14.07.2016

21 Days after the Brexit: The Consequences from a Managerial Perspective

Professors of the University of Mannheim, Business School discuss the implications and potential consequences of the Brexit. Perspectives on the financial market, the European Business Taxation and the European educational landscape.

Three weeks have passed since the British people has voted "out". With a percentage of 51,9, a close majority has voted against the stay in the European Union. Which consequences this may have is being discussed by researchers of the University of Mannheim, Business School.

 

 

 

 

Professor Dr. Viola Klotz, Assistant Professor of Economic and Business Education, Competency Development and Training:

Brexit could Revise Achievements of the European Educational Area

The economic consequences of the Brexit on education are currently not foreseeable. The exit from the EU does not necessarily mark the end of the joint education landscape but there is a high probability it may negatively impact the exchange of knowledge and education.

For one, the costs for students and apprentices on both sides will increase due to the cancellation of funds of the European “Erasmus” program – which had funded monthly fees to tuition fees and costs of living. Students will have to expect substantially higher fees as “international students”, as well. The question to what amount existing funding programs of the exchange will be replaced by national initiatives remains unexplained. If diplomas acquired within Europe will still be recognized by the Bologna initiative is also doubtful. 
 
In addition, it is almost impossible to estimate loss of knowledge for Great Britain as well as for the EU – and not only because of the more difficult exchange of young students: universities are traditionally the location where technologies are developed and where the future is created. It is imperative to halt a complete stop of EU-funded research projects – which have funded the mobility of doctoral candidates and researchers.

Professor Dr. Viola Klotz is Assistant Professor of Economic and Business Education, competency development and training quality. Her research focuses are in the area of competency diagnostic and company-based training.


Professor Dr. Christoph Spengel, Chair of Business Administration and Taxation II:

Consequences of the Brexit for European Business Taxation

The Brexit has numerous consequences for the fiscal treatment of business relations with British companies. Three major consequences can be identified in the area of business taxation:

First, significant changes in cross-border taxation will occur: the United Kingdom will be excluded from the scope of application of directives (Parent-Subsidiary Directive, Interest and Royalty Directive, Merger Directive)  implemented to create a European internal market.

As a consequence, withholding taxes will be incurred on dividends, interest payments and licensing fees in cross-border business transactions which had previously been removed in accordance with EU-regulations and certain minimum holding quotas. This applies to intra-company payments from EU member states to recipients in the United Kingdom and vice versa. The resulting higher taxation can only be avoided if the United Kingdom negotiates new bilateral double-taxation treaties with all EU-member states and implements regulations analogous to EU-regulations.

Secondly, as a non EU-member, the United Kingdom would no longer enjoy the prohibition of discrimination and restriction as guaranteed by the EU’s fundamental freedoms. The omission of fundamental freedoms – especially the freedom of establishment and freedom of capital movement in the business sector – implies that the discriminatory taxation of business relations with the United Kingdom, currently widely restricted by the European Court of Justice, will no longer be illegal. This will lead to clear disadvantages for such business relations compared to other inner-European constellations.

Thirdly, the United Kingdom is classified as a third country by the German foreign tax laws. As a result, taking account of losses which occur in British subsidiaries will be restricted. Moreover, the United Kingdom is a low-tax state according to German foreign tax law, and therefore the strict rules of German add-back taxation apply. A EU-membership, however, prohibits the application of both regulations.

In the area of indirect taxes, changes will occur with regard to  value added tax, which has been harmonized across the EU. Leaving the EU would mean that the United Kingdom is no longer bound to the value-added tax system directive. This will have substantial consequences for thefiscal treatment of exports and imports from cross-border revenues from EU-member states to the United Kingdom and vice versa. On the other hand, the United Kingdom is no longer obliged to define tax exemptions or reduced tax rates for sales taxes.

