Eitan Urkowitz: This is Eitan Urkowitz at the Peterson Institute for International Economics. The UK Government is poised to invoke Article 50 in March to end its membership in the European Union. A move that is expected to have major ramifications on the UK and on the City of London itself.
Joining me is Simeon Djankov, senior fellow at the Institute and former finance minister of Bulgaria. Thank you for joining me Simeon.
Simeon Djankov: Thank you very much.
Eitan Urkowitz: So, you recently came out with a paper on the effect of Brexit, the British Exit from the European Union will have on the City of London and on the UK itself. So, what are some of your findings?
Simeon Djankov: Indeed, this is a topic hotly debated among economists and among politicians, and these are the first set of numbers that suggest that Brexit is likely to have quite a significant, even short term effect. What we estimate is that revenues in the City of London, the financial capital of the European Union currently, will fall between 12 percent and 18 percent almost immediately. And jobs will also be lost about 7 percent to 8 percent of current employment in the city will also go to other parts of Europe and indeed the United States.
Eitan Urkowitz: So, is this just in the financial sector or are there other sectors that will also be adversely affected?
Simeon Djankov: There will be other sectors that will also be adversely related. We start looking at the financial sector, but then our study goes beyond that and says well for finance to work you also have lawyers that need to sign up contracts, you have accountants that work on deals, you have real estate maintenance and so on.
So, we also look at this additional effect and basically once you look at these auxiliary sectors, the loss in employment about doubles. So, it goes from 7 percent to 8 percent of current employment to about 15 percent which is a considerable effect.
Eitan Urkowitz: So, you also argue against the UK deregulating its financial sector. So, why do you argue against that?
Simeon Djankov: Well, one of the common comments by current British politicians is well, we'll lose the European Union market but we'll also lose our chains of EU regulation of financial services and that would allow us to deregulate our financial sector and attract business from the Middle East, from Asia.
The reason that this is quite dangerous as a proposition is that of course is London or Britain were to do that, well then, there would be a response certainly from the US Government, from New York, perhaps from some Asian financial centers. And suddenly, the type of financial regulation that we currently have will be undermined and everybody will be losing out of that.
Eitan Urkowitz: So, how should the UK approach its negotiations with the EU?
Simeon Djankov: Currently, both sides not just the British politicians, but also European Union politicians have been, let’s say, not very constructive about negotiations and rather finger pointing has been kind of the flavor of the month.
But, also there's expectation that once the actual Article 50 is invoked later this month, the UK Government has clear negotiation tactics. We're yet to see whether that is the case and whether after this announcement, they will be a lot more constructive about the steps that need to be taken. Both sides need to be constructive, otherwise, if London’s financial sector were to shrink so will the opportunity for other European firms to get access to finance.
Eitan Urkowitz: So, there's also going to be major elections coming up in the EU, specifically in France and Germany, is that going to affect the timeline of Brexit?
Simeon Djankov: I think it will affect the timeline. In my time as finance minister, we were always waiting when a major decision needed to be taken by Brussels for the major elections. And we now have certainly France and Germany as you mentioned. We have elections in the Netherlands later this month. The possibility of Italian elections later in the year. So, all of these has to be taken into account. What does it mean? It means that even if the British Government has kind of a step by step process in mind, European politics may undermine that process and the UK Government needs to be a lot more flexible than it currently thinks it needs to be.
Eitan Urkowitz: Thank you Simeon.
Simeon Djankov: Thank you very much Eitan.