Brexit represents one of the most surprising voting results in recent history, a decision that will affect millions of people and will reshape the global economy landscape. In short, the United Kingdom of Great Britain and Northern Ireland voted to leave the European Union.
The European Union project started with the European Coal and Steel Community, proposed by Robert Schuman in 1950 involving the French and West German steel and coal industries. Then the Treaty of Paris and the Treaty of Rome followed, bringing together France, West Germany, Netherlands, Luxembourg, Belgium and Italy to form the European Economic Community in 1958.
The United Kingdom and the European Economic Community’s paths met on the January 1st 1973, when Great Britain (including Gibraltar), together with Denmark and Ireland joined the other six nations in the so-called EEC.
Following a long series of events that shaped the current state of Europe, the Maastricht Treaty was signed on the February 7th 1992 to create the European Union.
As one may know, the period between 1992 and 2016 led the EU to its current shape, consisting of 28 Member States, including the United Kingdom of Great Britain and Northern Ireland, finishing with the popular “Brexit” on June 23rd 2016, one of the worst political moves that Western Europe has recently faced.
What Triggered The EU Referendum
The recent problems in the European Union, following the global subprime mortgage crisis and the Eurozone debt crisis, encouraged eurosceptics to profit from a weak state of the Union and gain supporters of populist, nationalist moves urging towards a detachment from the EU. In the last few years, the Greeks were the first ones to take action. Their Grexit referendum raised a global signal that the EU, still considered by many a utopian plan, was shaking from the inside.
The UK leaders took their chance and asked for negotiations that would favour Britain in front of other EU members, raising sensitive points for a substantial part of the British population, such as additional conditions for the Eastern European workers coming to the UK, asking for social benefits and getting a big number of jobs.
All these issues brought to the idea of the well-known EU Referendum, set by the UK Parliament through the EU Referendum Act in 2015, establishing two opposing political campaigns. One supported the idea that the UK should leave the EU – the “Leave” campaign – while the other was for the UK remaining in the EU – the “Remain” campaign.
Voting Leave would “save £350 million a week to spend on priorities such as NHS, schools and housing”. A few hours after the official voting results were announced, Nigel Farage denied that the £350 million extra budget promised for the health services would be undoubtedly redirected towards the NHS. So from the beginning, the future leaders of Britain lack credibility, integrity, trust and respect for their compatriots. It is interesting that the “Vote Leave” campaigners have touched a soft spot for British citizens, the public system, which is actually one of the most efficient ones in Europe.
Voting Leave would lead the UK to take control of immigration. A Leave decision may mean imposing visas to European citizens. Even though the process would most probably increase the control of British authorities on immigration matters, it also widens the gap in the global social class and increases income inequality.
One counterargument is related to the British education. As admission for top educational programs in the UK is a global race, European students’ access to the UK educational level should represent a benefit, not a drawback to the UK students, as it boosts competition and hence British students’ performances. However, the impact of Brexit is expected to reduce the EU students’ presence in the British universities below 30%.
The “Vote Leave” campaigners also stated that an advantage would be getting back border control and decide who can come to the UK and who cannot. An interesting question for the pro-Brexit side would be how leaving the EU to raise the border control substantially, considering that the UK has never been a part of Schengen. Is there really no other solution apart from imposing visas on foreign citizens? Not to mention that this new process will increase bureaucracy, time spent on visas, as well as additional budgets for such services.
Another Vote Leave point states that “the EU Court prevents the UK from stopping violent convicted criminals coming into Britain from Europe and also stops the British authorities from deporting dangerous terror suspects. As the European legal and police structures are constantly tracking criminal activity within the EU territory, no European authority would let convicted criminals and terrorists travel around. Also, as mentioned before, the UK is not a member of the Schengen Area, meaning that border control is another filter against criminals entering the UK. Hence, it is questionable whether the pro-Brexit leaders’ make a valid point.
One statement made was that the UK would be free to trade with the whole world. The UK was free to trade with the whole world before too. However, costs are likely to increase massively after the Brexit.
“Over half our laws are made by unelected EU bureaucrats in Brussels for whom we never voted”
Even though this argument seems to be one of the few valid points of the Leave campaign, the EU leaders’ decisions were taken for a better integration of the single market and a faster reach of a common point of the 28 states. The EU “ideal state” still represents an ambitious target, difficult to be achieved on a short-term basis.
