A referendum was held on June 23rd 2016, to decide whether the United Kingdom (UK) should leave or remain as a part of the European Union (EU). This vote is commonly referred to as Brexit – merging words Britain and Exit. The 4 nations of the UK (England, Wales, Scotland and Northern Ireland) voted to leave the EU. This paper explores the reasons for the Brexit, its global implications, the current situation and what lies ahead.
Keywords: Referendum, United Kingdom, Brexit, European
Union.
On June 23rd 2016, a referendum was held to decide whether the UK should leave or remain as a part of the EU, also known as Brexit. The 4 nations of the UK (England, Wales, Scotland and Northern Ireland) participated in the referendum with leave winning by 51.9% to 48.1%, with almost 30 million people voting (Hunt A. & Wheeler B., 2017). To understand the reasons for the referendum and why the UK voted to leave the EU, a brief history of the relationship between the UK with the EU is studied. The reasons to vote for and against Brexit as also analyzed, along with its global consequences. Finally, the current situation and how much of the Brexit has been implemented is discussed.
After the end
of the Second World War, the European nations wanted to end the frequent and
costly wars between neighbors. In 1957, Belgium, France, West Germany, Italy, Luxembourg
and the Netherlands signed the Treaty of Rome, establishing the European
Economic Community (EEC), or ‘Common Market’. (European Union, n. d., para 2).
EEC was formed with the goal of economic cooperation between the European
nations. The 1960s improved the economy of the EEC members as they started
trading without charging custom duties when they traded with each other. On
January 1 1973, Denmark, Ireland and the United Kingdom joined the EEC. Greece
became the 10th nation in 1981, followed by Spain and Portugal five
years later. In 1986, Single European Act was signed, with the intent of
allowing free flow of trade across EU borders, creating the ‘Single Market’. (European
Union, n. d., para 5). The Maastricht Treaty in 1993 established the European
Union (EU), of which the EEC was a main component. The EU was formed with the
goal of unifying Europe’s nations under one united foreign policy, common
citizenship rights, trade rights and a single currency, called euro. (Pruitt
S., 2016).
Although the
UK became a part of the EU in 1973, the relationship between the UK and the EU
has been a turbulent one. The UK applied first applied for EEC membership in
1963. But France’s President Charles de Gaulle vetoed its application, on the
worry that English would replace French as the main language of the community.
But in 1973, UK was finally allowed into EEC under Conservative Prime Minister
Edward Heath. (The Telegraph, 2016). But within two years, UK was on the verge
on leaving the EEC. In 1975, UK voted on the referendum to whether stay or
leave the EEC. 67 percent voted to remain in the EEC. Tension again began in
1984, when UK Prime Minister Margaret Thatcher wanted to reduce British
payments to the EEC budget. At that time, the UK was the third poorest country
of the EEC, but was paying a lot more to the budget due to its lack of farms.
At that time, farm subsidies made up 70 percent of total expenditure. The UK,
due to its relatively few farms, got a very small share of the farm subsidies.
Margaret Thatcher with her tough talks managed to reduce Britain’s contribution
to the EEC from more than 20 percent to about 12 percent. The UK also had
issues with the EU regarding France’s ban of British beef during “mad cow”
disease outbreak in the late 90’s, to the decision to allow British chocolates
to be sold to rest of Europe in 2000, after a 27-year long dispute.
In 2011, David
Cameron became the first UK prime minister to veto a EU treaty. This was done
to protect London’s financial sector and stop a levy on banks. In 2013, he made
a speech where he outlined the challenges faced by EU and committed to
renegotiate UK’s membership with the EU. At the same time, a lot of support
began among British people for the UK Independence Party (UKIP), which held a hard
stance with the EU.
An ongoing
migrant crisis and an economic unrest in the Eurozone increased anti-Europe
sentiments. With the increasing support for the UKIP, David Cameron made a
pledge in 2013 that if the Conservatives were in power after the 2015 election,
there will be an in/out referendum. (Wright O. & Cooper C., 2016) . After
coming to power after the election, Cameron promised the vote by end of 2017.
He continued his renegotiation with the EU and had managed to make new deals
for Britain, which he said was a strong basis to back a Remain vote. To remove
the EU vote from holding headlines in the political agenda, David Cameron set
an early referendum date of 23rd June, 2016.
After the decision for the referendum date
was taken, a lot of polarizing took place for both sides of the vote-leave or
remain. Campaigns for both leave and remain had contrasting opinions of the
issues at large. Views for both leave and remain campaign regarding the
important issues are discussed below.
