Exiting Europe: Brexit and the UK’s Future

“World War III.” “A crippled economy.” “Chaos.” Ominous predictions circled through the UK in the days, weeks, and months preceding June 23, 2016. On that fateful Thursday, citizens of the UK voted in the referendum on the United Kingdom’s membership in the European Union. Coined “Brexit,” shorthand for “British exit,” this referendum drew more than 30 million ballots. The ballot asked, “Should the United Kingdom remain a member of the European Union or leave the European Union?” In a 52% to a 48% result, the UK decided to leave the EU.[1]

The EU represents a political and economic partnership between 28 member countries. Its purposes include fostering economic cooperation and growing a “single market” that allows goods and people to move freely throughout most of the continent. Around 2013, anti-EU rhetoric started gaining more support as the UK Independence Party (UKIP) started growing.[2] Ex-Prime Minister David Cameron promised to renegotiate membership in the EU if his Conservative Party won a majority in the general election, and since then, the debate over Brexit has been called “one of the most divisive and bitter political campaigns ever waged.”[3]

Among the high-profile supporters of Remain were Harry Potter author J.K. Rowling and many top government officials such as David Cameron. The Remain campaign claimed that the UK’s current “special status” in the reformed EU–including the continued use of the pound, British-specific border controls, and limits on EU migrants’ access to the UK welfare system–gave the UK “the best of both worlds.”[4] In return, the UK would have access to the single market while playing a “leading role” in determining the rules that govern it, eventually creating “opportunities, jobs, and greater economic security for the people of the UK.”[5] On the other hand, the “Leave” campaign had the support of many MPs such as Conservative former Mayor of London Boris Johnson and businessmen such as Reebok founder Joe Foster. A poll of 12,369 voters after the referendum found that the biggest motivation for Leave voters was “the principle that decisions about the UK should be taken in the UK,” followed closely by their belief that Brexit “offered the best chance for the UK to regain control over immigration and its own borders.”[6]

The vote was unsurprisingly divided along geographic lines, with England and Wales voting to Leave by margins of 6% and 4%, respectively, and Scotland and Northern Ireland voting to Remain by margins of 24% and 12%.

Shortly after the referendum, leadership in the UK dramatically shifted. Remain leader David Cameron was replaced by Theresa May as prime minister, and the Brexit and UKIP leader Nigel Farage similarly stepped down in early July. Though May supported the Remain campaign, she has affirmed that she will respect the will of the people, stating that “Brexit means Brexit.” She also said she “want[ed] to be clear … that we are not walking away from our European friends.”[7] England now faces the looming responsibility of enforcing the referendum. Amidst the confusion in these troubling times, it is time to examine Brexit’s implications on the world and if the grim predictions before the vote will come to fruition. 

Economy: the pound drops, but not all is lost

Many of the negative consequences predicted were economic ones. For example, the EU used to purchase nearly half of Britain’s exports, and leaving the single market would put the UK’s trade balance in danger. The day after the vote, the pound tumbled to 30-year lows, which The Economist cited as simply “a taste of what is to come.”[8] Among other possibilities, if confidence in the country continues to be dampened, investors would be more likely to place their assets elsewhere, which could possibly dip the UK into a recession. The Economist affirmed this: “A permanently less vibrant economy means fewer jobs, lower tax receipts and, eventually, extra austerity. The result will also shake a fragile world economy.”[9]

Yet, all is not lost. Contrary to its previous stance, the International Monetary Fund declared in July 2016 that “Brexit likely would not put an additional major dent into the already slowing global growth picture.”[10] In fact, Industry tracker Preqin reports that 16 percent of new hedge funds opened in the second quarter were focused on the region, with the norm being just 1 percent.[11] This would deliver value to key business sectors by increasing investments in UK companies, but in the long run, these hedge funds may end up shorting the UK economy since their goal is to maximize return on investment, which carries more risk than the overall market. In addition, the FTSE 100, a gauge of prosperity for businesses regulated by UK law, has been closing at all-time highs due to the decline of the sterling.[12] It is still too soon to tell whether this gain will provide the necessary opportunities to create lively markets.