There will be no direct impact on domestic business taxation in the United Kingdom. This is due to the fact that the European Union does not have a harmonization mandate for direct taxes. Consequently, the corporate tax system remains untouched in case of a withdrawal from the EU.

Professor Dr. Christoph Spengel is owner of the Chair of Business Administration and Taxation II. He has been a research associate at the Economic Research Institute (ZEW) in Mannheim since 2002. His research focuses are national and international corporate taxation, accounting as well as the competition effect of taxation especially in connection to the European integration. As a member of the German Advisory Council, he advises the German Federal Ministry of Finance.

Professor Dr. Sascha Steffen, Chair of Financial Markets:

Brexit – Implications for Financial Markets in Germany and Europe

The outcome of the referendum on Great Britain’s exit from the European Union came as a surprise for capital markets and has immensely increased uncertainty of the markets. After a brief (but heavy) shock at the stock exchanges, the FTSE 100 was on a higher level four days after the referendum while other European stock exchanges listed more significant deductions. This illustrates the significance of the referendum for the entire EU. Three observations demonstrate the scale of uncertainty: investors are increasingly clinging to hard cash, a rise in the sale of government bonds of the US and Germany has taken place (“flight-to-quality“) and the bank sector in Europe has been hit harder than all other sectors.

Great Britain’s economy will notice the consequences of the Brexit and (if the word of most economists is to be believed) slide into a recession. Economic growth will (at least temporarily) likely also recede in other European countries. Europe still has not reached a stable path of economic growth since the financial crisis of 2008 and the Brexit will only exacerbate the situation. Therefore it is unlikely that the European Central Bank will raise the interest rate level in the near future. It is more likely that through measures, like for example an increase of Quantitative Easing, more markets will be supported. A rise in interest rates is also unlikely in the US in 2016. 

For low-earning European banks of today, the phase in which they earn less money through maturity transformation will be prolonged even more. On the contrary, especially the business model of many German banks (mainly the savings banks and credit unions) is based on revenue from maturity transformations and therefore will be under constant pressure. An adjustment of the banking sector as a consequence (i.e. through mergers and acquisitions) would be highly appreciated. Because the problems of savings banks and credit unions are profoundly correlated, the Brexit is another risk for the financial stability in Germany and raises questions on the functionality of the institution guarantee of both banking columns. Both subjects (business models and institution guarantee) are on top of the agenda of this year’s “Single Supervisory Mechanisms (SSM)“.

In Great Britain, banks which are less diverse and finance the domestic economy suffer especially. However, in Europe the potential default risk of the banks with regard to the credits to the British economy is subordinate. Especially here it becomes apparent that the banks that are hit the hardest are those with small capital and bad credits on their balance sheet. Many of these banks (particularly in Italy) were dependent on the liquidity of the ECB but the shock has raised the risk of bankruptcy considerably. A political crisis (if one wishes to describe the result of the referendum as such) can therefore lead quite fast to a banking and financial crisis if the banking system is too weak.

It is probable that the functionality of the two existing banks of the banking union (esp. the “Single Resolution Mechanism (SRM)“) may soon be put to the test. Particularly the insolvency risk of Italian banks has risen through the uncertainty of the markets so that the SRM u.U. could be applied. However it is questionable to what extent the political will exists to utilize the European regulations.

The Brexit will have consequences on the integration of markets in Europe. Just like the Brexit has accelerated less rather than more Europe on a political level, the danger persists that the political will for the development of two important European projects, the banking  and capital market union, will recede further. Another consolidation towards European deposit protection (as a third column of the banking union) or even a fiscal union is hardly imaginable.

Professor Dr. Sascha Steffen is the holder of the Chair of Financial Markets of the University of Mannheim, Business School which is connected to the ZEW- research area “International financial markets and finance management”. The research focuses of Professor Steffen are in the areas of European banking regulations and financial market stability as well as financial intermediation. In 2010, Professor Steffen was awarded the Lamfalussy Fellowship of the European Central Bank.