A lot of arguments for the leave
campaign was based on the fact of economic freedom of the UK from the EU,
control of UK border from the migrant crisis and trade deals. Arguments of
remain was that the vision of the leave campaign lacked convincing detail.
(Buttonwood, 2016).
The leave campaign had the view that the
UK’s links with the EU meant that it cannot make individual trade links with
emerging markets like China or India. Leaving the EU would allow UK to
diversify its trade deals. However, the remain campaign pointed the fact the 44
percent of UK’s export goes to the other EU countries. Leaving the free-trade
agreement of the EU would hurt UK’s economy and leaving EU would be
counterproductive. Remain also argued that leaving the EU will hurt the banking
industry in UK as trading advantages of being inside the EU helps the banks
make profit. The leave campaign rubbished those fears and believed that London
would remain a financial capital outside of EU, and banks would still want to
be based in UK due to low tax rates.
People for the leave campaign had the view
that the UK cannot control their border as long they remained a part of EU. EU
gives freedom of movement to other EU citizens and an automatic right to live
in the UK. (Smith-Riley B., 2016). The immigration crisis also triggered very
polarized views. EU had the belief that aiding the refugees was a moral
obligation. (Mauldin J., 2016). But people who wanted UK to leave EU had the
viewpoint that immigration was a national issue and each country should have
their own say on whom they want to enter their country. Remain campaign were of
the view that leaving would not solve the migration crisis, but simply shift
border control from France to the UK.
Regarding jobs, nearly 2.5 million people
are employed in UK due to EU trade, which gives freedom of movement for EU
citizens. The remain campaign held the view that closing the borders would result
in loss of some of those jobs, raising unemployment in the country. Also,
businesses may invest less in the UK as they may have to pay high taxes for
import and export, outside of “free trade”. The leave campaign was of the view
that the job loss claims were exaggerated. In fact, jobs may flourish in the UK
if they can provide better incentives to new businesses like low corporation
tax.
People for the leave campaign had the
belief that the UK may have to contribute to a EU army to fight against
terrorism and other threats. Such a contribution would take away funds and
independence from UK’s own military. Remain campaign argued that countries
working together would give the best chance to the EU to counter terrorism
threats from ISIS and other countries which wants to undermine the EU.
Many people who supported the notion of
leaving the EU believed that multinational organizations take away control from
the individual nations. There was growing mistrust between the countries,
coupled with a simultaneous rise in nationalism. There were calls for further
economic integration after the euro crisis, which was opposed by the euro
sceptics. Remain campaign argued that in this age of globalization, countries
must have common economic goals to sustain a healthy economy benefiting
everyone. They argued that it is better to remain a part of EU and help change
the rules from inside, rather than leave it altogether and have no say in any
new decision makings.
On June 23rd 2016, over 33 million people of the UK countries of England, Wales, Scotland and Northern Ireland cast their vote to either leave or remain in the EU. Leave won by 51.9% to 48.1%. But the voting pattern was different in the 4 countries. While England and Wales voted to leave the EU, Scotland and Northern Ireland voted remain. But the overall vote count had leave have more votes than remain. A breakdown of the vote for leave and remain for the individual countries is given below.
There was a political fallout
as the immediate result to vote for Brexit. Scotland, who had decided to vote
to remain in the EU, were forced to leave as the UK voted as a whole. Scotland
wanted to go for another referendum to vote and decide whether to remain as a
part of the UK, or gain independence and apply to the EU as an independent
nation. Prime Minister David Cameron, who led the remain campaign, announced to
resign from his position. Theresa May was appointed as the new Prime Minister
of UK on 13th July 2016. From the beginning, she was firm in her
decision that no attempts should be made by UK to remain as a part of EU or to
rejoin it after Brexit. On the other hand, Eurosceptic leaders celebrated as
they strongly wanted to withdraw from European Union, or diminish the scope of
EU’s legislative influence. There was a political uproar throughout the whole
country because people plunged into the phase of uncertainty that could not
only affect the global political situation, but also could impact the world
economy.
European single market is a trade bloc, that
enables free trade between 28 countries (including UK) that come under the
European union. This single market not only enables easy navigation of goods
and services between the member countries, and easement of several trading
barriers, but also boosts economic growth, helps in effective governance of
trade practices, and improves the overall standard of living in the member
countries. Brexit will not only
hinder smooth trade practices but will also affect the financial markets.
“Just a day after Brexit, it had been seen
that pound fell sharply against euro. On June 24th, the pound fell
to a 31 year low against the dollar.” (Allen K. and Monaghan A., 2016).
