The European shoe industry has been thrown into a period of increased confusion and uncertainty about future strategies by the overwhelming defeat by the British Parliament last week on the agreement that Prime Minister Theresa May had painfully negotiated with the European Commission on the terms of the U.K.'s divorce from the European Union.
Everybody in the sector is afraid that the situation will remain stalled to the point where it will spiral out of control and the U.K. will have to leave the EU on March 29 without a negotiated solution – a scenario which is being referred to as a “Hard Brexit” or a “No Deal Brexit.”
It seems likely, however, that the U.K. will be granted a delay of up to three months in order to find a new compromise, if the British Parliament formulates its request before Feb. 26. The other scenario, which would be more favorable for our sector, would be a decision to hold a new referendum that could open the possibility that the U.K. will remain in the EU. If that happens, the currently depressed value of the pound sterling would probably go up rapidly.
Observers have noted that the sterling appreciated slightly after the British Parliament voted against a motion of no confidence against Prime Minister May, and that this indicates that the risk of a “Hard Brexit” has declined. The slight increase in the value of the pound has been a relief for British importers of footwear and raw materials. It's still 15 percent below the level that it had attained before the June 2016 Brexit referendum, and it could again collapse in case of a hard Brexit.
The uncertainty about the future value of sterling has made it more difficult for vendors and buyers to set prices for spring-summer reorders and the sale of the autumn/winter 2019/20 footwear collections. British producers have been burning cash by engaging in currency hedging more than ever before in quoting their sales prices to foreign clients, says John Saunders, who heads up the British Footwear Association (BFA), noting that this has become difficult or unsustainable for some smaller firms.
The BFA is working closely with the representatives of the clothing industry to clarify the situation for their members and to ask for a new negotiated solution that will make the U.K. “as closely aligned as possible” with the EU.
Most of their members were in favor of remaining in the EU, and they still are. One of the reasons is that some of them employ talented designers and skilled workers from other parts of Europe, who may have to leave the U.K. depending on the country's future regulations on immigration.
For the bigger Italian shoe industry, the biggest risk would be the U.K.'s exit from EU without a deal. Annarita Pilotti, president of the Italian shoe industry association, Assocalzaturifici, noted that it would lead to the immediate application of the World Trade Organization's tariff rules, which would imply import duties of between 4 and 11 percent for shoes imported into the U.K. from the EU.
Coupled with the likely further drop in the value of the pound, this would lead to higher prices for British consumers, at a time when they are looking for the best bargains (see the following article). The U.K. is the fifth-largest export market for Italian footwear in terms of volume as well as value.
A divorce from the U.K. would also imply additional border controls and lead some Continental European companies to set up their own warehouses in the country, said Manfred Junkert, who runs the German shoe and leathergoods industry federation, in an interview with the German magazine Schuhkurier. The U.K. is the sixth-largest shoe market for German producers and the seventh-largest for producers worldwide.
However, Mario Draghi, president of the European Central Bank, has stated that the uncertainty over the future status of the U.K. will likely lead to a protracted economic slowdown in the eurozone. This would affect all sectors, including ours.