Brexit: Causes and the Future of Britain

Abstract

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.

European Union and its History with the United Kingdom

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 10^th 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.

Decision to vote for Brexit

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 23^rd June, 2016.

Reasons for and against Brexit

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.

Main issues of Brexit

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).

Economic Issues

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.

Immigration and Jobs

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.

Defense and Sovereignty Issues

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.

What happened on June 23^rd 2016? How did UK vote?

On June 23^rd 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 13^th 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.

Economic & Global impact

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.

Currency Turbulence

“Just a day after Brexit, it had been seen that pound fell sharply against euro. On June 24^th, 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.

Reduced Trade

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)

Domino Effect

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.

Brexit’s influence on various industries

Housing and commercial property

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

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.

Telecom

“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

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)

Energy

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.

Transport

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.

Positive Aspects

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.

Current Scenario of Brexit’s Implementation

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. 

Article 50

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.

Hard and Soft Brexit

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.

Supreme court ruling

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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