Brexit: An overview

What is the European Union?

The EU is a political and economic partnership comprised of 28 member European states, initiated after WWII namely to strengthen trade relations. While the main objective was trade, the idea was that it would be less likely for countries that trade together to fight one another. With goods moving between member countries, the EU has become a major and influential “single market”.

With the introduction of the EURO, 19 member countries use the currency across their borders while the the whole union is tied by its own parliament and its own laws.

 

What is the Brexit?

The word, which means Britain and exit, refers to the United Kingdom of Great Britain exiting the eco-political union.

To exit the EU would mean a 2-year negotiations process for withdrawal. The period will be vital for putting trade agreements between the EU and the non-member-to-be, Britain. With this being the first time the 2009 exit article being tested, no one can be sure what the process would look like.

It is, however, still uncertain the UK would exit, even after the referendum, which resulted in a 51.9% leave majority. It is speculated that there is still a 30% likelihood of no Brexit.

With the UK having been a key decision maker in the union, it can no longer participate in law making, but has to abide by all laws while it negotiates its exit terms.

 

What is the economic impact?

Breaking of ties will ultimately change the UK’s membership rights with the EU. There will be major changes to currently standing policies which have an immediate impact on the UK economy.

Since 2012, net annual immigration from Europe has more than doubled, reaching 185,000 in march 2015. The UK’s workforce benefited from 0.5%  increase in labour without the need for wage growth or inflation. To retain full access to the single market, the UK could decide to maintain free movement of labour. However, it is far more likely the that Britain will open its borders only to highly skilled workers, leaving low-wage sectors such as agriculture to suffer. Britain’s migration requirements could shift policy in its favour.

About half of all Britain’s goods exports are to the EU. With 63% of exports linked in some way to its membership, Britain’s trade and manufacturing stands to be heavily impacted. The UK would  be, however, a ‘most-favoured nation’, and though trade tariffs could be introduced, they will be an inconvenience rather than a barrier. It would be in both side’s best interest for agreements to be reached to maintain close commercial arrangements.

Understandably, London’s financial services sector was immediately impacted when the British public decided to leave. City’s competitive advantage, with the United Kingdom losing its influence over the union, suffered an sudden shock as seen in the value of the pound dropping to decades low figures. This could also facilitate the UK’s financial services brokering of deals in emerging markets, paying dividends for the sector in the long run.

The Property market and consumption will somewhat be affected by the Brexit, though it may have been slightly exaggerated. The City part of the property market may have a lot to lose and the damage is said to be considerable, but the role of London’s financial services, again, is said to be somewhat overstated. There will most likely be a negative impact even on the macro economic level, though this would be small. The effect of independent policy making on immigration, trade and regulation, however, could give properties and consumption a helping hand.

Other aspects that may be affected are the public sector, which could save some of its £10bn annual EU budget contribution; and foreign investment in Britain, whose effects are overblown and Britain will remain a haven for foreign investors most definitely after introducing Brexit premiums;

Overall, with the Brexit impact on the UK’s economy still an uncertainty, it’s debatable whether Britain’s long-term economic outlook hinges on it. With some independence from the bloc, the divorce could result in a modest positive impact for the country. It remains to be seen how the country’s politics will affect this surprising decision, and which sectors will be more affected than others. Britain has pulled ahead of the bloc in economic performance terms and we could expect this gap to widen regardless of the countries membership status.

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