Chapter 2: The economic implications
The impact on Gibraltar
12.Professor Fletcher described Gibraltar’s transformation over recent decades from economic dependence on the UK (in particular on the Royal Navy dockyard and visiting British military families) into “a much higher gross-value-added economy”, based on services, which was now “incredibly resilient”.11
13.The Government of Gibraltar noted that this transformation was driven by Gibraltar’s geography, which left no room for manufacturing or heavy industry, and had been underpinned by access to the EU Single Market in services. It described such access as “a fundamental tool” in Gibraltar’s economic development.12
14.Professor Fletcher also highlighted Gibraltar’s ability to draw on the pool of workers who cross daily into Gibraltar from the surrounding area of Spain: “The frontier workers are exceptionally important for Gibraltar.”13 Government of Gibraltar statistics show that 10,473 jobs in Gibraltar are held by frontier workers, making up 40% of the entire workforce.14
Financial services and online gaming
15.The Gibraltar Government highlighted financial services and online gaming as significant sectors within Gibraltar’s economy (together accounting for 40% of GDP and a quarter of total jobs).15
16.The Chief Minister noted that Gibraltar’s ability to ‘passport’16 its financial services to the rest of the EU through the UK and directly as part of the Single Market could be affected by Brexit.17 Restrictions on the ability to move freely across the border would also have a significant impact, as nearly a third of jobs in the finance sector are held by frontier workers.18
17.The online gaming sector is also highly dependent on frontier workers (who make up 60% of jobs in this sector).19 On the other hand, Professor Fletcher observed that the industry was largely focused on UK customers, so access to the Single Market was comparatively less important. Even so, he warned that Brexit could make it harder for Gibraltar to compete for European business against gaming agencies located within the EU.20
18.Susie Alegre, of Doughty Street Chambers, suggested that leaving the EU might also leave Gibraltar vulnerable to EU economic sanctions, which target jurisdictions that have low or zero corporate tax regimes.21
Tourism
19.The tourism industry contributed £199.93 million to Gibraltar’s economy in 2015, and 93% of tourists arrived through the frontier, which the Government of Gibraltar described as the “vital artery of Gibraltar’s tourism sector”. Any restriction on people’s ability to visit Gibraltar via the border would therefore have a significant impact on the sector.22
Aviation
20.Mr Picardo raised the concern that Brexit could affect Gibraltar’s ability to access European airspace, recalling that it was only in 2006 that the Spanish Government had agreed to the inclusion of Gibraltar Airport in EU aviation measures.23 Professor Fletcher argued, though, that aviation restrictions would have more of a symbolic than an economic impact, as the vast majority of Gibraltar’s trade, labour and tourists arrived over the land border. On the other hand, Dr Grocott told us:
“Although 95% of tourism into Gibraltar is day visitors coming in from La Línea, the other 5% are people who are staying for longer than one night. They are the people who are filling the hotels, and there is an expanding number of rooms in Gibraltar. So in terms of the tourist industry, yes, day tourism is important, but air access is important as well, for the hotels and for the people whose jobs they support.”
He also noted that, for financial services professionals, “the speed with which you can move between” London and Gibraltar was important.24
Port services
21.Gibraltar is one of the Mediterranean’s leading ‘bunker’ ports, underpinned by its status within the EU but outside the EU’s VAT jurisdiction, which allows it to offer low-cost, VAT-free fuel.25
22.Commodore Bob Sanguinetti, CEO and Captain of the Gibraltar Port Authority, explained that ‘bunkering’ and other port activity could be “severely affected” by any additional border restrictions resulting from Brexit. He noted that 30% of Gibraltar’s bunker fuel was currently stored in Algeciras in Spain, and that uncertainty over the movement of parts, provisions, and labour could affect Gibraltar’s attractiveness to visiting ships and place its valuable refuelling business at risk. Cdre Sanguinetti also highlighted that the port would need to be entirely reconfigured if increased border restrictions obliged Gibraltar to import more goods by sea.26
Higher education
23.Professor Daniella Tilbury, Vice-Chancellor and CEO of the University of Gibraltar, was concerned about the impact of Brexit on her fledgling institution, which opened in 2015. Professor Tilbury noted that the University had a research-intensive business model based on assumed access to EU research funding and exchange programmes such as Horizon 2020 and Erasmus+. She emphasised the importance of the University’s inclusion in any agreement with the EU for the UK’s continued participation in these programmes.
