Brexit: How It Will Impact the Thing That Makes the World Run?

The economy makes the world go round, and the FOURTH biggest player in the global economy is making a big change to their economy. "So will that affect the world economy?" yes. "Will it affect the economy of whatever country you live in?" yes. This major change that is happening to the UK, the fourth biggest country in the economy, is that they are leaving the EU, a political but mostly economic group, through Brexit. And although there are many different little news articles that are going on with Brexit right now between what Theresa May is saying, along with other members of British Parliament as well as other global leaders around the world, Brexit is a complex issue with a lot of little moving parts. But one big question in relation to Brexit is how will Brexit affect the economies of the world? There is no guaranteed answer because no country has ever left the EU before, especially not a country as big as the UK. But there are many speculations by global economists, business leaders, politicians and even every day people as to what will happen to the thing that makes the world go round: the economy.

The UK’s Economy

Recently the EU and the UK have begun to plan for the possibility of the collapse of Brexit talks. As many as 2 score conservative members of parliament have signaled a lack of confidence in prime minister, Theresa May. Relative uncertainty has plagued the talks so far, as businesses and individuals clamor for clarity so as to plan future deals and financial actions. On November 6th, Prime minister May pledged to increase research and development spending in the UK to 2 billion pounds annually by 2021. This is another effort to offset the potential negative effects of Brexit on british firms. Overall, British citizens and companies are worried about the relative lack of clarity and foresight regarding the Brexit and how it will affect them.

Another interesting development lies in regard to the so called “divorce bill”, which will represent the conclusion of Britain's financial commitments to shared pensions and financial instruments. This bill has been a sore spot within the UK, as many politicians believe that Britain should not share in the bills of the European Union. However, recently Environmental Secretary Michael Gove stated that he would give May discretion in settling this bill, and would not oppose paying the EU to leave the union. However, given the large percentage of financial transactions which take place in London, and the ramifications of trade on both sides, a hard brexit could be disastrous.  

At the end of October the Bank of England released a report concerning the potential impact of Brexit on jobs within the finance sector. Without a deal explicitly exempting the finance sector the losses could be in the tens of thousands. In fact the bank believes that a number of 75,000 would be reasonable given the lack of an explicit deal. If a hard brexit were to occur the banks would lose the so called special passporting rights, which would make it much harder to higher foreigners. Approximately 10,000 of these jobs would be lost almost immediately, which would be disastrous for the British and European Union economies. However, estimates for jobs lost in the financial sector range as high as 200,000 which suggests that there is much uncertainty amongst professionals.

Ultimately, the key issue currently facing Brexit negotiators, businesses, and politicians is that “if” uncertainty. Because of this doubt and lack of clarity people are not able to plan for the future, which is harmfull to the economy.

For businesses, it is important to be able to consider future as well as present operations. The levels of staffing, budget allocations, and a host of other office and managerial decisions, must be made well in advance. If company needs to hire or fire new employees, it needs to do so well in advance so as to avoid losing precious time. However, since Brexit negotiations are uncertain, business have no idea what the future may hold.

There are a host of potential impacts on a business which could be negatively affected by Brexit including taxes, work permits, and tariffs. Each of these will be individually decided during talks, and will have huge ramifications on the actions of businesses in the EU, Britain, and around the world. Higher tariffs would mean reduced imports. This may be good for British firms, as they would have a more captive audience, however, it would be bad for British consumers. Higher taxes almost always means higher prices, so citizens in the United Kingdom would be forced to pay significantly more for goods from around the world. If citizens of other EU countries were no longer allowed in the UK, many would be fired and businesses would be less competitive. While it might be possible for British citizens to fill those gaps, it will take time to get them up to speed which will cost British company's money. Finally, taxes, if British firms are unsure of how they will be taxed, it may cause them to decide to move overseas. The Panama and Paradise papers have shown that companies and wealthy individuals are willing to do anything to avoid taxes, and any uncertainty will almost assuredly lead to money leaving the UK and heading to other countries such as The Caymen Islands.

The EU’s Economy

After the Brexit vote was cast, many wondered how it would affect not only the British economy, but the EU’s as well.  Compared to the economic status that Britain will most likely acquire due to it’s leaving the EU, losing the UK does not make the EU suffer as much economically. In fact, depending on the type of deal made, the main areas in which Brexit will change to the EU economy would be within trade, the EU budget, and investments. Being the EU’s second largest contributors towards the EU budget, the EU will need to find a way to make up for these lack in funds. Within the Brexit deal, a trade agreement is also being made, in order to sustain both economies. As well as this, the UK is one of the main recipients of foreign investments, and so many EU countries might possibly be sought after for investment opportunities in order to have a link into the European economy.