Another issue was the City of London regulatory system. The City of London had its own set of financial regulations, different from the European Union’s Single Rulebook (e.g., the Vickers Report versus the Banking Structural Reform concerning proprietary trading regulation). The latter was developed in some conformity with the existing regulations in The City. Additionally, there is ample proof that the EU Membership played a major part in keeping London as one of the most important global financial centres.
The pro-Brexit politicians argued that EU laws have cost British taxpayers £2.4bn. It is interesting to know where that figure came from, and it would have also been fair to present the benefits of those laws too.
Leaving the EU means for the pro-Brexit leaders apparently getting rid of having to bailout the Eurozone. However, the argument works the other way around too: what if the UK British economy were to collapse? Who will then bail them out? On a further note, it is hard to believe Nigel Farage’s statements after a set of contradictory declarations he made in the past. However, he stated that the UK is set to see a mild recession anyway, irrespective of the Brexit. Financial markets’ reactions after the Brexit announcement on June 24th reflected a different mood, far from mild.
The campaign is also stating that the UK has sent over half a trillion pounds to the EU. However, it fails to acknowledge what the UK got in return. Any rational economist or financial analyst would have pointed it out if being part of the EU were a losing strategy. It is pretty interesting how corporations did not seem to see the European membership as value-destructive, as rationality would have led them to shift their core operations geographically.
Another pro-Brexit point states that a quarter of a million EU migrants come to the UK every year, taking a substantial amount of British jobs. Even though the “Leave” supporters were easily convinced by this fact due to the low-skilled workers coming to Britain or requesting social benefits, the British economy was heavily lifted by highly qualified professionals in the last 30 years. According to UCL economists, the UK saw some £20bn in taxes from European migrants between 2000 and 2011, exponentially more than the amounts taken out as benefits. Furthermore, the education levels of Eastern Europeans coming to the UK are also improving, with 25% of recent arrivals having completed a degree, according to The Guardian. Another counter-argument to this statement is the increasing levels of EU students coming to study in the UK, which further supports the financial gains coming from migrants.
Taking control over the national economy and trade. Pro-Brexit politicians argued that only 5% of British businesses export to the EU, but 100% suffer the burden of EU red tape. First, it is the decision of the British businesses where to export and who to trade with. Second, it is hard to believe these figures, considering the fact that large businesses’ or SME’s representatives have rarely complained about EU regulation in their activities. There are other factors to be taken into consideration to help the business sectors, far more important than the EU trade regulations.
The campaign further states that the UK has no power to make free trade deals with fast-growing economies like India and China. Even though free trade is established at an EU level, the UK is still free to set more favourable trade partnerships with other countries such as China.
To attract more support, the pro-Brexit campaign states that countries around the world trade with the EU without accepting the ultimate control of the EU courts. Even though this is true, trade costs and benefits are different from case to case. None of them bring the same free trade benefits as the EU.
One irrational statement of the campaign states that “there is a free trade zone stretching all the way from Iceland to the Russian border. We will still be part of it after we Vote Leave”. At this point, common sense seems to have left the building. How could such illogical points convince over 17 million people? And more importantly, how can one believe that the UK would still benefit from the EU free trade if it votes to leave this Union? This demands an answer from the pro-Brexit citizens, exactly the ones who were googling “What is the EU?” after the official results came in.
The campaign supported by Nigel Farage, Boris Johnson and Michael Gove encourages Brexit for the UK to escape the permanent EU control of the British trade and economy. As the UK did not adopt the euro, the UK economy was under the control of the Bank of England, supervised by Mark Carney, as opposed to other EU members that heavily depend on the European Central Bank and Mario Draghi’s decisions. Furthermore, trade is not permanently controlled by EU parent institutions. However, the EU trade policy must be put into context here, as its main objectives include creating and maintaining a global system for fair and open trade, opening up markets with key partner countries, leading towards a better integration of the Single Market.
Again, this campaign proved to be full of lies.
Additionally, the “Leave” campaigners failed to showcase the benefits brought by the Transatlantic Trade and Investment Partnership, which may now have vanished due to Brexit.
Last but not least, Boris Johnson promised to sort through highly educated foreign citizens here based on their language skills and aptitudes. Not only will this lead to a loss of talent, but it is also discriminatory, xenophobic and surprising, especially from someone that could be the next Prime Minister.
According to the Centre for Economic and Business Research, staying in the EU would lead to an additional 790,000 more jobs by 2030. Staying benefitted British citizens by letting them find education, work, travel and retirement opportunities without visas.
