Brexit Consequences to the Economy

Question: Discuss about theBrexit Consequences to the Economy. Answer: Introduction Brexit which is an abbreviation for British Exit refers to the intention by the United Kingdom to withdraw from the European Union after the June 2016 referendum. This process has led to a lot of controversy on economic and diplomatic scholars who have argued for and against the process. This is because the timetable and terms of withdrawal had not been set up to as early as September 2016. The EU treaty of 2007 gave member countries under article 50 where constitutional requirements of a member country give the freedom of a member country t exit the EU after a member country has given notice of exit and the member countries have unanimously voted in favour of the exit (Nicholas, P12). UK joined the EEC which later changed to EU on January 1973, however after joining the EEC there a contest in the UK n whether the country should stay in EEC or exit. This led to a referendum in 1975 where the electorate voted to approve UK to remain in EEC. Booth et al (P11) suggests that since then ideologies in support of withdrawal and those for membership formed the basis of camping for political parties in UK. This thus led to pressure on David Cameron the prime minister of UK to determine the position of the UK people within the EU. Pressure from MPs from Camerons side and those from the UK Independent Party led to the announcement by the conservative party that it will introduce a referendum on Brexit. When the party won the election, there was no option but to introduce the referendum where the electorate voted for exit. This led to major campaign groups like vote leave, leave EU, Grass root out, and Better off out. These campaigns overpowered the official campaign to remain in EU (Britain stringer in Europe). This referendum that led to Brexit was thus a campaign manifesto pledge by the conservative party. Economic Arguments for and Against Brexit According to Breinlich, Dhingra and Ottaviano (p21) Members of the EU contribute an annual membership fee which costs the economy of the country. In 2015 UK made a net contribution of 8.5 billion pounds that amounts to 7% of UKs expenditure on NHS each year. This means that exit from the EU will benefit the UK through reinvestment of the membership fee into the country. This will thus change the nature of spending within the EU and thus new financial negotiations by the UK will help in benefiting from the EU investments without being a member. This comes with extended benefits of falling within the EU zone and the strategic position of UK in the EU. Prior championing of reallocation of EU spending from administration and support makes(Crafts, p191). Extended benefits of exit will lead to other countries moving away from the EU and thus making UK the preferred destination for business. The exit from the EU will lead to sovereignty by UK where the British parliament will have more powers to make decisions that can improve the economy of UK. This benefit will be coupled by other EU regulations which affect all countries and thus UK will have some level of sovereignty. This will include regaining of fishing rights on its coast which may improve the economy of the country. Experts argue that overregulation costs the UK economy 125 billion as a result of the Brussels red tape. However sovereignty will lead to negotiation of trade deals with emerging economies like China and Japan. Based on the Swiss or FTA models the UK negotiates access to EU markets Brexit model adopted by the UK will either improve the economy r lead to dire consequences. Due t EU priorities in agriculture and regional structural activities, the UK will benefit proportionately by bargaining on how the benefits are concentrated. However it will be easier for UK to negotiate its investment agreements with other countries outside EU that offer market for EU. Through this negotiating flexibility will increase business opportunities and advantages that come from the agreements by the UK and other countries. Therefore UKs membership in the EU leads to a lot of benefits that are as a result of free trade (Glick and Rose, P. 1131). Baldwin (1137), argues that EU has established a single market where no tariffs are imposed on both exports and imports between member states. UK exports 50% of total exports to EU countries without trade restrictions and tariffs. Therefore the EU gives member countries advantage to have a say on what happens within the bloc. Further EU countries benefit from trade between other superpowers like the US where the EU intends to create a bigger free trade area for its members. An exit from the EU will mean that UK loses all these benefits and has to make trade negotiations on its own. Further the country will have to face trade tariffs that non EU countries have faced since the inception of the EU. The UK will thus rely on trade agreements between individual countries which may be expensive since the EU has a larger control and the European countries may not be willing to make free trade agreements with UK (Haskel, Pereira, and Slaughter, p 491). UKs treasury released a report justifying the consequences of Brexit to the economy of the country. The report suggested that Brexit will increase unemployment and the value of the sterling pound will be affected. According to the Guardian Brexit vote was the beginning of UK recession with many changes being seen immediately after the vote. According to experts this meant that Brexit was not a good idea for UK. Declining prices in the real estate and pound verses dollar exchange are an indicator that all is not well. Brexit presents challenges that the UK has to deal with which will automatically affect the economy of the country. Through EU supply chains are concentrated geographically increasing the supply ratio of gods from UK. Thus Brexit will reduce trade and increase the cost of trade in the EU. This is due to loosing the benefits of the single market that provide economies scale and competition within the EU area. Thus UK largely benefits from the high ratio of trade that is r elative to value added terms from the EU (Straathof et al p13; Alfaro et al p97). Minford ( 21), Further experts argue that economic risks like increased tasks due to the Brexit will lead to decline of key businesses like car manufacturing companies that have benefited from the EU membership and thus enjoying free exports. Banks may also be forced to move their headquarters to the EU which will lead to a drop in tax revenues enjoyed by UK. Many countries invest in the UK since it is a gateway to the free EU market. Through this UK makes 400 billion a year from EU trade and thus could reduce UKS GDP by 10% since it may amount loosing over 500 million customers. Further trickle down effects of the exit will cost the citizen more money as a result of loosing EU benefits. EU citizens enjoy lower credit cards, cheap flight safety standards, and environmental standards. Thus the citizen will lose protection from the Brussels authorities that protect EU citizens against abuse from multinational companies. This means that Brexit will not affect that UK government but rath er UK citizens will lose the benefits that they have enjoyed from EU membership (Ottaviano et al, p9). Evaluate the Financial Impact on London as a Leading Financial Centre in the World, if the Referendum Result on