Brexit and the British Economy

Introduction

The term “Brexit” relates to the June 23rd, 2016 referendum of the British to leave the European Union. The immediate result of this choice was a constriction of fear throughout the interconnected European economies, and the value of the British pound fell to its lowest mark in decades. The long term effects of Brexit on the economy can only be speculated upon, but in the short term the economy is in trouble according to those in the know, the Treasury. The choice to leave the EU appears short sighted at best and full of trickery at worst. 

Decisive Choice

Perhaps as a result of the value of the pound dropping or perhaps simply regret due to the newfound lack of brotherhood, many Britain’s express regret at Brexit. Over three million people have signed a petition requesting a second referendum, with the hopes of also getting out many to the vote who did not see the importance until it was too late (Staufenberg). After all it was a close decision, with 48.1% voting to remain and 51.9% voting to leave. A follow poll “found that people who used Brexit as a protest vote - or thought their vote ‘wouldn't matter’ - are now having second thoughts” (Staufenberg). Like the reverse of buyer’s remorse this flippant approach to a key international issue now has many Britons quaking in the face on an uncertain future. 

Like a short-sighted lover with fantasizes of freedom without considering the costs, many Britons are shocked by the realities of their choice. Soon after the die was cast and the pound fell people were informed that holidays will cost more, as well as having lost the right to work, buy holiday homes, study, or travel without restrictions in the EU. Those who already own vacation homes in Europe are now confronted with citizenship issues. One Briton observed, “It seems to me that there was very little information on consequences if leaving was voted for. Perhaps a lot of the votes were more emotive than informed? Why wasn’t there more explicit information for people to digest?” (Rickman). In reality the information was likely available but not as easy to download as all the nationalistic fear mongering. 

Economics of Immigration

One factor of how Brexit will affect the economy is through immigration changes. Currently, “Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015. Immigration from the European Union is currently boosting the workforce by around 0.5% a year” (Capital Economics). This aspect of being open to the movements of the EU allow Briton’s economy to grow without wage growth or inflation, with has kept the interest rates at a lower rate for longer. Thus, Brexit has a chance of changing each of these elements, and much like America being confronted with the demands for higher wages, experience real inflation and climbing interest rates (Capital Economics). 

Considering that the United Kingdom has the second highest budget deficit in the G7 after Japan, interest rates play a large role in their economic health. Especially now that “Standard & Poor’s and Fitch Ratings both downgraded the U.K.’s credit rating. The weaker credit rating could make it harder and more expensive for the U.K. to borrow money and finance its debts” (Riley). The fall of the pound further complicates this issue with is also compounded by a new lack of trust. This trifecta of risk led Moody to warn; If investors start pulling money out of the U.K., further pressuring the pound, ‘this would raise questions over the funding of the U.K.'s large current account deficit ... and more fundamentally over the role of [the pound] as one of the few global reserve currencies.’ (Riley)

Many analysts are crying that the British sky is falling, and it is unclear exactly how this will shake out. The issue of crippling deficits in a changing global economy is an issue that many nations must soon deal with. In the EU Britain has been the financial hub for the union, but this is almost certain to change, leaving the financial sector devastated. This has huge implications for the economy as “the financial services sector specifically counts for 8 to 10 percent.  Britain is one of the three most important global hubs for financial services, along with New York and Tokyo” (Mitchell). Since trust and credit rating are such a key element of this district, it is already experiencing the shortfall of the Brexit. 

Now that the border relations have changed with Brexit, immigrants and migrants will not be as free flowing, which may lead to a stagnation of less skilled workers. Researchers emphasize, Whether the United Kingdom gains any powers to restrict immigration from Europe will depend on its future relationship with the European Union. If Britain wanted to retain full access to the single market, it may have to keep the free movement of between the United Kingdom and the Union. But this is unlikely. is far more likely to change to restrict the number of low skilled workers entering the country and shift towards attracting more highly skilled workers. (Capital Economics)

It is uncertain how this would shake out, more Britons may be forced to fill out the less skilled positions, but also could draw in more skilled workers. Since it would be more contained within Briton, national policy in this area could be shaped to fit Briton’s unique needs. No matter what change is coming in this sector.

Economics of Trade and Manufacturing

Half of all British trade goods are destined for the EU. Even so, “The trading links are bigger if we include the countries that the United Kingdom trades freely with because they have a free trade agreement with the EU. These agreements mean that 63% of Britain’s goods exports are linked to EU” (Capital Economics). This relationship is projected to remain stable as it benefits both parties to find a mutually supportive trade structure. Even a worst case scenario would not significantly damage the market, as “Exporters would face some additional costs, such as complying with the European Union’s rules of origin, if they were outside the single market. However, these factors would be an inconvenience rather than a major barrier to trade” (Capital Economics). Due to the balanced policies of the EU which seeks harmony rather than manipulation, under the Libson Treaty a country vacating the union has two years’ time to negotiate a withdrawal agreement which is acceptable to both parties. 

