Britain’s exit from the European Union has been a tale of two halves. A satisfactory economic performance following the shock referendum result have gradually given way to a slowdown. The uncertainty of the UK’s future both economically and politically does not imperatively mean that the nation-state is over. Thus, the question is: To what extent is Britain in fact worse off with Brexit?
By Dina Marto
To evaluate Brexit, it is important to understand why Britain decided to leave the EU. In the referendum held on June 23, 2016, the UK voted to leave the bloc by a margin of 51.9 percent to 48.1 percent. Although opinion polls were close, betting markets predicted a victory for the “Remain” campaign, hence markets were caught by surprise with the referendum results.
According to the “Leave” campaign, Britain’s soveriegnty and economy had long been constrained by membership of the EU. Concerns over immigration also played a big role, given that freedom of movement for workers was a founding principle of the bloc.
The entire process for Britain to leave the EU will take two years (from March 29 this year until the same date in 2019), and negotiation goals are being set out by Prime Minister Theresa May in a letter to the EU Council President Donald Tusk through Article 50, the exit plan for any member of the EU. May will retire as Prime Minister on August 30, 2019 following the complete exit of Britain from the EU.
As part of this exit process, the UK and EU negotiating teams will be meeting for one week each month to agree on the impact of Brexit on the UK economy, the post-Brexit trade deal, reach an amount of money that the UK will need to pay upon leaving the EU, its relationship with neighboring and international countries, as well as 43-years’ worth of treaties and agreements covering thousands of different subjects related to the UK’s relationship with EU member states.
Impact on the UK Economy:
Preceding Prime Minister David Cameron, his Chancellor George Osborne and other senior governmental figures who wanted to stay in the EU predicted an immediate economic crisis should Brexit occur. However, these predictions of immediate difficulty were defied with the UK economy estimated to have grown 1.8 percent in 2016, second only to Germany’s 1.9 percent among the world’s G7 leading industrialized nations. However, the growth rate has only improved to 0.3 percent in the second quarter of 2017 and still remains “tepid” according to the International Monetary Fund, and considerably slower than the average 0.5 percent that the UK has achieved since 2010. As such, many economists view the outlook of Britain’s economic growth as troubled.
Inflation (or CPI – Consumer Price Index), has risen since June 2016 to stand at 2.6 percent due to a drop in the price of petrol, which offset upward pressure from import-sensitive goods and services such as clothing, household goods, and food and drink. The Bank of England expects the CPI to reach 3 percent by the end of 2017. Further price increases can continue to harm living standards and household budgets, especially that they are rising faster than wages. For example, the Real Pay is down 1.4 percent between April 2017 and June 2017.
Positively, unemployment has continued to fall to stand at a 42-year low of 4.5 percent. Low unemployment has traditionally meant higher wages, which means that Real Pay could rise in the short-to-medium term. However, if wage growth remains low, the Bank of England is likely to delay raising interest rates. Because of the uncertainties of Brexit, Britain’s labour market is becoming progressively challenging to interpret. Conventional economic theory suggests that low unemployment should ultimately lead to an increase in wages, but puzzlingly, there has been little evidence of this as of recent.
As for mortgage and borrowing rates, an early post-referendum cut in interest rates helped keep rates low, but only for the end of 2016. The proportion of income saved by households hit a 53-year low in the first quarter of 2017, highlighting that people have been saving less and borrowing more to maintain their levels of consumption.
As a result, the price of properties has fallen from 9.4 percent at the time of the referendum to 5.6 percent in April 2017. The market is losing momentum and UK housing prices are in their worst slump since the aftermath of the 2009 financial crisis after falling three months in a row and this is largely due to the weakening of the pound. Nonetheless, should the Bank of England consider increasing interest rates due to the continuous rise in inflation, mortgages and loans might become more expensive to repay, which in turn could increase savings (and potentially the size of the economy and its growth).
Value of the Pound:
Following the results of the referendum, the pound slumped and remains around 15 percent lower against the dollar and 10 percent down against the euro. Even if the pound regains some of its value, currency analysts expect it to remain at least 10 percent below in the long-term. Nonetheless, the lower value of the pound does not necessarily mean that this is a negative outlook for the UK’s economy; UK goods will be cheaper, and imported goods will become more expensive. This suggests an increase in domestic production, which can support a rise in economic growth.