It is interesting to note the relatively small direct effect of Brexit on consumers. Incomes are rising since Brexit and employment is at “an all-time high of 74.4[%],” both of which support consumption.[13] Though the weaker sterling will increase the prices of imported goods, a month after the referendum a majority of the British still supported the referendum. Those who did not still remained in a “decent financial state,” so they were not too adversely affected, at least immediately.[14] BBC reports that the UK’s services sector grew 0.4% in July, indicating that consumers continued spending as usual after the vote.[15] By September, consumer spending returned to pre-referendum levels after a small dip.

However, these growth statistics do not imply that the UK economy is doing significantly better after Brexit on the whole. A recent one percent jump in inflation due to the depreciation of the sterling—the highest in almost two years—will, according to the Institute for Fiscal Studies, “cost poorer households an extra £100 each per year.” The cost of imports and raw materials has risen as well, which the UK government estimates will cost each household an average of £360 per year.[16]

Despite the recent jump, inflation is still relatively low in the UK, which can explain the steady rate of consumption post-referendum. Nonetheless, even small increases in the price level can have a serious impact on poorer people, so this inflationary effect is not insignificant.

Another important indicator of Brexit’s effect on the UK economy is the potential movement of large multinational corporations, particularly financial services companies, out of London to elsewhere in Europe. “For access to the EU, London will no longer be the natural choice,” says Nicolas Mackel, CEO of Luxembourg for Finance.[17] Many banks and fund managers have been looking to establish roots in Luxembourg after Britain decided to leave the EU, though entire teams moving out of London seems unlikely. London is and will remain a major global financial center, especially for companies that have a history with the city, but Mackel predicts that new European financial companies will be less likely to choose the UK as their company base, and investment banks such as Morgan Stanley are reconsidering whether it is in their best interests to invest further in the UK.[18]

There has also been a decline in confidence among small businesses. The Federation of Small Businesses conducted a survey of 1,035 firms that revealed small and medium-sized businesses were more “pessimistic about the future than positive for the first time in four years.”[19] This is the second largest fall in confidence in the history of this index and the third consecutive quarter that confidence has fallen.[20]

Furthermore, the referendum brought about higher borrowing costs, which Deloitte expects to hinder economic growth; however, the pound’s decline in value, combined with the resilience of UK institutions, may actually help propel activity in the future.[21] Andy Wilson, a U.S. head of Deloitte, expects at least a reasonable 10 to 20 percent real growth.[22] To further boost the UK economy, the Bank of England cut interest rates to a record low from 0.5% to 0.25% in August, with another possible cut in November.[23] This is significant because lowering interest rates stimulate growth by encouraging borrowing and spending.

Despite the economic troubles that occurred post-Brexit, it is encouraging to see that the possibility of a crushing recession is not as close on the horizon as experts thought it to be. To Remain and Leave supporters alike, this news is a relief.

Political stability: Brexit brings about uncertainty

Instability and uncertainty have percolated from Parliament to the people. Before the vote, then-Prime Minister Cameron agreed that he would immediately invoke Article 50 of the Lisbon treaty, which is the only legal method to set Brexit in motion. However, his swift left the actual invocation of Article 50 to the current Prime Minister, Theresa May. Article 50 has still not been invoked.