Due to the free movement of goods principle within the EU, the membership meant cheaper groceries, petrol and utilities, saving more than £350 a week per household, according to London School of Economics researchers. Leaving the UK may lead to a drop of £38 in the average weekly wage, according to the Trades Union Congress
According to the Confederation of the British Industry, the British economy received £91bn, while paying out £5.7bn a year, according to The Institute for Fiscal Studies. It is interesting how the pro-Brexit campaign “failed” to see these facts. Trade with the EU accounted for 44% of the UK exports. This is in opposition to the Leave campaign’s argument that only 5% of the British business will be affected by the Brexit. The 44% trade costs will now increase, damaging the economy.
World leaders such as Barack Obama, Angela Merkel or Narendra Modi publicly expressed their hope that the UK will stay in the EU.
Unfortunately, The United Kingdom has voted to leave the EU. This will most probably lead to lower salaries, less purchasing power when traveling abroad, job cuts, reduced benefits for UK citizens and a poorer quality of public services due to a lower budget. Additionally, it will affect the quality of the professional workforce, with less competition, further leading to a reduced quality of services, quality of life and increased poverty.
It is revolting to see how everything happened, considering the comparison between the Leave and Remain campaigns’ facts. Was the ‘Remain’ side not vocal enough? Maybe. Is the level of education in the UK lower than expected, thus making manipulation easier? Probably. One thing is for sure: Britain will suffer enormously after this decision.
Remain had been predicted to win, and even Nigel Farage was conceding one day before the results. Financial markets were confident in a Remain vote too. However, traders were set for an all-nigher on June 23rd to avoid disaster. Unfortunately, the disaster still came. There were only a few hedge fund managers predicting the exit and substantially generating profit. Disaster came at a global level.
It is and will continue to be an mystery how the Leave campaign convinced so many citizens that this was the right decision for the UK. Factors such as a “break free” mentality or taking more control leading to a better general situation could only account for some many votes. It takes time to reach a powerful conclusion, so time will show which decision was better.
However, Brexit currently shows a great gap between the social classes in the UK.
A first conclusion: Britain disappointed. One of the most educated nations in the world has failed one of the most important tests in the last decades. They failed to see the benefits of staying in the EU and were attracted by the illusion of nationalism, control and short-term, unproven financial and employment benefits.
Regarding politics and formal process, the UK has already been urged by the European leaders to start the process of leaving.
The process of involves three sets of negotiations:
First negotiations will relate to the withdrawal terms themselves, such as agreements on EU citizens residents in the UK’s rights
The second set of negotiations should relate to future trade agreements between the EU and the UK
Finally, the UK should negotiate its terms with the World Trade Organisation, as well as with countries that have trade arrangements with the EU, not applicable anymore after the Brexit
It is already clear that this will be a lengthy and costly process for the UK. It could also lead to a wide range of bad scenarios due to the effect Brexit had on the image and reputation of UK’s top representatives.
Leave campaign argued that the process will take at least two years. Everything will be clear after a formal program is be published.
A few hours after the final results were announced, financial markets had already punished the British economy: FTSE 250 faced the worst drop ever. The pound is at its lowest level since 1985. This raises the prices of imports and decreases the purchasing power of the sterling abroad. Public services will also be affected, as the tax budget value is lowered by this substantial drop of the GBP. On the other side, the good part is that debt holders benefit from the pound drop.
S&P has downgraded the UK’s AAA credit rating to AA. This may lead to a substantial departure of foreign businesses from the UK due to a lower level of confidence in the British economy, in addition to the higher costs (trade costs and labour costs due to visa requirements).
Furthermore, The FTSE 100 plunged more than 8% in its biggest opening slump since the financial crisis, wiping £120bn off the 100 biggest UK companies. To summarise, $2tn have vanished from the global markets in the day the vote results came in.
As one of the top global financial centres, banks with a major presence in London were hit too. Barclays and Lloyds Banking Group were down 17% respectively 19%, while Deutsche Bank shares fell 12% on the Brexit day.
Moreover, Barclays and RBS shares were suspended from trading on Monday, June 27th, due to major losses on the London Stock Exchange.
It is a certainty that the Leave decision will affect investment banking activity and therefore revenues, due to lower business volumes, in addition to the drawbacks that hit the industry in the current economic cycle and a reduced level of M&A activity. The calling signs for another recession are obvious. Trading is likely to be hit not only by the current and future economic conditions caused by Brexit, but also by the increased costs of doing business and the loss of talent due to new visa requirements imposed after the formal exit, reduced salaries for top performers in case of relocation and the continuous problem of increased regulation.