Trade and the Single Market:
With Brexit, the EU will lose its second-largest economy and its second-largest net contributor to the EU budget (Germany: 14.3 billion pounds, the UK: 11.5 billion pounds and France: 5.5 billion pounds). Thus, the departure of the UK could result in an additional financial burden on Germany and France unless the budget is reduced accordingly. Germany would have to pay an additional 4.5 billion pounds for 2019 and again for 2020, while France would need to pay an additional 1.25 billion pounds in 2019 and again for 2020.
The post-Brexit trade deal is likely to be the most complex part of the negotiation process as it will need the unanimous approval of more than 30 national and regional parliaments across the EU, some of whom may want to hold referendums.
The single market is seen by advocates of the EU as one of its biggest achievements and one of the main reasons the EU was established. Up until the referendum, Britain was a member of a free trade agreement in Europe where countries can trade goods, services, money, and people within the EU as if it was a single country.
Following the referendum, the Institute for Fiscal Studies has warned that Britain could lose up to 70 billion pounds in reduced economic growth if it did not retain single market membership. Additionally, the Financial Times has estimated that exiting the Single Market could account for a loss of up to 71,000 jobs and 10 billion pounds of tax annually.
However, one of the options for the UK to take up on is the Transatlantic Trade and Investment Partnership (TTIP), which is currently under negotiation between the EU and the United States and would create the biggest free trade area in the world. Even with Brexit, the UK can still negotiate joining this free trade agreement with the United States and allow for a boost in British exports to the U.S. to approximately 10 billion pounds a year. Nevertheless, given that US President Donald Trump has been an opponent of the agreement, the implementation of TTIP is perceived with negative outlook.
Another option would be for Britain to join the Free Trade Association of the European Economic Area along with Norway, Lichtenstein, and Switzerland (non-EU members).
Even without an agreement on new free trade accords, the UK will operate under World Trade Organization rules, meaning customs checks, increased tariffs on goods, and longer border check for travelers. The increases in trade costs between the UK and the EU will focus on higher tariffs on imports, higher nontariff barriers to trade, arising from different regulations, border controls, and the lower likelihood of the UK participating in future EU integration efforts, such as the continued reduction of nontariff barriers. Thus, the overall net effect of Brexit is likely to be negative. WTO tariffs are already quite low, so further reductions do not make a substantial difference.
Big corporations were in favor of Britain staying in the EU given the uncomplicated movement of money, people, and products around the world. While the long-term effects of Brexit on UK corporations will become clear by 2018, profit growth at some of the UK’s largest companies is expected to drop considerably. Financial Times analysts expect profit growth to rise by 7.2 percent in 2018, compared to an expected 19 percent this year.
Moreover, many companies are putting plans on hold or are planning to shift their operations to other parts of the EU. Examples of these companies include:
- Burberry, whose planned trench coat factory in Leeds has been put on hold.
- Deutsche Bank could move 4,000 jobs out of the UK (which is approximately half of its workforce) as early as next year over concerns that it will not be able to conduct business throughout Europe after March 2019.
- Barclays Bank has already chosen Dublin, Ireland as its post-Brexit European hub. The bank has around 120 staff in the country and will expand this by at least 100 employees by next year.
- Goldman Sachs has planned to relocate its hedge fund operations from London to New York City.
- Lloyds is planning to move its insurance arm to Brussels, Belgium. However, the new office would be an additional base and less than 100 London jobs would be affected.
This is one of those issues where it is not possible to say conclusively what will happen post-Brexit. For now, British expat communities around Europe (though not definitively in every single member country) can get free access to local General Practioners, and their hospital treatment is paid for by the National Health Service (NHS).
If Britain remains in the single market, it might be able to continue with this arrangement. However, if Britain exits any or all free trade agreements with EU member states, it may opt to continue paying for expats’ healthcare through the NHS or British citizens will have to cover their own costs if they continue to live abroad.
Immigration was the second-most important reason for advocates of Brexit, suggesting that Britain had to take back full control of its borders and reduce the number of people living and/or working in the nation-state.
Prime Minister May has said that she is committed to bringing net migration (the difference between the number of people entering and leaving the country) down to a “sustainable” level, which is below 100,000 a year. Net migration to the UK was estimated to be 248,000 in 2016, a fall of 84,000 from 2015.
Sectors such as hospitality and construction, which rely heavily on EU workers, are already warning of growing skills shortages. Universities have also expressed fears over losing important staff members.
