The market volatility and financial uncertainty that has gripped the UK after the Brexit referendum is a major concern for its cities. As a new report by Metro Dynamics, “AdiEU: The Impact of Brexit on UK Cities,” makes clear, it is critical that city and metro leaders have a significant voice within their national government, both during exit negotiations with Brussels and in the creation of a new national budget.
First, the AdiEU report shows that a significant amount of economic progress in UK cities has been the result of direct EU funding, the future of which is now in doubt.
In each of the past two years, the UK has received £1.8bn in European Structural and Investment Funds – investments in innovation, business development, skills, and employment, as well as a number of city-specific initiatives – meant to equalise well-being across regions, meaning struggling industrial cities will be especially hurt by their loss.
Support for major infrastructure will also evaporate. Half of the UK government’s 600 planned infrastructure projects over the next five years are in cities – yet Whitehall only planned to contribute one-quarter of the total funding, looking to private investors and the EU for the rest. Now, not only is direct EU funding for infrastructure investments unlikely to materialise, but projects will also likely struggle to raise private capital in an uncertain market environment.
In the past, the European Investment Bank (EIB) has contributed more than £40bn of financing to the UK, 78 percent of which has gone into cities. But, with 55 major infrastructure projects in the UK currently still under EIB consideration, the possible loss of financing may spell an interminable pause for many important urban transportation, energy, and economic development projects.
The UK also receives a net surplus of EU research funding – around £1.8bn per year – the overwhelming majority of which goes into the nation’s cities. This funding has provided invaluable support to projects, like the Graphene Institute at the University of Manchester, that support innovation and local economies.
Brexit will also hinder UK cities’ access to the open market – for goods, services, and labour.
Currently, 44 per cent of all UK exports are sent to the EU. While a potential depreciation in the value of Sterling could offset some of the pain of new trade barriers, UK cities are still anxiously awaiting the outcome of post-Brexit trade agreements. Foreign direct investment (as well as domestic investment) to cities will likely also drop amid the uncertainty. And between general uncertainty and a possible loss of the EU’s “passporting” system – in which banks in one member state can serve the whole EU – it is probable that some financial institutions will decrease their activity in London and other UK cities.
Job losses are likely in trade intensive and service sectors that are integrated with the EU, and are especially threatening in the financial services sector. Regional economies will also be hurt as they lose access to talented foreign nationals from other EU states. For example, around 15 percent of university employees in the UK are citizens of other countries and around 125,000 EU citizens study in British universities every year, contributing significantly to local economies. When the available labour pool for cities shrinks from a continent to a small island, global competitiveness will suffer.
The Metro Dynamics report sends a stark message to UK cities.
First, it’s time to amplify the push for devolution. British cities were undergoing radical structural reforms before Brexit hit. Since the referendum threw the country’s politics into chaos (and hastened the exits of David Cameron and George Osborne), devolution’s future hangs uncertain.
But continued devolution is essential. It would help cities fight for funds as the UK reallocates spending post-Brexit. And it could give cities more control over local resources and decision-making. Now more than ever, UK cities need to be equipped to adapt to disruptive change – just as US cities are adapting to the drift of their federal government and German cities are adapting to an influx of refugees.
Beyond devolution, British cities must explore other avenues for driving economic growth and investment. They should, among other things, leverage their balance sheets, use municipal bonds to finance projects (a tactic that has been underutilized so far despite the recent establishment of the Local Capital Finance Company), and look to social impact bonds to invest in opportunity initiatives like funding pre-school or prison reform.
In the end, UK cities must fight both for their own self-determination and to stay connected to the broader world, even when their national government adds more barriers.
Bruce J. Katz is the inaugural cross-disciplinary Centennial Scholar at the Brookings Institution.
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