 

The EU has 27 other countries who contribute to their fund, however the UK was one of the main contributors and made up 5% of this fund, leaving the EU 19.4 billion euros short per year.  This lack of money will most likely fall on Germany, as they are one of the EU’s largest members and will possibly have to pay an extra 2.5 billion Euros per year. Alongside this dip in funds, trade deals between the EU and the UK are being evaluated.  “The EU can cope without an EU-UK trade deal much easier than the UK can since less of its GDP depends on the flows of trade between the two economies” (Brinded 2017). However, in the best interest of both economies, many people believe that a trade agreement should be put in place.  The data shows that the amount of trade between that UK and the EU is substantial, meaning both parties would be hurt economically if they do not incorporate a free trade deal.  After the official results of Brexit, the UK was hit with the weakening of the Pound, this in turn impacted EU goods exported to Britain, which make up almost 2.6% of the EU GDP. Also due to the Brexit results, “a possible reintroduction of import tariffs of 10%” will appear, leading to the reduction of EU GDP by 0.26% (Blenkinsop, 2016). If a trade deal is not put in place, the countries that would be impacted the most would be the Netherlands, Belgium and Ireland, since they have heavy trade relations with the UK. Despite funding and trade causing a depletion in the EU’s economy, investment takes a different turn.  When the Brexit vote was in place, many companies were waiting to learn the results in order to decided whether or not to invest in British companies, since they are the best way to branch out into Europe.  “The United Kingdom is consistently the largest recipient of foreign direct investment in the European Union, according to UNCTAD data, with an average of some $56 billion per year in the 2010-2014 period. EU partners supply just under half of this” (Blenkinsop, 2016). Now, with one of the largest holders of foreign investment most likely losing their investors, the opportunity opens up for other EU countries to become the primary recipient.  “The major EU27 exporters of capital measured in stocks of FDI to all worldwide destinations are Germany (€1,634 billion), France (€1,184 billion), the Netherlands (€948 billion), Spain (€426 billion), Italy (€421 billion) and Belgium (€414 billion). The same set of countries are the leading importers of capital, although on a somewhat smaller scale.” (An Assessment of the Economic, 2017).  While a hard Brexit wouldn’t affect the European Union as hard or as dramatically as it would the UK, it could still do some serious damage, the worst case scenario being economic dislocation and financial blight that could spell disaster for the European economy.

The Global Economy

Since its founding the EU has been one of the biggest players in world economics. It is not only extremely stable, but also a large importer of goods from all around the world. Since its beginning the EU has put a large amount of money and resources into the world. In 2016 it was the second largest economy in the world generating 19.2 trillion dollars in economic output, only behind China (Amadeo 2017). While the EU only has 6.9% of the world's population it accounts for almost 20% of the world's import and export. The EU works not only to stabilize the economies within but also helps to stabilize the economies outside of it's members. But with the oncoming storm that is Brexit, the EU and its role in the world's economy is in a state of danger, as the EU will be losing a large contributor to its economy, which could lead to many different outcomes and effects to the world's economy (The Economy 2017). 

Since the Brexit vote last year other world powers have been almost betting on how the UK leaving the EU will turn out. These bets are, on the most basic level, shots into the dark as there is no precedent for this action. While there is a vague timetable that is outlined in the Lisbon Treaty it is assistance that they will have in the process of deciding on the thousands of details that bind the UK and the EU and to finally snip the binds that tie them together. There are many potential impacts that Brexit could bring, one big impact that is possible is that businesses will flee from the rocky and potentially unstable EU and UK markets to “safe haven” markets such as the U.S. and Japan. This could lower the market interest rate in both the UK and the EU (The Potential Impacts Of Brexit 2016). In the recent months many other world powers, including South Korea, the U.S., and China, have pushed for a speedy Brexit deal. This urgency for a fast deal comes from the fear that the trade relationships will begin to fail or at least be disrupted if a Brexit deal takes a long time (Hunt 2017). This is a giant concern as in 2016 the UK imported 635.76 billion dollars in goods and exported 409.4 billion, which are not numbers to scoff at (WTO 2017). According to the World Bank 2016 was the weakest year for the world’s economy since the 2008-09 recession, a large cause behind this was Brexit (Elliot 2017). Many fear that this trend will continue and lead to worldwide economic instability or at least Europe wide, which is exactly what the EU was created to prevent. Took help prevent this some are even suggesting extending May’s recommended two year transition period to five years (Treanor 2017).

Some speculations about what will happen as a result of the Uk leaving the EU are negative, and others are positive. There are many small factors that could affect whether Brexit is “positive” or “negative”, but there is no way of being sure. We have provided you with some possible scenarios of what could happen as a result of the UK leaving, but there is no way to be positive as to what will happen. A lot of speculation, however, does show that the UK leaving is a negative thing because it shows an increase in nationalism and distrust in other states and their 

governments. Just as a side note, these types of feelings did lead to WWI and WWII. But the UK seems to be realizing the faults of Brexit, hence why it is becoming so impossible for British Parliament to make any progress in the Trade Negotiations. Where we are on the “timeline” can be answered by one title of an article from Wharton Magazine of University of Pennsylvania: ‘Bracing for Brexit: Virtually All the Work Is Still Ahead’ says it all. Britain is still trying to put together a trade deal within their own Parliament. There is however one interesting new development that could potentially cause a lot of derailment, and that is that Ireland threatens to block progress of Brexit talks over border issues. There is no telling what may come of this as the situation has just developed, but it could cause the Brexit negotiations to take an even longer unnecessary amount of time. But as we have seen from the impact economically of Brexit on the UK, EU and the World, YOU should care about this. The fourth largest contributor in the global economy is leaving the financial union they have been apart of since June 5 1975 and there are going to be major ripple effects if it happens.

One Perspective on Brexit

Another Perspective on Brexit

Sources

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