Therefore, two of the top revenue generators within the investment banking industry will be heavily hit by this political decision. Will London still be a global financial centre? Quite unlikely. It mainly depends on how the UK Parliament will react to recent events. And where will all these financial institutions relocate their core operations? As some said they are looking to move to Lisbon, Warsaw, Paris or Dublin, this split may have an unanticipated, negative effect on the European financial industry, leading to a loss of business development and reduced economic growth.
The fact that Brexit has high magnitude effects on the British economy is now a certainty. The exact impact can be showcased by analysing how the free trade agreement cancellation will affect the industries highly dependent on trading with European partners. According to HM Revenue & Customs, the chemicals industry exports 57.2% of its goods to the EU. The manufactured goods stand at 53.1 %, while the mineral fuels export 77.3% of their products to the EU. The banking and insurance industries in the UK are known to have a global client base. The European offices of these institutions are focused on the entire European area. Have the pro-Brexit politicians questioned the impact of cancelling the free trade agreement? Of course, the British businesses can reset their plans and focus on other areas. However, this will most certainly come at a higher cost or with a reduced quality of goods and services.
Brexit is also likely to impact mortgage prices, due to financial markets’ chaos and decisions by the central bank regarding interest rates. This is also supported by Fitch Ratings, stating that interest rates could become more volatile as a result of the Leave vote.
Furthermore, a wide range of businesses are likely to relocate their operations to continental Europe. Therefore, up to one million jobs could be lost by 2020. As everything is linked, this will also lead to reduced tax revenues and a reduced gross domestic product.
Leaving the European Union also entails the cancellation of access to European funds for various matters such as business development. The lack of funds will result in an additional reduction in business activity, therefore reduced foreign investments, shaping together with the other factors an “ideal” scenario for recession.
Lastly, it would be interesting to see how Leave campaigners justify the benefit their decision brings to the UK in connection to Mark Carney’s required action to provide an extra £250bn in funds through normal central banking facilities and substantial foreign currency lending to banks if they run short of dollars, euros or yens.
Geopolitics Come Into The Mix Too
From a geopolitical point of view, Brexit means the beginning of a chaotic period for the EU. Remains to be seen whether populist parties will gain power within their countries, leading to France, Italy, Spain or Portugal leaving the EU.
It is clear that the EU is weaker without the UK, and in the same way the UK is weaker without the EU. The rise of the populist parties and extremist ideas in Europe may favour Russian foreign policy, but this also depends on the EU leaders’ ability to deal with the existing crisis and continue to work towards their objectives.
On the other side, the UK’s relationship with the US is in danger, regarding both business and politics, irrespective of the US elections. Barack Obama publicly expressed his support for the UK remaining in the EU. The Transatlantic Trade and Investment Partnership is set up as a US-EU deal, not a US-UK-EU deal. This could be a crucial factor damaging the US-UK relations.
Going further, the Scottish leaders made clear their will to remain in the EU and asked for a Scottish independence referendum, considering the fact that Scotland’s overall result reflected a Remain decision. Additionally, Northern Ireland also voted Remain and wants to unite with Ireland and leave the UK. Therefore, the EU Referendum result brings into question the very existence of the United Kingdom of Great Britain and Northern Ireland. Will they leave? Highly possible. With an increase in recent xenophobic and extremist acts by English citizens in the streets of London, Birmingham and Sheffield following the vote, the probability of Scotland and Northern Ireland’s leave decisions to unite with the EU is becoming greater too.
However, some British citizens asked for the chance of a second referendum. Even though 3 million people already signed a petition on the UK Parliament’s website demanding another vote, going through with it would lead to a lack of credibility in the current political system. A second referendum would further boost hate, xenophobic and extremist behaviour from the pro-Brexit citizens, as their voting rights would be put under question.
All in all, is there a bright side? If yes, it shied away in the first few days following the final results. Who is most likely to benefit from this situation? Apparently, apart from the pro-Brexit politicians, nobody. Hopefully, the advantages will get clearer as time passes, for both the UK and the EU.
It will be interesting to see how the UK manages to maintain its relations with the EU, to reach the same level of prosperity it saw in recent years. At the moment, however, the situation looks disastrous, uncertain and pessimistic on the Western side of the Channel.