Brexit on 23 June 2016 Turned out that Britain Leaves the EU. Dhingra et al (p13,), state that the argument on the effects of Brexit on the UK economy extends to the dominance of London as the leading financial centre in Europe. Different arguments have been presented on whether London will remain an important financial centre under the new conditions. London is the worlds financial leader above New York that is regarded the financial powerhouse of US. According to Feyre(21), in the last decades London quickly rose due to developments from emerging markets that are a result of BRICs economies. These economies have changed time zones of financial centres where Londons working hours have overlapped all major financial centres. This has enabled London attain global reach by influencing the terms of the fianc industry. London has thus become a boardroom centre for financial decisions across the world. This includes interest rates, commercial mortgage contracts, and insurance contracts. This rise in financial globalization has positioned London at the centre of international banking. Therefore the Brexit decision will affect the role of London as a worlds financial leader. Therefore London is the most preferred centre for many businesses due to its strengths that date back to the 19th century. The city has relied on the time zone, language and legal advantages within the city. This will be an advantage to the city in the case it exits from the EU since develop a revolution for digital technology and artificial intelligence. However the bargaining exit by UK will determine the benefits that London will get from the EU. George Osborne has lobbied for protection of London from EU regulations against British banks against other countries (Holehouse, p 23). Pain and Young (p391), suggest that the exit from the EU will affect London as a preferred financial hub with most banks like JPMorgan Chase Co., and HSBC bank having plans to move some of their investments to Paris. Experts argue that the city of London cannot avoid financial consequences that it has benefited from the EU. Most investors will pull out of London since the free trade benefits that are as a result of the EU rules will not apply. Further London has prospered in regulation making it the best preferred EU country. Brexit will create a long period of uncertainty within UK and London to landlords, homeowners and developers. International investors will change their investment trends and thus some business sectors. These market unrests will therefore reduce the dominance of London and the prices that have been set by the city. London will lose its dominance therefore becoming an offshore centre vulnerable to EU policies and regulations. This will therefore lead to some dominant businesses within UK shifting their operations. This will lead to the emergence of new cities within Euro zone like Paris where the business operations will shift to. British banking industry that is a major boost to London will lose access to a single market giving rise to other regions. For example US banks have developed plans that will ensure they dominate the EU market after Brexit. The banks have already moved some of their activities to Dublin as an early preparation for Brexit opportunities (Baier et al, 490). Further trickle down effects to London will affect over two million workers who earn a living in the city. The workers will be forced to leave London due to limited opportunities. This exit from London will affect the housing industry and reduce the tax revenues that are gained from these two million people. The Centre for European Reform study for reforms study established that these changes will make Britain to be classified as third world country by EU. Therefore EU regulations on third world countries to maintain and regulate their financial sectors will limit grants that UK receives form the EU. Therefore the outcome will be reduced opportunities for UK and London. Longer Term Risk Management Approach of British firms if the Referendum Results on Brexit Markets in the UK are experiencing high volatility levels with sharp falls by experienced on the sterling pound, banking stocks and reducing credit rate of the UK. This falling in stocks affected many countries like Germany, Italy, and France. This deteriorating economy presents markets with two uncertainties of getting outside the EU and how they will reach their. This presents political risks that will change the future of the UK. The conservative party in the UK is being faced with political challenges with the UK prime minister being ready to resign. The conservative party has the task of leading the country out of the EU and seeing the country regains its position in Europe. Clear political strategies that are aimed at changing the countrys political nature. The new prime minister has to negotiate the terms of exit in the EU. Article fifty of the constitution stats the exit plan that will take the country two years to leave the EU. UK has to agree on new arrangements that will s ee the European council support the exit (Campos, Coricelli and Moretti, p 32). Negotiations on the exit are supposed to form an exit plan that will see the removal of cross border barriers that will hinder UK from accessing cross border advantages in the market. Directive like capital Requirements Directive (2009/138/EC), Markets in Financial Instruments Directive (2004/39/EC), Payment Services Directive (2007/64/EC) and Undertaking Collective Investment Scheme Directive (85/611/EEC). These directives can be used to develop new regulations that will see UK benefit firm EU. However UK can also adopt the Norwegian Model by becoming a member of the EEA with European Free Trade Association (EFTA) where there will be access to the single European market but will lose the decision making advantage. This means that policies will be made by other countries and thus will be dictated on UK. Alternatively UK can become a member of the EFTA without EEA developed from Switzerland approach of negotiating bilateral agreements n specific areas of the single market that UK has interest in. Lack of decision making on policy issues will limit UKs ability on negotiating rights on passports that may have tremendous effects on some European banks. These regulations will affect business and how UK as a country relates with other partners (Mejean and Schwellnus, p8). Parker has developed a decision that will see UK leave EU through a new practise that will see 100 technical experts from different areas and industries to provide strategic advice and support to develop clear policies and strategies for implementation of the disengagement process. Conclusion Britain has been an EU member for over forty years and thus an exit will automatically interfere with the economy f the country. The effects will create an economic uncertainty that will negatively affect households spending. However UK can borrow from models like the Norwegian style of European Economic Area, Turkish style of customs union, free to agree, Swiss-style bilateral accords and MFN approach in doing trade within the EU. However the prospects of changes in the financial market are dependent on the outcome of the referendum where an exit will affect the stock market, bond market, and the sterling pound where the tremors will spread and affect other markets in the world. 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