Brexit: strategic changes to ensure economic renewal

As the Brexit agreement becomes a reality, this major shift will impact multiple economic activities in key sectors. In response to this, organisations and governments must implement mid to long-term strategies to relocate economic activities while the Brexit agreement is being finalised. 

Grégory Vanel, Professor in International Economics at Grenoble Ecole de Management, shares his analysis of the Brexit agreement and its impact on economic activity.

In France, healthcare is one of the most competitive sectors alongside the aeronautics and alcohol industries. The healthcare sector is led by high added value tech companies. Another specificity of the French market is that healthcare activities are at the heart of the French social security system. Both access to care and access to treatment and medicine are regulated by this system. The current challenge is therefore to analyze and understand what makes a European company valuable today.

Sanofi recently announced 300-600 layoffs for European R&D activities, including its research center in Strasbourg. Is this a positive step towards keeping value within the territory?

These decisions were set up a long time ago. Over 10 years, R&D has lost 50% of its staff. Sanofi is facing a challenge in terms of scale and critical size in order to successfully carry out ambitious research projects such as a Covid-19 vaccination. Above and beyond this, France and Europe are losing value because capital is not playing the long-term game.

Sanofi is locked into a financial logic as its shareholders push for decisions that focus on profitability. When profitability becomes the guiding focus, you no longer invest in knowledge. You no longer invest in projects with uncertain outcomes and thus, you forgo important research activities. While value will increase for shareholders, Europe will lose skills and production capacities. Certain essential molecules like Paracétamol are generating lower margins and are produced in Asia despite their high intrinsic value.

The challenge is therefore how to implement a strategy to relocate research in the healthcare industry… 

Yes it’s a question of European sovereignty, in particular due to our aging population. But we lack state entrepreneurs in France and Europe. The USA, China, South Korea… All of these countries invest heavily in public research, which enables the transfer of expertise to the private sector. Those are state entrepreneurs.

The question is to understand why France continues to entrust strategic research and innovation activities to the private sector. Public investment in healthcare is not high enough and there is no strategy beyond simple financial support such as tax incentives. We have to establish a new balance between long-term investment and short-term profitability.

Economic growth will also be impacted by the final Brexit agreement. Is the starting framework established on December 24 a good starting point for various European actors?

Right now, we cannot say for sure if economic activity will come back to its pre-Covid-19 form. In the short term, many production lines have been disorganized which has caused increases in costs and mistakes. As a result, companies are wary of hiring or setting up new partnerships. This disorganization impacts investments levels and creates the risk that production costs will rise on both sides of the Channel.

The free-exchange agreement is built around the Ceta model between the EU and Canada. It focuses primarily on the exchange of goods. But these agreements will only apply to exports to the EU of products with a minimum number of pieces. For example, cars will have to contain a maximum of 45% materials from the UK or EU in order to access the European market. These agreements enable European components exported from the UK to be considered as “local” and thus be combined with strictly British components.

However, this agreement is unclear over the long term because the details haven’t been hashed out. For example, the agreement doesn’t take into account the financial sector which counts for 7% of the UK’s added value and 4.2% of jobs. A more precise agreement should be reached mid-2021. In the meantime, we’re seeing numerous activities being transferred from London towards European marketplaces. For the fishing industry, access to British waters has been maintained with the condition that European fishing activities give up 25% of catches in these waters by 2025.

The content of the agreement creates uncertainty, weighs down the decision making process and leaves questions as to the free exchanges of goods, the fluidity of production and service activities, trucking and air transport… It also weakens a number of large scale programs like Erasmus and Galileo. The negative impacts of Brexit are currently impossible to count. In 30, 40, or 50 years, we might have recorded a loss of 1, 2, or 3 GDP points? I’m not very optimistic.