May has met with some EU leaders, but there have been no formal negotiations because EU leaders insist that Article 50 must be triggered before actual negotiations can begin. Because Article 50 provides the terms on which Britain leaves without a British vote, many Brexiteers have argued against invoking it because the terms would not be in the best interests of the United Kingdom, so they instead have proposed negotiating informally with the diplomats in Brussels.[24] Thus, Europe is currently in a stalemate: the EU will not negotiate until the UK enforces Article 50, while the UK will not invoke Article 50 until the EU negotiates with them. This power struggle has pushed the future of Brexit into even more uncertainty than before. Prime Minister Theresa May announced in early October that Article 50 will be triggered before the end of March 2017, so the UK should be out of the EU by the summer of 2019.[25] However, further ambiguities arose in early November that will prevent May from enforcing her plan. The UK’s High Court ruled that Parliament must give its approval before the process of Britain leaving the European Union can begin. This weakens May’s hold on the negotiating process, so lawmakers could pressure May into making more compromises on post-Brexit UK policies since they are now forced to work together. Though this court ruling will not stop Brexit, the process will now take significantly longer.

Another complication brought about by Brexit was the lack of unity within the United Kingdom in terms of vote distribution. Only two years ago, Scotland held a similar referendum on independence from the UK, which asked, “Should Scotland be an independent country?” By a small margin of 55% “No” and 45% “Yes,” with a total of over two million votes, the country decided to stay in the UK, and the United Kingdom remained united. The paradox of this decision is that one of the primary reasons Scotland leaned towards remaining in the UK was for the economic benefits, certainty, and stability that the UK—and consequently its involvement in the EU—offered to the country, all of which would not be attainable for Scotland as an independent country.[26] One independent source of revenue Scotland could potentially rely on is its oil and gas reserves; however, those revenues stagnate once those resources are depleted, and the volatility of oil prices makes any unhedged reliance on energy exports extremely risky. In addition to diversifying its economy as an independent nation, Scotland would also have had to increase taxes and “make more spending cuts […] to ensure long-run fiscal sustainability,” according to the Institute for Fiscal Studies.[27] Therefore, when the UK referendum was held, it came as no surprise that most Scots voted to remain. Now at odds with the rest of the Kingdom on the EU question, excepting Northern Ireland who also voted in favor of Remain, Scotland may reconsider another bid for independence.

Declaring independence could help escape the “instability and uncertainty” post-Brexit, suggests Nicola Sturgeon, First Minister of Scotland. “If Scotland is in the position against our democratic wishes of being taken out of not just the EU but the single market, knowing that that is going to seriously damage our economy, our place and reputation in the world I think I would have a duty to give Scotland the ability to decide whether it wanted that or whatever it wanted to provide a different path.” Sturgeon warned May that she would “trigger a second referendum if Scotland’s interests were threatened.”[28]

In mid-October, Scotland’s Constitution Secretary Derek Mackay unveiled a draft Referendum Bill.[29] Although this bill does not guarantee another referendum, Sturgeon wants the country to be ready to hold a vote before the UK formally leaves the EU if necessary. Thus, not only is the UK’s relationship to the rest of Europe at stake, but its very own unity could be at stake as well.

What Brexit means for the United States and the world 

Fears that the European Union will split apart has been—and should be—a key global concern post-Brexit. For instance, French right-wing leader Marine Le Pen called for a referendum vote in France, and concerns about referendums have been raised in Italy and the Netherlands as well.[30] If enough countries leave the EU, the entire union would collapse. France’s departure alone would probably be enough to bring about the dissolution of the EU. Because the European Union has such a big influence on trade, especially as a major trade partner with the United States and China, its unraveling could set the global economy into limbo as trade deals are negotiated and business relationships between countries are reevaluated.

