sharing on security threats throughout Europe. As the UK prepares to trigger Article 50 of the Lisbon Treaty effectively initiating its exit from the EU the prospect of having to conclude bilateral legal assistance treaties with EU member states or negotiate associate status to various European security bodies has raised concerns as to the security gaps that may emerge in the interim until these agreements are finalised. 3

Positively, however, many of the security benefits that the UK currently enjoys as part of its membership to the EU are based upon practical cooperative agreements that have arisen out of a mutual recognition of benefit rather than as an imposed requirement from Brussels. As such, it is in everyone s interest for this co-operation to continue even in a post-brexit environment and both the UK Government and businesses need to support the continuation of existing arrangements as Britain moves forward in reshaping its relationship with the EU. Protecting the ability of the UK, and London in particular, to access money and create wealth is also a high on the agenda of priorities for government and businesses alike. Closing markets in whatever form restricts economic growth and will create economic pressure on the UK financial system. Consequently, public-sector organisations will need to re-energise and change if they are to weather this challenge successfully. Managing the technical realities of the UK s post-brexit regulatory environment will also not be without its difficulties. Presently, the UK possesses a total of 30 trade negotiators to manage the seismic shift in regulatory framework that will result from Britain s European withdrawal. In stark contrast, the number of trade negotiators retained within the EU is approximately 100 times greater, indicating that the UK must enlarge its capacity and level of expertise if it is to make Brexit a success. Negotiating its new trade relationship with the EU is, however, but one component of success for the UK outside of EU membership. Britain will now need to turn its attentions to new markets, particularly in Africa and Asia, to regenerate global links that will provide new opportunities for trade and access to markets. However, while the UK s departure from EU federalism will not be without its challenges, London still possesses the skills, knowledge, products and services to remain highly attractive to businesses across the globe. With some of the brightest capital talent in the world, a stable regulatory framework, and a strong rule of law which cannot be underestimated in commercial value, London remains the gateway for trade in the EU and a very attractive place to live and work. 4

Over the course of its history, the people of London from nations pulled together on the basis of trade and mutual benefit, not enforced cooperation, have many times over demonstrated that with risk comes opportunity. Brexit offers a chance to UK businesses and resilience professionals to demonstrate their capability and confidence in the methods and processes that they have spent many years developing. It is also an opportunity to expand upon existing knowledge and best-practice on how best to deal with shocks and stresses to harness future potential. Brexit Means Brexit: Navigating the Political Landscape As the dust begins to settle on the UK s decision to withdraw from EU membership, both the domestic and wider European political landscapes look decidedly less serene. While in reality the UK will remain part of the EU for at least another two years during which time it will continue to trade within the single market and abide by EU rules and regulations the UK domestic political scene has been turbulently manoeuvring itself to prepare for what is anticipated to be a difficult period of negotiations ahead. There does remain, however, considerable speculation as to whether the referendum result will be upheld or even reversed in light of the narrow victory for the leave camp. A case will be brought before the British courts in October to assess whether the UK Parliament has the authority to action the referendum result and trigger Article 50 or whether it is also constitutionally required to hold a Parliamentary vote. The likelihood that a Parliamentary vote will lead to a reversal of the referendum result, however, appears to be very slim due to the lack of appetite within Parliament to vote against the expressed decision of the general public. Similarly, threats made by the Scottish Parliament to block constitutionally the UK from leaving the EU also appear to be without substance. Under the Sewell Convention, the Scottish Parliament has the power to object to any laws passed in London that it believes would have a detrimental effect on Scottish domestic issues. While the Scottish vote in the referendum was clearly a vote for the UK to remain in the EU, the Sewel Convention only affords Scotland the opportunity to object formally to any legislation brought forward by Westminster to leave the EU, it does not give them the power to veto. 5

With the possibility of successfully blocking the UK s withdrawal from the EU seemingly low, the prevailing assumption remains that Brexit, does indeed, mean Brexit. Once Article 50 has been invoked through formal notification to the President of the European Council, Donald Tusk Britain has a twoyear period in which to negotiate the terms of its future relationship with the Union. If, however, no agreement has been reached by the end of the two-year period, Clause 3 of Article 50 grants the EU Council with the power to extend negotiations in the event of a unanimous vote. There is, therefore, potential room to manoeuver as Britain attempts to navigate its way through the Brexit process. Indeed, following weeks of demands by the German Chancellor, Angela Merkel, and the French President, François Hollande, for Britain to invoke Article 50 with immediate effect, there has now been a mellowing of attitudes and a recognised need for flexibility in the coming months. As such, Britain s newly appointed Prime Minister, Theresa May, has been granted until the end of the year to conduct pre-brexit negotiations before officially invoking Article 50 in early 2017. This adjustment in European attitudes towards Britain s position comes as many European states face domestic challenges of their own. At a time when Chancellor Merkel must contend with public dissatisfaction towards her migration policy and wider discontent across Europe over the stability of the EU and potential threats posed by the weaker economies within the Union, Britain s withdrawal must be dealt with delicately if the EU is to protect the European project from collapse. With Britain s departure from EU membership, Germany now loses a fellow advocate for policies favouring free-market economics, low levels of regulation and a more capitalist Europe. Consequently, Britain s absence from the Union will force Germany into the political minority as the new majority shifts towards a more protectionist, state-controlled, Southern- European vision of the Union. In the interest of preserving the EU and fostering greater unity between the remaining 27 member states, there is a very strong will to retain a close association with the UK and its market containing 60 million consumers. Britain s absence from the Union will significantly reduce the attractiveness of the European market and in the interest of avoiding further economic and political instability many EU members have expressed a desire to maintain access to the UK and the City of London in particular. 6

