Beware the Brain Drain

Economic
Saturday, July 15, 2017
Clement Julhia

Theresa May’s government faces a number of challenges over the course of this Parliament, however the most daunting one is, as one would expect a consequence of last June’s referendum, specifically the potential brain-drain of British high-qualification service jobs. In particular, there is a real risk of exodus by both the financial and academic sectors, which in turn could signal a recession – or at least a serious dip – throughout the economy since those are its two main drivers, as in most modern developed countries.

Starting with the financial sector, the first thing to note is that its activity represents 10% of Britain’s economy and 25% of the economy in London. Yet a lot of the attractiveness of London as a financial centre has to do with its passporting rights as a member of the EU (the ability to exchange financial products from an EU member to another under a unified set of regulations). Though many banks will probably not relocate, Paris and Frankfurt are attractive alternatives for institutions seeking to keep their activities in the Union. Outside of the EU, the United Kingdom will be in direct competition with major financial hubs, especially New York, where liquidities are often more abundant.

What is more, Britain’s departure from the European Union creates – at least in the short term – a problem of volatility with the exchange rate between euros and pounds Sterling. When investing to a different currency zone, the optimal situation is for the currency of the country to which one is investing (here, the euro) to appreciate against the currency of the country from which the capital is invested (here, the pound) between the time the investment is made and the time profits are collected. This ensures a maximal return. Thus, predicting the evolution of exchange rates is key. With the current volatility in the matter, it would be a safer bet for banks to relocate their capital to the Eurozone or countries with more stable currencies.

The university sector, which is ranked globally only second to universities in the US, is the other area where talent threatens to leave the country. For one thing, UK universities receive substantial (around 15%) of their research funding from the European Union, which will naturally stop with Brexit and the upcoming restrictions on EU foreign workers will likely affect the ability of British universities to attract or keep high-level academia. For another thing, tuition fees paid by foreign students from the EU alone in the UK have brought over two billion pounds to the British economy. Changes in visa rules regarding foreign students as a result of Brexit could, according to academic executives, reduce significantly this economic flow to the UK.

This is a longer term issue as historically speaking, academic reputation and national wealth and power have never been disconnected, while in the shorter term, lack of skilled minds is typically a shortcoming which exacerbates all other problems.

 

These issues are not in any way insurmountable. As was suggested and emphasized during the referendum campaign, the UK is more than capable of presenting serious competition to other hubs in the financial sector and of investing in higher education to offset the cessation of EU funding, which features strongly in last month’s budget. Those are, however, the most important challenges for this government and likely the next as well and this budget is a good sign that the government seems to realize this.