Brexit Economical Impact

Abstract

On June 23, 2016, the United Kingdom (UK) voted 53 to 48 percent to leave the European Union (EU) in a national referendum. The vote was divisive throughout the UK, and a majority of residents of Scotland and Northern Ireland were in favor of remaining in the EU. On June 24, Prime Minister David Cameron, a Conservative opposed to Brexit, resigned; he was replaced by Theresa May. At that time, London was considered the financial center of Europe and served as the entry point for third-party countries doing business with the European single market. The British exit, or Brexit, created an environment of international uncertainty, and analysts continued to examine its economic impacts as the long process of realizing the split unfolded.

Overview

In the months before the Brexit vote, Britons divided into two camps: "Leavers" (or "Brexiteers"), who believed that the future of the United Kingdom was in reclaiming British sovereignty, and "Remainers" who feared economic disadvantage or even collapse if Britain left the EU. Predictions of the economic impact of the decision ranged from an 11.5 percent lower Gross Domestic Product (GDP) upon leaving to a 20 percent or greater increase in GDP by remaining (Busch & Matthes, 2016). In the aftermath of the 2016 vote to leave the EU, most experts argued that in the long run, Britain’s GDP will be reduced by leaving the EU, but they did not agree on how much the GDP will be reduced or how long it might take Britain to recover its financial equanimity.

What It Means for Europe. While Germany and France were expected to continue as leaders of the EU, experts suggested that third-party nations might begin looking to Ireland, Luxembourg, and the Netherlands as new channels for conducting financial and business dealings with a post-Brexit EU. Some 2016 surveys showed that as many as three-fourths of foreign business located in the United Kingdom expected to relocate during the removal process, and it seemed almost certain that many firms would relocate to Ireland, which would provide them with continued access to EU financial entities.

Britain exerted a strong political influence on the EU, and it was the EU’s third largest contributor, donating 12.57 percent of the EU budget in 2015 as compared with 21.36 percent for Germany and 15.72 percent for France. Budget expenses included support for poorer EU member-nations, agricultural funding, research support and economic growth training, development aid and support for the EU’s global role, rural and fishing sector development, security and border control, and administration (Hunt, 2016). The United Kingdom’s withdrawal meant a substantial reduction in contributions, forcing the EU to review its commitments.

Anti-EU Dissatisfaction. Swati Dhingra (2016) of the London School of Economics contends that since the mid-1970s, the United Kingdom had been dealing with major economic problems, which led to increased economic inequality, threatened infrastructures, and overburdened health and education systems. Within two years of joining the European Economic Community (EEC), the EU’s predecessor, in 1973, Britain held its first referendum on leaving amid claims that the separation would result in lowered prices, increased wages, and improved job opportunities. By a vote of 67 percent, Britons chose to remain.

By the early twenty-first century, however, anti-EU feeling was widespread as average weekly earnings continued to decline. In 2000, 30 percent of men who had left school before the age of 16 were unemployed. Two months before the Brexit vote, that number had climbed to 43 percent. Half of all British children who lived below the poverty line resided in homes with working parents (Dhingra, 2016). In 2010, a coalition of Conservatives and Liberal Democrats formed a government since neither party had won a clear majority in the House of Commons. Under Prime Minister David Cameron, a Conservative, the coalition launched an austerity program that slashed benefits to children, the disabled, and the unemployed and cut housing subsidies.

In 2015, the United Kingdom had the third largest economy in Europe (after Germany and France) and the fifth largest economy in the world. Britain had a per capita income of $41,200, an unemployment rate of 5.4 percent, and a poverty rate of 15 percent. The UK economy was heavily dependent on the banking and insurance industries and on business services. In mid-2015, the deficit was reported to be 5.1 percent of the GDP. After the 2015 election, the Cameron administration announced that it intended to reduce the deficit by 2020 by cutting welfare benefits. Corporate taxes were cut at the same time from 20 to 18 percent.