However, while the EU member states have expressed their willingness to exercise a degree of understanding towards the newly appointed British Government as it prepares its position ahead of exit negotiations, their patience will, of course, have limits. It can also be expected that despite EU enthusiasm for continued access to UK markets that the negotiating process will not be painless. As President Hollande has already intimated, Brexit will have consequences for the UK. If the process of exiting the EU is perceived to be uncomplicated and results in a wholly positive outcome for the UK then the remaining member states may be encouraged to secure similar arrangements. EU leadership will, therefore, most certainly seek to make negotiations difficult if it is to prevent further political fragmentation within the Union. The outcome of Brexit negotiations, however, is far from defined and there exists a number of possible arrangements which may define the UK s future relationship with the EU: Norwegian-style EEA membership Full access to the single market without any controls. Turkish-style customs union Internal tariffs avoided but the UK must impose EU external tariffs without any influence or guaranteed access to external markets. Free Trade Agreement-based approach UK agrees free trade deals with all partners including the EU as a block. Swiss-style bilateral accords The UK and EU agree a series of bilateral accords covering different sectors but coverage is patchy and depends on EU doing the deals. Most Favoured Nation WTO-based approach where there is no need for common standards but where the UK faces EU trade barriers on 90% of exports by value. From a business perspective, the Norwegian-style membership model which allows for full access to the single market and for the continued free movement of people would be the most acceptable and minimise the level of risk in the UK. This arrangement, however, will be difficult to reconcile with the will of the British public who, it is believed, voted to leave the EU largely based on their opposition to rising levels of European migration to the UK. 7

The Business Impact of Brexit As the UK now prepares itself for a future outside of EU membership, concerns over risk and uncertainty continue to trouble British businesses and global markets. While the initial slump in the stock market appears to be making a strong recovery, elsewhere, the signs are less encouraging. Confidence in the pound has declined causing it to drop to its lowest rate against the dollar since 1985 and recovery is likely to be slow. The IMF has downgraded its forecasts for UK growth in 2017 from 1.3% to 0.9% and, similarly, the Treasury has released an economic forecast indicating a cut of 0.3% in 2016 and 0.6% in 2017. There are, however, some areas of opportunity after Brexit. London property is now keenly priced and the acquisition of UK assets is considerably cheaper now than it was prior to the referendum making the UK a more attractive offering to foreign investors. Navigating Risk and Uncertainty Over the next few years, as Britain embarks upon a complicated negotiation process that will finalise its divorce from the EU, UK businesses will find themselves grappling with a considerable amount of risk and uncertainty. Broadly speaking, uncertainty can be understood as the factors which are unknown but which affect outcomes. Risk, on the other hand, can be defined and quantified, allowing businesses to calculate impact probabilities. As businesses look to prepare for uncertainty in the short, medium and long term, there will be four principal areas that will shape the future for the UK and EU economies: Trade This area will see increasing and persistent uncertainty for the foreseeable future i.e. exports to the EU, access to markets, imports (supply chain) from the EU, impact on customers e.g. business done in the UK with EU owned businesses, trade standardisation, TTIP, TPP, etc. Trade with other markets could also be impacted as EU trade deals are taken away from the UK. 8

Migration There will be an impact on the ability of businesses to hire (and retain) skilled and low-skilled staff with and produce the possibility of wage pressure. There may also be an impact on existing staff and on perceptions and sentiment towards migration. Regulation Uncertainty will govern changes to the regulation of products and services which will have an impact on standards and future investment. There is some evidence to indicate that scientific partnerships will be impacted in addition to innovation funds. Government Policy Access to EU research, funding and taxation will also be affected. It is possible that state aid will be provided by the UK Government to back selected sectors. Any business looking to navigate the risks that will arise from the UK s withdrawal from the EU will need to demonstrate capability across all of the following five areas: Foresight horizon scanning, anticipation of threats and opportunity. Agility organisational design and disposition to vary strategy, execution and governance. Co-operation through the extended enterprise of suppliers, customers, regulators, partners, innovators. Efficiency appropriate resilience, processes of governance while continually working to reduce cost. Simplicity understanding complexity and mastering it. Businesses dealing with uncertainty should seek to achieve organisational agility in the following three areas: Operational agility is a company s capacity, within a focussed business model, to find and seize opportunities to improve operations and processes. It is important for businesses to understand their risk profile and the risks that they have the ability to affect directly. Portfolio agility is the ability to shift resources quickly and effectively, including cash, talent, and managerial attention, out of less-promising and more-attractive ones. Strategic agility is where business opportunities are not distributed evenly over time. Rather, firms typically face a steady flow of small opportunities, intermittent midsize ones, and periodic golden opportunities to create significant value quickly. 9

As the UK Government prepares to enter into Brexit negotiations with the EU, it is imperative that UK business, particularly in London, work with organisations such as London First, the Confederation of British Industry and other sectoral bodies within industry to promote business interests. It is important that government is made aware of business needs and that their concerns and requirements are fairly represented in negotiation proceedings. Widespread engagement in initiatives that promote UK business will also be vital if economic stability is to be maintained in the coming months and years. The London is Open campaign launched by the Mayor s office is an excellent example of work currently being done in the capital to reassure international investors that London remains a competitive and influential business centre. Ultimately, identifying the positive effects of Brexit and framing the UK in an attractive light will be the key to boosting international confidence and to maintaining Britain s stability in global financial markets. As outlined in the UK s National Security Strategy, economic prosperity will ensure national security. Financial stability will allow the UK to continue spending 2% of Gross Domestic Product (GDP) on defence and 0.7% of Gross National Income (GNI) on overseas development. These two commitments are imperative to increasing national security and safeguarding prosperity in the UK and will become even more important as the UK attempts to expand its global reach and influence while it withdraws from the EU. 10