Britain to Face ‘Inevitable’ Tariffs After Brexit, Hungary Says

Updated on
  • Brexit may feed eastern unrest in two-speed EU, minister says
  • Euro area may be dividing line between core Europe, the rest

Mihaly Varga.

Photographer: Akos Stiller/Bloomberg

The U.K. will face “inevitable” tariffs from the European Union after Brexit, and its departure may speed the creation of a two-speed trading bloc, Hungarian Economy Minister Mihaly Varga said.

The single currency area may prove a dividing line between core European states and the rest, threatening the development of eastern members outside the euro area and potentially igniting social unrest, Varga said in an interview in Budapest Monday. The British Chambers of Commerce recommended in a report on Tuesday that the U.K. push for low tariffs and ensure there’s no sudden disruption to trade.

“It looks like the imposition of trade tariffs is inevitable,” Varga said in Budapest on Monday. “The EU-27’s common interest is to maintain preferential treatment within the bloc and not extend that to a country that is about to leave the community. There’s simply no reason to do that.’’

Prime Minister Theresa May, who’s pledged to officially start extracting the U.K. from the 28-member trading bloc in March, has said Britain will also quit the EU single market to recapture law-making powers, including establishing its own immigration policy. The EU looks set to take a tough negotiating position to ensure other countries aren’t tempted to follow. This week, Austrian Chancellor Christian Kern said Britain should be charged about 60 billion euros ($63 billion) when it leaves.

Economic Damage

Since the European debt crisis, Hungarian Prime Minister Viktor Orban has cited the discrepancy in wealth with western, mostly euro-area nations for Hungary’s delaying adoption of the currency indefinitely. The Baltic states of Estonia, Latvia and Lithuania, as well as Slovakia and Slovenia -- all ex-communist eastern European nations that joined the EU along with Hungary last decade -- have since joined the euro. Poland and the Czech Republic are among those who have stayed out, keeping their independent monetary policy. Varga said Hungary’s not interested in joining for now.

“There’s a real threat that with Britain leaving the EU,” Varga said. “The threat is that the gap between developed and less-developed EU member states won’t narrow significantly” in a two-speed, post-Brexit Europe and this may carry with it “the potential to generate social unrest.”

Hungary will be losing a key ally in the EU, Varga said. It saw eye-to-eye with Britain on the strict interpretation of the EU’s deficit rules. The U.K., a net contributor to the common budget, was also a strong proponent of eastern Europe catching up in terms of living standards with the richer West, he said. Hungary’s output per capita, in purchasing power terms, are about 68 percent of the EU average, according to the latest available data from Eurostat, up from 61 percent when it joined in 2004.

Hungary’s economy will be bruised by Brexit, reducing Hungary’s economic growth by as much as 0.4 percent percentage point over three years, Varga said. Among other factors, he cited direct trade links in which the eastern EU nation has a surplus of 2 percent of economic output as well as via the impact on Hungary’s EU trading partners, the destination of almost 78 percent of exports.

“It’s a new ballgame,” Varga said. “And in this new ballgame it’s our economic convergence that’s being challenged.”

— With assistance by John Ainger

    Before it's here, it's on the Bloomberg Terminal.