Economic stresses caused by austerity were accompanied by increased immigration. By 2015, 13 percent of the total UK population was made up of immigrants, and many Britons insisted that the time had come to reclaim Great Britain for Britons. Others viewed such sentiment as thinly veiled racism and xenophobia, and contended that immigrants were not responsible for the economic struggles of some demographics. Economic differences between London and southern England and the industrial north were another particularly distinct factor in prevailing attitudes toward EU membership (Dhingra, 2016). Those in and around thriving, cosmopolitan London tended to favor remaining in the EU, while those in the more economically disadvantaged north tended to favor leaving.

The coalition government called for a referendum before the United Kingdom would agree to cede additional power to the EU, and Prime Minister Cameron advocated a referendum on whether Britain should remain in the EU or withdraw its membership. Leaders of the Leave movement included Boris Johnson, the Secretary of State for Foreign and Commonwealth Affairs. Johnson was considered the top choice to replace Cameron who was certain to step down if Leavers carried the vote. Anti-immigrant and anti-EU rhetoric was rancorous, and tensions heightened in the days leading up to the Brexit vote on June 23. On June 16, 2016, Labour Member of Parliament and vocal Remainer Jo Cox was assassinated at a library in West Yorkshire by a man who expressed nationalist views as his motive for the killing.

Further Insights

Observers predicted that Remainers would win the Brexit vote, but that did not happen. The failure was due in part to the fact that many Britons had become adamantly opposed to increasing immigration rates, especially as the so-called migrant crisis caused by violence in Syria and other troubled areas accelerated. EU member-states were expected to take in a designated number of refugees, often over the objections of citizens. Britons were also frustrated over paying out large sums in EU dues each year. Some observers suggested that the rise of far-right parties in Europe was another major influence on the Brexit vote (Grunstein, J., 2016).

The British have always been concerned about losing sovereignty to the EU, and the United Kingdom has never been politically vested in the organization to the same extent as Germany and France. Many in the UK have been fond of quoting the words of Prime Minister Winston Churchill who proclaimed that Britain was "in Europe but not of it." Britain delayed joining the EEC when it was established in 1958. It was not until 1973 that Britain joined the organization. The United Kingdom was a founding member of the EU when it was formalized by the Maastricht treaty in 1993, but Britons chose to keep the pound monetary system rather than adopt the EU’s common currency when the other EU members converted to the Euro in 2002.

Some experts have raised concerns about a post-Brexit Britain becoming isolated from other Western nations despite being an active member of the United Nations Security Council and the North Atlantic Treaty Organization (Begg, 2016). Further, while Leavers carried the vote in England and Wales, Remainers were in the majority in both Scotland and Northern Ireland, leading some observers to wonder if Scotland and Northern Ireland would eventually opt to leave the United Kingdom in order to seek individual membership in the EU. Scotland had voted 53.3 percent to 44.7 percent in 2014 to remain in the United Kingdom.

Berthold Busch and Jürgen Matthes (2016) identify the chief advantages of Brexit as being able to avoid EU protectionism, not having to comply with EU regulations, and not having to pay out large sums in EU contributions. The major disadvantages of Brexit involve losing access to the single market, which means that Britain may be forced to pay tariffs on goods from other European countries and may lose the free movement of goods throughout the EU area.

Britain may also be forced to negotiate new Free Trade Agreements and will almost certainly lose all rights to participate in decisions made by the EU. Between 50 and 90 percent of all British exports involve other EU members, and Britain may be required to pay import taxes to continue trade with those countries once Brexit is finalized. Iain Begg (2016) argues that British business will be forced to deal with new restrictions on trade and investment, a delay in new projects, and a major reevaluation of UK assets by financial markets.

Issues

EU rules allow up to two years to formalize the process of separation, but experts predicted that it might take up to ten years for UK ties to be completely broken. The EU was expected to make it as difficult as possible for Britain to leave the Union so that other member-nations would be discouraged from trying to leave. During the separation period, the British government must determine what its future relationship with the organization will be. Jacob Miethe and David Pothier (2016) suggested that Britain might explore financial possibilities for offshore integration with Crown dependencies such as the Isle of Man and the Bailiwicks of Jersey and Guernsey. Most analysts agreed that the United Kingdom would have to make a decision about adopting one of three possible scenarios for a post-EU Britain: the Norway model, the Canada model, or the World Trade Organization (WTO) model.