The fall in the pound has had the most direct impact on British citizens and the rest of the world. Raw materials imported by UK manufacturers were 7.6% more expensive, which is a sharp rise compared to the 4.1% rise during the year up to July.[31] Britain has been running a trade deficit for a number of years, which means that it imports more than it exports. This is not necessarily unhealthy for the economy, because it means that there was also high foreign investment in UK assets. Thus, recent trends have been helping exporters. British tourism has decreased in foreign countries. On the other hand, the cheaper pound has boosted UK’s own tourism, according to the travel analytics firm ForwardKeys, which found that “flight bookings to the UK rose 7.1% after the vote.”[32]

A strong U.S. dollar relative to the pound makes U.S. companies’ products more expensive to foreign buyers, which hurts US sales, especially for tech giants like Apple, equipment makers like Deere and Caterpillar, and global brands like Coca-Cola and Nike.[33] Consumer confidence within the States has deteriorated, and this is important because this confidence determines how much American consumers are spending, which affects if and by how much the economy grows. “The keys to whether the U.S. economy is affected significantly will be whether equities tumble enough to have a major impact on business and consumer confidence,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics, a research firm.[34] Because Brexit has shaken up the global stock markets, this uncertainty could cause American business owners and consumers to reconsider consuming and instead opt to save. This could potentially offset the country’s economic progress post-recession.

However, it has been predicted that Brexit will not overall have a large impact on the US, since the Federal Reserve will likely only raise interest rates very gradually, letting a more “gradual path of monetary policy normalization” offset the downfalls, and because a decline in confidence and stronger US dollar.[35] Stock averages in the US have reached record highs. Andy Wilson, a U.S. head at Deloitte, believes this is the case because the post-Brexit uncertainty remains as “just another uncertainty in the market,” without precedence over the others.[36] However, the US should definitely still pay attention to issues concerning Brexit, because we are not immune to what happens in Europe.

Previously, America was able to communicate its economic and political agenda in Europe primarily through Britain. Britain’s exit from this stage has made America’s stronghold in the continent much weaker.[37] President Obama and Vice President Joe Biden both emphasized that this “special relationship” between the US and the UK will endure after the vote, but changes are bound to occur to better America’s interests in Europe.[38] In April, Obama said that if Brexit passes, Britain would be moved to the “back of the queue” when it came to trade deals with the United States.[39] This will put stress on their special relationship, and America is starting to negotiate trade deals and further their relationships with the rest of Europe in the meantime to be able to exert more influence in the EU. Richard Haass, the president of the Council on Foreign Relations, believes that “references to the U.S.-UK ‘Special Relationship’ will be increasingly rare and hollow, as the United States turns to partner with other countries in other regions.”[40]

What Next?

Now that the vote has passed, what will happen from the coming months to the next decade is incredibly uncertain. In the near future (from now until when Brexit should be completed), there are two likely possibilities for what will happen:

  1. Maximum Brexit

This would mean that UK becomes a completely separate country. Thus, it becomes a fully independent nation that can create its own trade deals, laws, immigration policies, and more. Its relationship to the EU would be based on World Trade Organization rules, like Japan’s or Chile’s or China’s relationship to the EU—fully independent and without a vote, as if it were any other country outside of Europe.[41]

  1. “Soft” Brexit

This scenario, which involves the United Kingdom leaving the Union but remaining in the European Economic Area, is most likely to occur. The European Economic Area consists of EU Member States and Europe Free Trade Association States, which currently include Iceland, Liechtenstein, and Norway. This internal market covers four freedoms—the free movement of goods, services, persons, and capital—in all of its States.[42] This is often referred to as the Norway model, because Norway has full access to the single market, but must make financial contributions, accept the majority of EU laws, and allow free movement. Economists disagree whether or not this would be beneficial for the UK.

A paper circulated at a meeting of Theresa May’s Brexit cabinet committee claimed that adopting a Norway-style model would force the UK to “grow trade with its 10 largest partners outside the EU by 37% by 2030” to counteract any negative impacts on trade.[43] One of these negative impacts would be EU import tariffs that would now be enforced, which would, for example, add 10% to the price of a UK-produced car.[44]

The Economist disagrees. It argues that adopting this deal would be in the best interest of the UK because it “gives full access to the world’s biggest single market,” maximizing prosperity.[45] A trade-off would be that the principle of the free movement of people would still have to be maintained, which goes against the Leave campaign’s promise to control immigration. However, European migrants have been proven to “more than pay their way for their use of health and education services” and are a necessary part of the labor force, so having free movement may actually be beneficial. But this was true before the referendum, too.