Sterling also fell against euro. This weaker status of pound against euro
brought tension among holidaymakers, tourists, and exporters because pound
could then fetch lesser returns and made trading more competitive. Tourists
from UK couldn’t travel Europe as comfortably like before as they got lesser
money’s worth after Brexit.
The Organization for Economic Co-operation and
Development, popularly known as OECD, which is an association for developed
nations, has stated that Brexit would bring a “major negative shock” in UK.
France, Germany and Italy are the stronger members of European Union. They are
also key trading allies of UK. But now due to Brexit there will be reduction of
trade with these countries due to stringent regulatory policies and lesser
labor mobility. UK cannot easily access the European single market. “By
2020, GDP would be over 3 percent smaller than otherwise in the U.K.” (Rafal Kierzenkowski et. al., 2016)
UK
has been the first state to withdraw membership from EU. Since no other state
has withdrawn the membership from EU, this could frame a pattern or design that
will enable the other member states to increase their momentum of membership
withdrawal from EU. In fact, after Britain’s exit from EU, Alternative for
Germany (AfD) chairman Bjorn Hocke said “I know the German people want to
be free of EU slavery.” On the other hand, there can be a different outlook
towards exit. “For instance, Scotland
might leave the U.K. to become a stand-alone nation within the EU (like the
Republic of Ireland).” (Geewax M.,
2016). In a nutshell, Brexit will keep bringing rippling effect that will not
only bring disruption in political front or obstruction in the flow of labor,
capital and commerce; but will also increase Euroscepticism among the present
member states of EU.
The unreliability and unpredictability of the
market after the referendum’s result came out, freaked out the Investors, which
also affected the commercial property sector. Estate agents were more affected
than house builders. As per Anthony Codling, an analyst at Jefferies, housing
sector would be comparatively less affected because government helped the
first-time buyers with financial aids. In fact, demand for houses would be
vigorous but the cost of construction would keep rising. Building shares kept
declining and the most affected housebuilders were Taylor Wimpy, Barkley and
Baratt. In FTSE 100, they lost more than 4% in addition to their land
securities. (Inman P. and Farrell S., 2016)
Retail sector was badly hit, which was
already going through a lot of pressure. In fact, before the voting results
were even declared, an atmosphere of uncertainty was creeping up. The shopping
habits of majority of consumers took a different path. They stopped spending on
things that do not come under necessary products. For example, the fashion
sales declined drastically and saw the biggest drop in their sales for seven
years. As most of the fashion retailers purchase their raw materials from Asia
and pay them in dollars, they have been affected more due to the drop in the
value of pound.
But
some companies have benefitted as well. We know that deflation is the situation
in which the supply of money in an economy gets diminished. During this time
the purchasing power of money is greater. So, Brexit would help to bring relief
to Britain’s supermarkets, which couldn’t earn their desired revenues in last
two years due to the deflationary environment.
Also, FTSE 100 index is currently at
7343.08 compared to 6338.10 on the day of referendum. This index basically
depicted many companies which earned in dollars and not in pounds in UK. Hence,
when there was a decline in the value of the pound compared to dollar, their
returns multiplied.
“Vodafone’s
announcement that it could move its headquarters out of the UK brought one of the most striking
impacts of the referendum on corporate Britain.” (Rhiannon B. et. al.,
2016).
Since EU has a pivotal role in regulating
the telecom sector, Brexit has already put forward many questions against
Britain’s own telecom industry. A Spanish telecom company called Telefonica
also began their assessment and evaluation of their UK based subsidiary company
named O2. An attempt was made to sell O2 to Hong Kong’s CK Hutchison, but that
unfortunately got hindered due to concern over competition. Later in October
2016, Telefonica has also renounced their plan of listing O2 in the London
Stock Exchange due to the tumult created by Brexit.
Also, there could have been rise in the
momentum of Vodafone’s merger with the company called Liberty Global, which had
taken over British cable group Virgin Media in 2013 to branch out into Europe’s
cable market. But due to the turmoil created by Brexit, the valuation of Virgin
Media had significantly dropped.
Insurance companies had to mandatorily
comply with Solvency II directive of European Union Law. This rule aims in
harmonizing EU insurance regulation. Solvency II consists of three pillars,
viz., pillar 1, pillar 2 and pillar 3. Pillar 1 states the quantitative
requirements and resources that insurance companies need to maintain for
meeting the liabilities. Pillar 2 deals with risk management structure, which
helps to foresee risk against which capital must be held. Pillar 3 deals with
transparency and disclosure of risk and meeting the capital requirements. Lord
Turnbull, the former civil service head who served as a board member of
Prudential, believed that Brexit would help the global companies who wanted to
disassociate themselves from the complex directive of Solvency II.