Norway Model. The Norway model provides Norway, Iceland, and Lichtenstein with some of the benefits of EU membership without actually being members. For Britain, that would mean avoiding the payment of customs fees on most items. Access to the single market for Britain would be provided through membership in the European Free Trade Association, which is controlled chiefly by Norway. The special status of the Norway model, which has been described as "semi-detached," would prevent Britain from having a voice in EU decision-making. However, Britain would be required to abide by market-related EU laws and would continue to contribute to the EU budget. That contribution has been estimated at 94 percent of its 2015 donation of 10.4 billion pounds. While the Norway Model has been highly recommended by financial analysts, it was reputed to be highly unpopular within the EU.

Canada and WTO Models. The Canada model would continue to provide Britain with access to the EU marketplace, but UK banks would lose their passport rights to EU banks since trade would be negotiated through a series of free trade agreements. Between 1975 and 2013, Britain’s banking sector assets rose by 450 percent (Miethe & Pothier, 2015). Leaving the EU has created a dilemma for British banks because without EU financial passports, they would no longer have open access to other EU banks and to non-EU banks that have branches in EU countries. Canada’s agreement with the EU provides both Canada and EU members greater access to trade contracts and to tariff removal or reduction. However, observers are unsure that the agreement between Canada and the EU will continue post-Brexit. If it does not, Britain’s options would be limited.

With the WTO model, Britain would have the same status with EU countries as do other third-party countries and would be forced to negotiate separate trade agreements with each EU member-nation. Members of the WTO retain all decision-making rights for themselves.

Implications of Separation. By October 2016, four months after the Brexit vote, the British pound had fallen to its lowest level since 1985. Prime Minister May delayed the start date of negotiations from January 2017 to March 2017 as her administration struggled to find a solution acceptable to most Britons while it sought to salvage Britain’s economy. Though negative economic repercussions were immediate, the eventual consequences of separation include loss of EU support in areas such as security.

British Conservatives pushed for a solution that would free Britain from forced compliance with EU regulations and close British borders to free movement of citizens from EU countries. Between 1995 and 2014, the number of migrants rose in Britain by 17 percent. Even though analysts contend that the influx of migrants has not affected British jobs, public opinion argued otherwise. The anti-immigrant sentiment that was seen as the main driver behind Brexit raised concerns about the potential for xenophobic incidents involving European Economic Area (EEA) nationals. EEA nationals expressed concerned about whether they would be allowed to keep their jobs once Brexit terms were finalized.

Employment laws such as those on discrimination, family-friendly policies, work hours, and holiday rights are among British laws that were changed as a result of EU membership (Jay, Davies & Reid, 2016). Further, the future of British citizens working in EU member-states is also uncertain as Britons may no longer be entitled to freedom of movement once EU membership is dissolved. Furthermore, Britain will lose EU support in areas such as security.

Outside Britain, political and economic leaders took positions that were generally unfriendly to the UK separation. Donald Tusk, the president of the European Council, and Jean-Claude Juncker, the president of the European Commission, advocated penalizing Britain for leaving the union because of the threat that Brexit might serve as a precedent for other dissatisfied EU members (Gatehouse, Gillis & Hayden, 2016). It was considered to be in the interests of Ireland, the Netherlands, and Austria to make the exit process difficult, but not so harsh as to sever relations with Britain.

On March 29, 2017, Prime Minister May officially invoked Article 50 of the Lisbon Treaty, beginning the Brexit process and the two-year negotiation window. May's government established the March 29, 2019, final separation date in British law. While some organizations and individuals held out hope that the entire process could be stopped, most British politicians shifted their focus to determining terms of the separation. By late 2018, the UK and the EU had reached provisional agreement on some major issues: the money owed to the EU by the UK, the status of the border of Northern Ireland, and the implications for UK citizens living in the EU and vice versa. Still on the negotiation table were details of the Northern Ireland border issue and the complexities of future relations between the UK and EU. Both parties agreed to a transition period (March 29, 2019, to December 31, 2020) in which the terms of a final deal on UK-EU relations could be eased into effect.