Because the future of the United Kingdom and the European Union is still uncertain, the best we can do now is wait and see how events will unfold starting in March 2017. Either method of exiting the EU includes both costs and benefits for the UK, so it is up to the nation to determine its priorities and pick the option that will work best for its future.

[1] Hunt, Alex and Brian Wheeler, “Brexit: All you need to know about the UK leaving the EU,” BBC, 11/10/16

[2] Pruitt, Sarah, “The History Behind Brexit,” History, 6/24/16

[3] Elgot, Jessica, “JK Rowling condemns ‘ugly’ rhetoric of EU referendum campaign,” The Guardian, 6/20/16

[4] “EU Referendum,” The National Archives

[5] Ibid.

[6] Bennett, Asa, “Did Britain really vote Brexit to cut immigration?,” The Telegraph, 6/29/16

[7] Sculthorpe, Tim, “Theresa May vows ‘Brexit means Brexit but we’re not walking away,’” Daily Mail, 7/20/16.

[8] “A Tragic Split: How to minimize the damage of Britain’s senseless, self-inflicted blow,” 6/11/16, Page 11.

[9] Ibid.

[10] Cox, Jeff, “The Brexit recession no longer looks so certain,” CNBC, 7/21/16

[11] Ibid.

[12] Cunningham, Tara, Szu Ping Chan, and Marion Dakers, “FTSE 100 hits new record high but pound drops below $1.21 as Brexit hard-landing fears rattle City,” The Telegraph, 10/11/16

[13] Heath, Allister, “So far, so good for the post-Brexit economy,” The Telegraph, 7/21/16

[14] Ibid.

[15] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[16] Rodionova, Zlata, “Higher inflation rise will cost poor families extra £100 a year, warns IFS,” Independent, 10/18/16

[17] Ibid.

[18] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[19] Ibid.

[20] Ibid.

[21] Cox, Jeff, “The Brexit recession no longer looks so certain,” CNBC, 7/21/16

[22] Ibid.

[23] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[24] Ibid.

[25] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[26] Stone, Jon, “Scottish independence could bypass the ‘instability and uncertainty’ of Brexit, Nicola Sturgeon says,” Independent, 10/14/16

[27] Monaghan, Angela, “Scottish independence: economic implications,” The Guardian, 2/7/14

[28] Stone, Jon, “Scottish independence could bypass the ‘instability and uncertainty’ of Brexit, Nicola Sturgeon says,” Independent, 10/14/16

[29] “New Scottish independence bill published,” BBC, 10/20/16

[30] Gillespie, Patrick, “How Brexit impacts the US Economy,” CNN, 6/24/16

[31] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[32] Ibid.

[33] Gillespie, Patrick, “How Brexit impacts the US Economy,” CNN, 6/24/16

[34] Ibid.

[35] Cox, Jeff, “The Brexit recession no longer looks so certain,” CNBC, 7/21/16

[36] Ibid.

[37] Foroohar, Rana, “Why Brexit Really is a Big Deal for the US Economy,” Time, 6/27/16

[38] Criss, Doug, “5 reasons why Americans should care about Brexit,” CNN, 6/24/16

[39] Ibid.

[40] “How Brexit will Change the World,” Politico Magazine, 6/25/16

[41] “Brexit: What are the options?,” BBC, 10/10/16

[42] “EEA Agreement,” European Free Trade Association

[43] Pasha-Robinson, Lucy, “Brexit: Theresa May warned Britain could lose 4.5% of its GDP if it leaves EU customs union,” Independent, 10/19/16

[44] “Brexit Britain: What has actually happened so far?,” BBC, 11/10/16

[45] “A Tragic Split: How to minimize the damage of Britain’s senseless, self-inflicted blow,” 6/11/16, Page 11.

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