24.Professor Tilbury noted that the movement of staff and students over the land border with Spain was critical to the success of the University. If the University could not recruit adequate numbers of students, there would be a significant impact on its financial viability.27
EU funding
25.The Government of Gibraltar estimates that, by 2020, Gibraltar will have received almost €60 million since its first allocation of EU funds in 1990. The Chief Minister acknowledged that this level of EU funding “might not sound like much … but for Gibraltar it has meant kick-starting a lot of businesses and giving them opportunities they might not otherwise have had”.28 Professor Fletcher considered it to be a “major investment”,29 based on Gibraltar’s population size, and the Government of Gibraltar emphasised that it did not want access to EU funding to be put at risk as a result of Brexit.30
26.In addition to supporting higher education and research, the Government of Gibraltar described how EU funding to the territory had primarily been channelled through the European Regional Development Fund and the interregional cooperation programmes SUDOE and MED. Gibraltar also received funding through the Konver programme, which supported it in converting assets from military to civilian use.31
27.Robin Walker pointed to HM Treasury’s commitment to guarantee programmes under the EU’s 2014–2020 funding period:
“Gibraltar is covered by the EU funding guarantees made by the Treasury in August 2016 and by the additional guarantees made in October 2016. In August, the Chancellor announced that all European structural investment fund projects signed or with funding agreements in place before the Autumn Statement would be fully funded, even where those projects continue beyond the UK’s departure from the EU. In October, he announced that, for projects signed after the Autumn Statement that continue after we have left the EU, funding will be honoured by the Treasury if the projects provide strong value for money and are in line with strategic priorities. Those guarantees cover funding awarded to participants from Gibraltar as part of the European territorial co-operation programmes. That includes the funding awarded to the University to participate in the climate project funded under the south-west Europe ETC programme.”32
28.Mr Walker also said that the UK Government would aim to ensure that the UK and Gibraltar “can continue to benefit from the research collaboration that takes place across Europe … and we would hope to establish opportunities to continue that kind of funding well into the future”.33
Economic links to the UK
29.Several witnesses emphasised the relative importance of Gibraltar’s economic links to the UK, particularly the City of London, over those with the rest of the EU. The Chief Minister told us that, in terms of financial services and online gaming, most of Gibraltar’s business was with the UK, and said that his priority would be to deepen and strengthen this relationship following Brexit, especially if Gibraltar should find itself excluded from the Single Market in services.34
30.While noting that trade in financial services is already facilitated by the UK’s Financial Services and Markets Act 2000 (Gibraltar), the Government of Gibraltar emphasised that it would seek to develop a broader, “bespoke” arrangement to improve access to the UK market in services before withdrawal from the EU.35
31.Mr Walker confirmed that the UK Government has agreed to work with the Government of Gibraltar to explore where the two governments can “broaden economic cooperation and increase market access”.36
32.Looking beyond Brexit, both the Government of Gibraltar and Robert Vasquez, Chairman of the opposition Gibraltar Social Democrats Party, emphasised Gibraltar’s interest in participating in future UK international trade agreements, which they believed could help to compensate for any loss suffered by Gibraltar as a result of leaving the EU.37
Implications for Spain and the Campo de Gibraltar
33.A number of witnesses commented on the importance of Gibraltar to the economy of Andalusia, particularly the border area known as the Campo de Gibraltar. The Chief Minister described Gibraltar as an “an engine of the regional economy of Andalusia”, noting that Spanish nationals made up 55% of frontier workers and that Gibraltar accounted for 25% of employment in the entire Campo region. This made it the second biggest employer after the Junta de Andalucía (the state government).38
34.Dr Grocott told us that the Campo, which already has some of the highest unemployment rates in Spain, would suffer a “significant loss” if Gibraltar were cut off from the region after Brexit.39 Professor Fletcher agreed, noting that, in addition to jobs, Gibraltar contributed €800 million to the GDP of the region through trade and visitor spending.40
35.According to an economic impact study conducted by Professor Fletcher in 2015, Gibraltar imported almost £381 million in goods and services from Spain in 2013. Residents of Gibraltar also spent £73 million on shopping, food and other goods and services in Andalusia during 2013, of which £46 million was within the Campo de Gibraltar. Overall, the study concluded: “The Gibraltar economy has a significant and positive economic impact on the Campo de Gibraltar region”.41