In July 2018 May's government laid out its proposal for future relations, known as the Chequers Plan, but parts of it were quickly opposed by the EU. The plan also received much criticism within the UK, both from anti-Brexit groups and a number of prominent pro-Brexit Conservative leaders. Negotiations remained ongoing, and analysts continued to examine and debate the economic implications of various issues involved. Eventually EU leadership signaled willingness to work with May's administration to pass some kind of agreement in order avoid a total "no deal" separation, which many (aside from extreme conservatives) saw as the most potentially economically damaging.

Terms & Concepts

Conservative Party: Also known as Tories, the Conservative Party of Great Britain is similar to Conservatives in many other nations, including the United States. The focus of conservative governments is on promoting the interests of business, maintaining a strong military, and preserving traditional social and cultural elements. One of the best known of contemporary British Conservatives was Margaret Thatcher, who shared many of President Ronald Reagan’s political beliefs. There was a major split in the Conservative Party over Brexit.

European Union: An economic and political union of twenty-eight European countries originally established in 1958 as the EEC. Citizens of member countries move freely throughout the Union, and many members have adopted the common Euro monetary unit. Members must meet EU standards to qualify for membership, and the EU has been instrumental in improving the quality of life for former nations of the Communist Bloc.

Globalization: The economic connections that link markets of the world together and increase the interdependence of all nations. Globalization forced individuals to recognize that events in a single country may have a major impact on other nations of world. Within some countries, anti-globalization movements have surfaced among those who argue that it has meant a loss of national sovereignty and identity and has damaged local economies.

Labour Party: Viewed as the chief rival to Britain’s Conservative Party, the Labour Party, which is known for its strong union ties, advocates a strong national government role in the economy and supports social spending. It is representative of liberal and socialist democratic parties around the world. One of its best known leaders was Prime Minister Tony Blair, a close friend and ally of President Bill Clinton.

Leavers: The 53 percent of Britons who successfully voted to leave the EU. The group was predominately made up individuals over the age of 50 and those with lower levels of education. Three-fourths of Parliament also identified themselves as Leavers.

Liberal Democratic Party: British political party that resulted from the merger of the Liberal and Social Democratic parties in 1988. It is considered a compromise between the politics of the Labour Party on the left and the Conservative Party on the right. The Liberal Democratic Party is somewhat similar to the Libertarian Party in the United States.

Remainers: The 48 percent of Britons who voted against leaving the European Union. Remainers were more likely to be Londoners, Scots, Northern Irelanders, individuals under the age of 30, and highly educated.

Single Market: The European single market was established to treat all European Union members as a single entity, allowing free movement of goods, services, and people throughout the area. The single market was designed to promote economic growth, but it has not been received well by the public in many EU countries.

Bibliography

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Jay, S., Davies, P., & Reid, M. (2016). Brexit: Implications for employers. Employee Relations Law Journal, 42(3), 69–82. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118803922&site=ehost-live

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Suggested Reading

Fichtner, F., Brenke, K., Clemens, M., Junker, S., Michelsen, C., Podstawski, M., & … van Deuverden, K. (2016). German economy: Upward trend continues despite Brexit vote’s dampening effect. DIW Economic Bulletin, 6(36), 435–438. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118528553&site=ehost-live

Hobolt, S. B. (2016). The Brexit vote: A divided nation, a divided continent. Journal of European Public Policy, 23(9), 1259–1277. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118370186&site=ehost-live

Oliver, T. (2016). European and international views of Brexit. Journal of European Public Policy, 23(9), 1321–1328. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118370185&site=ehost-live

Paraskevopoulos, C. C., Grinspun, R., & Geōrgakopoulos, T. A. (1996). Economic integration and public policy in the European Union. Brookfield, VT: E. Elgar.

Sinn, H. (2016). A Brexit lesson: Is a single currency not worth the gamble? International Economy, 30(3), 42–70. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118557441&site=ehost-live

Whyman, P., & Petrescu, A. I. (2017). The economics of Brexit : a cost-benefit analysis of the UK's economic relationship with the EU. Cham, Switzerland: Palgrave Macmillan.