Brexit: A Comprehensive Study of the Aftermath of 23/6/16

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Brexit: A Comprehensive Study of the Aftermath of 23/6/16

Postby danybrown » Thu Oct 06, 2016 12:14 pm

The massive public vote in favour of UK leaving the European Union—of which it had been a part since 1973 (the EU had been EEU or European Economic Community back then). The development, brought on as a result of feverish campaigning by far-right groups such as UK Independence Party, came as a shock for the proponents of an integrated tariff-free market, as well as the Left Liberal groups. And expectedly, as predicted by a number of experts, the pound saw a massive downslide in the foreign exchange market (a 31-year slump to stand at 1 Pound=USD $1.32). Indeed, the months before this incident were extremely tense, with debates being carried out at different levels about the possible consequences regarding the exit of Britain from the common market it was a part of till now.

So, what are the main impacts that Brexit has had on the overall economic scenario of Britain, Europe and the world in general? Below are some prominent points:

The Trade Report: For this, we have to briefly go back to the main factor which motivated a bunch of West European countries to enter into the Maastricht Treaty back in 1992, and formally establish the European Union. Among the list of agreements in that treaty, the main one was regarding the creation of an integrated, tariff-free market for all the members of the EU. This was an arrangement which provided for the free movement of labour and raw materials throughout Europe. And consequently, almost half of the market for British goods comprised of this integrated European market; not to count those countries which have inked free-trade agreements with the EU (when added together, the EU and ‘free trade’ countries, together make up more than 70% of the UK’s export market). Keeping this in mind, it might appear that an exit from the European Union would hit exports hard and result in an immediate slowdown for the economy of Britain. However, taking a closer look suggests that this might be only a temporary and short-term effect. Although the UK does risk losing a chunk of its trade market after leaving the EU, it’ll have enough time to ease into a new system and build up an alternative, independent trade policy. We may recall the Lisbon Treaty in this regard, which gives any country leaving the EU a preparatory time period of 2 years to negotiate the terms of withdrawal. Also, the fall in tariff rates worldwide would mean that the costs of exports would be there, but not so massive as to have any significant impact on the economy. Also, it would give Britain the chance to script its own trade policy. So, after all initial downturn (experts in the Economic Outlook predicts a 1.6% slowdown in trade growth), things would begin to look up gradually in early or mid-2017. Though, manufacturing and production sectors which depend chiefly on imported raw materials would be at low ebb because of a weakened Pound.
The Public Sector: As a result of the aforementioned Maastricht Treaty which was the corner keystone of the EU’s foundation, the signatories were to form a supra-national, an umbrella organisation which demanded that every member contributed a particular percentage of their national income towards formulating the Annual EU Budget. Of this budget, UK had one of the greatest shares in terms of contributions (nearly eleven percent of funding amount). Leaving the EU would help UK save up this huge amount which it has so far been paying to the EU. This is a huge gain for the UK’s economy, considering the opinions of some experts who say that the British rebate (tax returns) from the EU would’ve been under threat in the current years (if UK had continued to stay on). The amount saved can be used to pump money into the manufacturing sectors which would be definitely hit after the Brexit.

Impact Worldwide: Many fear that the economic uncertainty that has ensued following the June 23 referendum, would cause investors to withdraw capital from the region; i.e. a flight of capital is inevitable, leading to further loss of demand of both the Pound as well a value reduction of the Euro. It’s too early to predict an exact outcome in this (probable) scenario. But if this were to take place, then interest rates would plunge and other currencies will gain against the Euro. As of July 2016, economists are predicting an overall slowing down in the growth of Euro, to stabilise at 1.2% early next year. The Japanese Yen and the US Dollar are expected to be the big gainers in such a scenario.

However, so far the negative impacts have been felt mostly in UK, while the Eurozone managed to bounce back following an initial low in consumer confidence. In fact, a reading by the European Commission in various countries painted the picture of strong confidence in the manufacturing, financial services and retail trade sectors. Consequently, confidence indices have shown a big drop in points when it came to UK and Pound, a downward jump of 4.4 points to 102.6. In contrast, the EU gained 0.2 points, to reach 104.6 on the same scale.

It remains to be seen, whether this downturn continues into the next year or not. As of now, people are hoping for the best.

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