One of the reasons Briton felt supported in their leaving is that they are not dependent on the EU for their economic health. As, falling tariffs, the decline in manufacturing and Europe’s diminishing importance in the global economy mean we doubt that even the absence of a trade deal with the European Union would hurt the United Kingdom’s overall exports materially. The benefits of being in the European Union are smaller than they were a few decades when a Brexit would have been a far bigger deal. (Capital Economics)

The possibilities for negotiating stronger trade agreements outweigh the apparent loss for many analysts. However, many other analysts are keeping their sights within the confines of the British island, and forecasting a recession for the next few years. 

Other Economic Sectors 

The drop in the pound came in part because financial analysts believed the world economy was at a fragile juncture, but that could always be said since economics are not built on sustainable models and so trust is always an issue. Thus uncertainty has already undermined the economy, as “the future of the UK’s trading relationship with the EU; the regulatory backdrop; and political uncertainty, including a possible referendum in Scotland” (Treanor). Uncertainty and lack of trust tend to spiral out affecting many areas. The rating agency which downgraded the UK’s credit rating offered, “This uncertainty will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will further damage business confidence” (Treanor). During times of change it is difficult to prepare for the future, and investments are proposed to take a big hit. 

The interconnected nature of the European Union market will definitely feel the effects of Brexit. Fitch points out, “The eurozone will suffer a larger shock from weaker UK demand and the depreciation of the pound, but for the block as a whole, growth adjustments will likely be significantly smaller than for the UK” (Treanor). However, on the home front, U.K. Treasury Chief, specialist in this area, George Osborne understands the next step for Britain’s economy-cutting spending and raising taxes-not what people had bargained for. Without the support of the EU, Osborne clarifies, “We are absolutely going to have to provide fiscal security to people…In other words, we’re going to have to show the country and the world that the government can live within its means” (Riley). While there was much authentic fear mongering going on surrounding the vote to leave the EU, the warning from the Treasury went unheard; The chancellor of the said ahead of the vote that an emergency budget would be needed to fill a "black hole" of about £30 billion ($42.6 billion) per year if the U.K. left the EU. Critics dismissed the and accused the Treasury official of running a campaign based on fear. On Tuesday, Osborne said that specific decisions on future austerity would be left to the next prime minister. (Riley)

Only after the issue and with the sobering drop in the pound and their credit rating are people hearing this expert opinion. However, while there is clear and present danger the moment, some analysts are asserting that when it all shakes out Britain’s economy will be stronger as productivity rises (Chancellor). However, this projection does not take into account that the changing economy is moving away from rampant materialism and into other sectors which it very well may have benefited the nation to stay involved in the EU. A few years (or months) of realizing the real cost of leaving may be enough to send the U.K. back to the union with a so-sorry face, serving as a message to other nations that it pays to stay committed just like in any relationship. 

Conclusion

The danger in a democracy is that the people may make the wrong choice without having all the facts. In the contemporary mish mash of data, information, and propaganda it is often uncertain who to trust. It appears the Brexit decision is a cautionary tale of emotional voting.

Works Cited

Capital Economics. “The economic impact of Brexit.” Woodford Investment Management LLP, Feb. 2016. Retrieved from: https://woodfordfunds.com/economic-impact-brexit-report/

Chancellor, Edward. “Brexit will make the UK economy stronger.” CNBC, 28 Jun. 2016. Retrieved from: http://www.cnbc.com/2016/06/28/brexit-will-make-the-uk-economy-stronger-commentary.html

Mitchell, Christopher. “Here’s how Brexit may cripple Britain’s financial sector — and the British economy.” The Washington Post, 28 Jun. 2016. Retrieved from: https://www.washingtonpost.com/news/monkey-cage/wp/2016/06/28/heres-how-brexit-may-cripple-britains-financial-sector-and-the-british-economy/

Rickman, Dina. “The Mail has explained what Brexit means and its readers seem shocked.” The Independent, 25 Jun. 2016. Retrieved from: http://indy100.independent.co.uk/article/the-mail-has-explained-what-brexit-means-and-its-readers-seem-shocked--Z1772TI4aNW?utm_source=indy&utm_medium=top5&utm_campaign=i100

Riley, Charles. “Brexit will mean higher taxes, less spending for U.K.” CNN, 28 Jun. 2016. Retrieved from: http://money.cnn.com/2016/06/28/news/economy/uk-economy-brexit-taxes-spending-austerity/

Staufenberg, Jess. “Brexit: More than one million people want to change their vote from Leave to Remain.” The Independent, 27 Jun. 2016. Retrieved from: http://www.independent.co.uk/news/uk/politics/brexit-eu-referendum-bregret-leave-petition-second-remain-latest-will-we-leave-a7105116.html

Treanor, Jill. “Brexit will take heavy toll on UK economy, says rating agency.” The Guardian, 29 Jun. 2016. Retrieved from: http://www.theguardian.com/politics/2016/jun/29/brexit-toll-uk-economy-fitch-rating-agency