On June 23, 2016, a UK-wide referendum was held on the country’s membership of the European Union (popularly known as Brexit). About 52% of those who cast their votes supported Great Britain’s withdrawing from the EU, while another 48% were opposed to it. The referendum was advisory, which means that its results should be approved by the British Parliament.
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The referendum resulted in Jonathan Hill stepping down as British Commissioner in the EU on June 25, 2016. Great Britain’s flag near the building of the European Commission in Brussels was lowered. The English language lost its official status in the EU. Meanwhile, the number of ethnically and racially motivated crimes committed in Great Britain increased tenfold.
The plebiscite also led to David Cameron resigning as Prime Minister and Conservative Party leader. The EU, in its turn, came up with a statement saying that the UK’s withdrawal from this organization wouldn’t be possible without the country’s working out a fully legitimate way of doing that.
Immediately after the announcement of the referendum results, the UK economy began to decline, with the British pound hitting its lowest value to the dollar since 1985. Even skeptics could not predict that sterling would drop from 1.5 to 1.32, reaching a new 31-year low against the US currency. Many experts did prognosticate that the referendum would affect the British economy but they didn’t think it would hit it that hard.
The UK’s decision to leave the EU left the British business community in a state of deep uncertainty. About 80% of CEOs expressed an opinion that the future didn’t look particularly promising for them. The adverse effect is expected mainly in the wholesale, retail, production and other sectors of the economy that rely heavily on migrant workers.
According to the OECD, Bank of England and Treasury, the UK economy may lose up to 8% of GDP due to Brexit. Some experts claim that these losses could be offset by specific measures aimed at streamlining national legislation and attracting foreign investment.
However, the plummeting pound has already made the UK less attractive for foreign direct investment (FDI) which is predicted to decrease by 22%. According to Ernst & Young experts, international financial institutions can withdraw up to $1 trillion from the UK, which accounts for nearly 10% of all of the country’s banking assets. Analysts from Goldman Sachs Bank posit that Brexit has already cost the UK economy more than $100 billion and about 2.5% of its GDP. After the UK quits the EU, the real income of every British family is projected to decrease by £1,250 annually in the next several decades.
Dramatic Events of 2019
It was planned originally that the UK would withdraw from the EU on March 29, 2019. However, the UK Parliament did not approve any variants of “divorcing” with the EU until that date. Therefore, Theresa May, British Prime Minister, asked the EU to postpone Brexit. According to the new conditions, the deadline for leaving the EU was moved forward to May 22. However, it has recently become known that the British Parliament has delayed the UK’s exit from the EU until June 30.
On January 15, 2019, UK MPs rejected Theresa May’s EU withdrawal agreement. After that, thousands of people took to the streets of London demanding that the Prime Minister and her government call off their Brexit plans. Nevertheless, the House of Commons has rejected the draft deal three times by now.
Negotiations with the EU were deadlocked due to the organization’s steep financial demands. Initially, Brussels wanted London to pay it some 60 billion Euros; however, it then increased the bill to 113 billion.
Also, the status of more than 3 million Europeans currently residing in the UK is not yet legally defined.
The third stumbling block is the border separating Northern Ireland, which is part of the UK and the Irish Republic.
As of now, none of the three obstacles has been resolved.
“Hard” or “Soft” Brexit
Recently, the European Commission has made it known that it’s OK with a no-deal Brexit (the so-called “Hard Brexit” option) and taken some steps in this regard.“Hard Brexit” means that the UK will leave the EU’s customs union and common market on April 12, 2019. Many British economists, including Liam Fox, State Secretary for International Trade, expressed an opinion that the “hard” approach would help the UK become a world trade state. However, according to the International Monetary Fund, exiting without unconditionally is the worst case scenario for the UK because it can immediately result in the British economy shrinking by 4%.
This version of Brexit will affect not only the UK but also the EU countries that export their products to Great Britain. For them, the United Kingdom will become a “third world country,” and this fact will have grave economic consequences, such as increased tariffs and quotas. The origin of goods brought into and out of Great Britain will have to be verified at the border where no restrictive measures have been administered for decades.
“Soft Brexit” scenarios, e.g. maintaining the UK’s membership in most significant treaties or using the Norwegian model (i.e., an association with the European Economic Area), can be more beneficial to both parties. Also, as soon as the UK exits the EU, the former can sign new agreements on free trade with EU countries or deal with them on the basis of the WTO regulations. Of course, trading under the WTO terms will lead to an increase in customs tariffs and additional fees for complying with the EU standards. This can be particularly burdensome for UK companies that do business in international markets.
At the same time, the cheaper pound will make the British export operations more competitive abroad and help mitigate the consequences of leaving the EU. In particular, this may have a positive effect on the UK tourism industry in the future. While it will be more expensive for tourists from the UK to go on holiday abroad, more foreigners will come to Great Britain and spend their money there.
What We Can Expect?
The UK hasn’t experienced a more profound political crisis since the end of WW2. According to the British Institute for Fiscal Studies, the economic forecast is pretty disappointing. The planned exit of Great Britain from the EU without an agreement is becoming increasingly real. If the UK leaves the EU without it, the losses are likely to be almost catastrophic.
The economic consequences of Brexit will also depend on whether new agreements with other countries can stimulate the growth of the British economy (just as the British government hopes). The EU, in its turn, is likely to support a softer version of Brexit, which implies maintaining economic ties between Great Britain and the EU. Brussels is ready to make concessions to minimize negative consequences for both parties. However, this option will depend not only on the decisions taken in Brussels but also on the current political situation in Great Britain.
Now, the British Parliament supports delaying Brexit until June, 30. According to the Financial Times, European officials are now considering an option whereby the “divorce” can be postponed to January or April 2020, thus giving the UK a chance to take part in the elections to the European Parliament.