The British public decided that it is within their best interests to leave the European Union (EU). So now what? Although it might seem chaotic initially, the EU has actually set out a procedure to be followed in case one of the members want to leave. It’s Article 50 of the Lisbon Treaty. Over the next two years British Lawmakers will sit down and negotiate the terms of Britain leaving the EU. Many of the economic and social effects of Britain leaving the EU will depend on what sort of decisions are made during these negotiations. But for now let’s analyse what might happen from the information which available. There are many fronts to the implications of Britain leaving the EU. But for simplicity lets break it down like this, for Britain, for the EU and for the rest of the world.
Through the Eyes of Britain
There has already been a major political shift within the UK. Prime Minster David Cameron who was for the UK remaining in the EU resigned. It is very likely that George Osborne who is the chancellor will have to resign as well. Osborne was seen as the obvious successor to Cameron for the leadership of the Conservative Party. That too is now in doubt. This leaves the political future of Britain in major doubt and it will be very interesting to see how this plays out in the next few months. Theresa May, Home Secretary since 2010, is emerging to be the lead contender. She wanted to remain in the EU.
Economically we have seen some very drastic changes immediately. The Sterling Pound slumped to its lowest value in 31 years. The FTSE100 (the main stock market index in the UK) had its worst day since the financial crisis of 2008. Now many of the long term effects of Brexit will be based on exactly how Britain and the EU negotiate their breakup. Ever heard of smooth breakups?
In the long term many forecasts within the UK have predicted that the GDP growth will be stunted. But there have also been a few brave models which have predicted accelerated GDP growth. A few pragmatic ones think it won’t be bad as we might think.
Let’s quickly run through the logic of why each of these scenarios might occur,
- Stunted GDP Growth– No matter what sort of trade deal the UK is able to strike up with the EU post Brexit, it will be less beneficial than the single market approach. Also because the other nations know Britain is now desperate to achieve new trade deals with them they will have leverage to negotiate a favorable deal for them. The pound will be severely depreciated, leading to more expensive imports.
- Accelerated GDP Growth– The devalued pound will help make exports cheaper and being able to drop many of the strict EU regulations and import tariffs will make business boom. Also assumes the freedom of the UK being able to negotiate their own trade agreements with other major nations will favour them.
- A bit of both – A mix of increased exports and decreased imports will cancel each other out over the long term, however everything is based on the sort of political position Britain decides to incorporate over the next few years.
In reality though ?
In reality no one can say for sure how Brexit will turn out economically for Britain. It depends mainly on what sort of trade agreements the UK can strike up with the EU, USA and other major economic blocs.
At this present point many of the multinational corporations have their European Headquarters based in London. Any citizen of one EU nation is allowed to freely work and live in another EU nation. With Brexit no one knows what will happen to all the non-UK citizens who are from other EU countries who live and work there. If they decide to withdraw this policy many organizations might have to withdraw from the UK. It might make private investment in the UK less attractive than earlier.
A huge issue which was argued extensively within the Leave or Remain debate was migration and security. With Britain leaving the EU the number of migrants from the EU will decrease. But it is unlikely it will have any effect on immigrants from more faraway lands.
One very important side plot of this entire ordeal is that Scotland voted to remain in the EU. This difference in opinion between Scotland and the UK might lead to another referendum vote for Scottish Independence.
Through the Eyes of EU
Their second largest constituent economy just left. The EU is right now in shock. The most important immediate task for the EU is to make sure that Britain isn’t the first of many nations to leave. Leaders within the EU are scrambling to make sure there isn’t a domino effect. Already law makers in Italy, France, The Netherlands, and Denmark have called for referendums about the Euro and also about leaving the EU altogether.
Without having Britain as one of its constituent nations the negotiating power of the EU is weakened and it might not be able to make very favourable trade deals with other global superpowers. Britain leaving will also have a serious effect on the political cohesion of the EU nations. Further fragmentation of the single market maybe in the making. This might have very dangerous ramifications if there is another EU economic crisis.
There are some studies which show that the Brexit will lead to a slowdown of the GDP growth of the Eurozone. (Countries which use the euro as their currency). But this slowdown in growth isn’t very significant. A severe reduction in the economic clout of the EU will be a direct effect of Brexit. A smaller EU means less comparative advantages on the world market.
Through the Eyes of the rest of the world
Although there are some fears of Brexit directly leading to a global recession similar to the one experienced in 2008, these fears aren’t likely to happen. Though many banks, financial institutions and organizations have attempted to accurately forecast the effect of Brexit it has been very difficult as the complex correlations of the global marketplace cannot be accurately represented. Economists believe many of the major countries will use this situation as leverage to strike up favourable trade deals with the UK and also the EU. Although bigger nations will likely take advantage of this in the long term, smaller nations with less powerful economies might suffer from Brexit, due to a lack of a substantial trade deal with Britain (the world’s fifth largest economy).
There are mumblings around about Britain planning to strike up multiple free trade deals with Commonwealth countries. This seems attractive. But when and how this might happen is questionable. As long as the negotiations between the EU and Britain continue, they cannot move forward to finalize any of these deals.
For Sri Lanka ?
In terms of Sri Lanka, there is quite a big hit. Any future GSP Plus deal with the EU will not include Britain, which might be quite disadvantageous to us. There is another side to this. External markets are becoming uncertain and volatile with Brexit, putting pressure on Sri Lanka’s outstanding debt. Also according to the latest estimate Sri Lanka exports 10 percent of our exports to the UK (around USD 1 billion). And 28.8 percent of our exports to the EU (around USD 3 billion). So there is no doubt Brexit will have some sort of indirect effect on the Sri Lankan economy. But it is immediately not clear what it might be.
A lot has been said within this article and on all sorts of social media. Yet no one really knows the true effect of Brexit. This is truly unprecedented. The economic effects on both the British and global markets cannot accurately be predicted, with no historical precedent. When Article 50 of the Lisbon Treaty is triggered, the EU and Britain have 2 years to sort out how a post Brexit Europe looks. Current indications point toward this period being far more accelerated as jilted EU leaders attempt to move on from Brexit as quickly as possible. How exactly the procedures of Article 50 are carried out will define the path that Britain, Europe and the world takes.