Also, after Brexit investors were in
dilemma because of its harm on balance sheets and regular business operations.
That’s why insurers had to struggle to minimize the immediate problem of share
price fluctuations. Legal & General’s stock declined substantially by 30pc in
two days, before it reassured shareholders that its solvency and cash
generation were retaining properly. (Williams C., 2016)
National Grid and SSE have both urged the Government to
ensure Britain remains in the EU’s internal energy market (IEM) that will
enable them to perform smooth trading of electricity and gas between UK and the
European countries. (Williams C., 2016). Since EU laid an easy pathway for UK
to make smooth dealing in regards to receive the utilities and benefits of
energy sector, Brexit would bring disruption in the whole process that ran with
a continuous synergy. Therefore, the UK consumers will now have to incur more
costs for energy consumption because UK’s exit from EU could lead to 500
million pounds rise in the cost of procuring energy as a resource.
Airline industry has also been badly hit
due to Brexit. Sterling’s sharp depreciation has brought perplexity in the
aviation sector because this decline in the value of sterling would reduce the
demand to travel. This drop in the value would make traveling more expensive. EasyJet
has already speculated that they will have less passengers to travel during
summer months, and this uncertainty has forced them to rethink whether they
should carry on their business in UK or not.
Pounds weakness would increase tourism in
UK. People from all around the world can visit and spend comparatively more
than what it used to be before. UK’s hospitality industry can flourish more.
Big touristy attractions like Madame Tussauds or Legoland can gain more foot
traffic. Even the renowned restaurants and pubs can get more customers.
Theresa May, the current Prime Minister of
the UK has stated that she will trigger Britain’s exit from the EU by end of
March, 2017 and begin the two years of negotiations. To begin the negotiations,
she must invoke Article 50 of the Lisbon Treaty, and decide on what deals the
UK will make with the EU. According to the deals to be made, people are terming
it as either a “hard” Brexit or a “soft” Brexit.
None of the states have ever left European
Union; Britain was the first to do so. This has created a lot of turmoil in
global economy. The rules for withdrawal or exit is mentioned in Article 50 of
the Treaty of Lisbon. Lisbon Treaty aimed to make EU more transparent and
efficient in functioning. It was a treaty that was agreed by the head officials
of EU member countries. But since UK has left the EU, Prime Minister Theresa
May would trigger Article 50 by the end of March 2017.
Though the decision of the referendum was taken in a day, the process of leaving EU will be time consuming. After Article 50 is triggered, no directives or rules of EU that exercise control over its member states, will be applied to Britain. Britain and EU will then become two individual parties to any contracts or agreements, and will have to take every decision through bargains and negotiations. Many economists believe that creating future trade relationships or agreements on crucial policies like immigration or trade tariffs between UK and EU countries can become more difficult and burdensome.
A hard Brexit will be an arrangement where
the UK will surrender its full access to the single market and customs union
along with the EU. (Sims A., 2016). The trade relationship will be based
initially on the World Trade Organization (WTO) rules. Going for a hard Brexit
will give the UK full control of its border, and decide on trade deals on its
own. A soft Brexit on the other hand will mirror the current deals the UK has
with the EU as much as possible. It will lose having a seat on the European
Council, but may keep access to the open trade market of the EU. The leave
campaign members are more inclined towards going for a hard Brexit approach,
while the remain campaign wants to take the path of a soft Brexit. However,
both approaches come with their own pros and cons.
International Trade Secretary, Liam Fox,
has said a hard Brexit approach would benefit the UK by making it a global
trading nation. (Sims A., 2016). However, leaving the open market may subject
the British goods and services to tariffs, as well as increase bureaucratic
checks on goods. If the UK decides to go for a soft Brexit, London’s position
as a financial hub may be kept intact if the UK decides to allow the EU rule of
free movement of European nationals to work and settle in the UK.
The latest update of Brexit’s
implementation is the Supreme court ruling. Justices
ruled that Prime Minister Theresa May cannot use the privilege to trigger Article 50 of the Lisbon Treaty and begin the
two-year process of negotiating the UK’s separation from its EU partners. (Telegraph
Reporters, 2017). Britain’s Supreme court has also ruled out that the UK
government must hold vote in the Parliament before beginning the process of
annulment. (Greene Allen R. & Dewan A., 2017). Though UK Government was
dissatisfied with this new ruling but they would abide by it. Jeremy Wright,
Attorney General of England and Wales, told reporters that they would agree to
court’s ruling but would also take every measure to implement Brexit. Theresa
May is playing the key role in enacting Brexit and she looks forward to execute
all the plans by the end of March 2017, in association with all who voted for leaving
EU.
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