Post-Brexit: What now?

- Meghana Yerabati , Economics Association

2017-02-19

Technical

The Economics Association will be doing a series of comprehensive all-you-need-to-know articles on current topics. Here is a glimpse of what was discussed during the Brexit panel discussion with Mr. Shamuel Tharu on August 26th.

Perhaps the best summary of Brexit was given by biggest fund manager in the world*, BlackRock, which said that:

“Our bottom line is that a Brexit offers a lot of risk with little obvious reward.”

This was the consensus that most of us arrived at by the end of the Brexit debate. Brexit need not necessarily be bad for EU or the rest of the world. But the uncertainty about the future is too high to speculate. Now that the vote has been in favor of Brexit in the referendum, we take a brief look at the debate that took place and the state of affairs now.

The European Union and the Single Market

The European Union grew out of a desire for peace in a war-torn and divided continent post the World War II to foster economic co-operation. The United Kingdom joined the European Economic Community (EEC), the predecessor of the EU, in 1973, though continued membership was approved in a 1975 referendum by 67% of voters.

As a result of the Maastricht Treaty, the EEC became the European Union on 1 November 1993. The new name reflected the evolution of the organisation from an economic union into a political union. The European Union, therefore, is now an economic and political partnership involving 28 European countries. It set up a single market that allows the free movement of goods, services, money and people within the European Union, as if it was a single country. It is possible to set up a business or take a job anywhere within it. The idea was to boost trade, create jobs and lower prices.

It requires common law-making to ensure products are made to the same technical standards and imposes other rules to ensure a “level playing field”. But this policy of common- law has been criticized as some believe that it generates too many petty regulations and robs members of control over their own affairs.

The most contentious issues were those involving trade and immigration. When public support for keeping Britain within the EU was collapsing, Mr David Cameron- the prime minister of UK and member of the Conservative Party- fought for the renegotiation of its terms to save Britain’s membership. A more generous deal—perhaps aimed at allowing the U.K. more control over immigration, the top public concern in Britain—would probably have (just) stopped Brexit. But the deal failed to pull through, and the referendum took place to weigh popular vote through a plebiscite.

Now that the referendum has passed with the Leave Vote winning the majority (London and Scotland voted to stay in the EU, Wales and the English shires voted to get out.), UK will have to invoke an agreement called Article 50 of the Lisbon Treaty which gives the two sides two years to agree the terms of the split.

Theresa May- the new prime minister and also a member of the Conservative Party- has said she will not kick off this process before the end of 2016. Article 50 was only created in late 2009 and it has never been used. The UK must now notify the EU, negotiate a new deal with the 27 EU member states and get it passed by the EU parliament- a process which can take a few years.

Political Changes

Mr. Cameron announced that he would resign because he felt the country has taken a new direction—one that he disagrees with. Mrs May was also against Britain leaving the EU but she has now said she will respect the will of the people. May is hopeful in gaining support from other member states whose economy is strongly tied to the UK, thus “allowing a more nimble union to focus on the free trade of goods and services without undue bureaucratic burdens, modern antitrust law and stronger external borders, leaving the rest to member states”

Theresa May has set up a new government department, to be headed by veteran Conservative MP and Leave campaigner David Davis, to take responsibility for Brexit. Former defence secretary, Liam Fox, who also campaigned to leave the EU, has been given the job of international trade minister and Boris Johnson, who led the Leave campaign, is foreign secretary.

The UK Parliament has proposed a number of alternatives to EU membership which would continue to allow access to the EU internal market. These include remaining in the European Economic Area (EEA) as a European Free Trade Association (EFTA) member

Economic Changes

The UK economy appears to have weathered the initial shock of the Brexit vote, although the value of the pound did fall near a 30-year low, but opinion is sharply divided over the long-term effects of leaving the EU. IMF forecasts reduced world economic growth by 0.1%. uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth by 1.5%

Permanent hiring had dropped to levels not seen since the 2009 recession. Producers costs have risen. Britain also lost its top AAA credit rating, meaning the cost of government borrowing will be higher.

The Bank of England is hoping its decision to cut interest rates from 0.5% to 0.25% – a record low and the first cut since 2009 – to stave off recession and stimulate investment, with some economic indicators pointing to a downturn causing higher inflationary pressures

Even if the pound regains some of its value, currency experts expect it to remain at least 10% below where it was on 23 June, in the long term. Imports will be more expensive unless producers absorb the extra costs without passing these on to customers.