Looking to the future
36.The Chief Minister struck an optimistic note, saying that “the rest of the world beckons”42 if Gibraltar’s access to the Single Market is restricted after Brexit. In written evidence, however, the Government of Gibraltar acknowledged that Brexit presented “few opportunities worthy of mention”, and that losing access to the Single Market in services would be a “severe blow” to Gibraltar’s economy.43
37.In terms of Gibraltar’s potential to diversify and seek new markets, Dr Grocott noted recent efforts to build links with Hong Kong and the US, but believed that simple geography would lead to a continued economic focus on Europe and the UK.44 Professor Fletcher observed that, for a micro-economy, Gibraltar was already well diversified, and suggested that further diversification might affect Gibraltar’s competitiveness and ability to achieve economies of scale.45
38.Mr Walker argued that the UK Government’s priority would be to secure the best possible access to the EU Single Market in services after Brexit, which would benefit both the UK and Gibraltar. He also indicated that the UK was prepared to walk away from trade talks if it did not like the terms offered by the EU, and acknowledged that an agreement would not necessarily be reached at the end of the negotiations.46
39.Mr Walker did not speculate on what a so-called ‘cliff edge’ scenario—a break-down of talks on withdrawal—might mean for Gibraltar. But Dr Grocott suggested it could result in Gibraltar’s frontier being severely disrupted or even closed. He argued this would be “potentially disastrous … financially and in terms of labour”, and might require the UK Government to step in to support Gibraltar’s economy, as it did when the border was shut during the Franco era.47
Conclusions
40.The EU Single Market has played an important role in helping Gibraltar to develop its vibrant, service-based economy over recent decades. We note the view of our witnesses that the economy is highly resilient. Nevertheless, a loss of Gibraltar’s access to the Single Market in services would unavoidably have negative consequences for Gibraltar’s economy, at least in the short term.
41.A common theme in the evidence we heard on the economic impact of Brexit for Gibraltar has been its reliance upon the free movement of frontier workers, who make up some 40% of the total Gibraltar workforce. If Brexit leads to restrictions being imposed on the daily movement of labour across the land border, this will seriously damage several key sectors of its economy, including the port, tourism, financial services and aviation.
42.The economy of the Campo de Gibraltar region of Spain benefits substantially from the employment opportunities offered by Gibraltar and would also be significantly affected by any restriction of the movement of goods and people over the frontier.
43.EU funding has played an important role in Gibraltar’s economic development and in supporting regional cooperation. We welcome Mr Walker’s confirmation that EU-funded projects in Gibraltar will be covered by HM Treasury guarantees, but note that, as in the UK, funding is uncertain beyond 2020. It is also possible that projects in Gibraltar may not be deemed to fulfil the criteria of fitting with UK Government strategic priorities. We call on the UK Government to clarify what future UK-based funding will be available to Gibraltar if it cannot access EU programmes after Brexit.
44.Gibraltar’s most significant economic relationship is with the UK itself, and it will be important for Gibraltar to maintain and enhance its access to UK markets to compensate for any loss in access to the Single Market. The UK also has a responsibility to support Gibraltar in benefiting from any opportunities that arise following Brexit, including by participating in any new international trade deals.
16 Passporting is the term normally used to describe the ability of financial services firms authorised in the one Member State to provide services into and within other EU Member States without the need for further authorisations.
23 Q 4; Tim Hepher and Julia Fioretti, ‘Aviation industry seeks EU intervention in Britain-Spain row over Gibraltar airport’ Reuters (30 April 2016): http://uk.reuters.com/article/uk-europe-aviation-gibraltar-idUKKCN0XQ27M [accessed 20 February 2017]
25 Felicity Landon, ‘Defending the Rock’, Seatrade Maritime Review, Quarterly Issue 4, (December 2016): http://www.gibraltarport.com/sites/default/files/news/merged_document.pdf [accessed 20 February 2017] ‘Bunkering’ is the supply of fuel for ships in a seaport.
37 Supplementary written evidence from the Government of Gibraltar (GLT0001) and written evidence from Robert M. Vasquez (GLT0005)
41 John Fletcher, Yeganeh Morakabati and Ken Male, An Economic impact study and analysis of the economies of Gibraltar and the Campo de Gibraltar: Update 2015 (May 2015): http://www.infogibraltar.com/info_gibraltar/sites/default/files/Economic%20Impact%20Study%20FINAL [accessed 20 February 2017]