There are 3.2 million EU citizens in the UK. As part of the negotiations, and according to May, all EU nationals lawfully residing in the UK for at least five years will be able to apply for “settled status.”
However, if the government opts to impose work permit restrictions on EU nationals through its Brexit negotiations, then other countries might reciprocate. This could lead to an increase in visa and work permit applications, and a possible loss of jobs if applications stall or are prolonged over a period of time.
As for tourists, it would depend on visa restrictions and negotiations with the EU, non-EU member states, and the rest of the world. As for UK nationals, it can be argued that this issue will not be a problem for them as many non-EU member countries such as Iceland, Lichtenstein, and Norway will accept British tourists for up to 90 days without a visa.
The Cost of Brexit:
According to the EU, the UK will not make an exit from the EU until it settles all outstanding bills. There has been no official estimate published of the size of the bill, which covers pension payments, EU officials, the cost of relocating London-based EU agencies and outstanding EU budget commitments.
Several figures ranging from 44 billion pounds to 88 billion pounds have been discussed. Although the UK has agreed to meet its financial obligations, Brexit secretary David Davis has said that they will not be paying any number close to 100 billion pounds as the amount is immaterial to the UK economy and should be excised. Nonetheless, not paying the obligations can and will lead to extensive court battles over many years.
The EU will conduct European Parliamentary elections in June 2019, where 73 members of the parliament from the UK will have to vacate their seats. In April 2017, a group of European lawmakers discussed what should be done with these seats; one plan is to replace them with a Pan-European constituency list, and another would be to drop the British seats without replacement, and reassigning some or all of the existing seats from other countries to reduce inequality of representation.
Domestic and Foreign Policy:
Following Brexit, UK foreign policy will need to secure the nation-state’s long-term interests, security, and prosperity. Britain will need to avoid fatalism and instead seek to shape events in its own image and to its benefit. Anyhow, the UK will still have a significant military force, will remain a wealthy country, and will still be a nuclear power.
Relationship with Scotland:
The majority of Scotland voted for Britain to remain in the EU. However, following the Referendum results, Scotland’s First Minister Nicola Sturgeon has said that it was “democratically unacceptable” for Scotland to face being taken out of the EU. Sturgeon has officially asked for permission for a second referendum to be held in 2018 or 2019, but this might not take place until 2021 following the rejection of May. In retaliation, Sturgeon has called for an independence vote for Scotland from the UK. Although Scotland cannot block Brexit, it will still have the right to move forward with its independency vote.
Relationship with Northern Ireland:
The land border between Northern Ireland and EU member the Republic of Ireland is a key part of the Brexit negotiations. Ireland, Northern Ireland and the UK have shared, (since the 1920s), a Common Travel Area without border controls. According to May, she intends to maintain this arrangement.
Like Scotland, Northern Ireland voted to remain in the EU in last year’s referendum. Sinn Fein, who was part of the ruling coalition in the Northern Ireland Assembly before it was suspended, has called for a referendum on leaving the UK and joining the Republic of Ireland as soon as possible. Nonetheless, the Conservatives rejected Fein’s request.
Following Brexit, in order to prevent illegal migration across the open Northern Irish land border into the UK, the Irish and British governments suggested in October 2016 a plan whereby British border controls would be applied to Irish ports and airports. However, this agreement was never official and was met by opposition from political parties in Ireland. In April 2017, the European Council agreed that, in the event of Irish reunification, Northern Ireland will be able to rejoin the EU. For the short-term, this is unlikely to occur.
Relationship with the Rest of the World:
The objectives of British power will remain unchanged. These include formal membership of international organizations such as the UN, the G7 and NATO, the Commonwealth and a broader network of strong alliances across the world.
The UK should aim to create a post-Brexit ‘special relationship’ with the EU on foreign and security policy. The gap in diplomatic representation resulting from Brexit will need to be filled by the UK by investing more in bilateral and diplomatic representation in other European capitals. For example, the UK’s influence on European security will remain considerable, given its position as NATO’s most willing European power.
The UK with Germany and France will continue to maintain close relations outside the EU due to their strong trading links. German and French relations are likely to become more important post-Brexit, but there could be some limitations with regards to military cooperation and intelligence sharing.
As for its relationship with the United States, it has been mentioned that both US President Trump and Prime Minister May will continue to maintain a strong relationship, especially in terms of military and economic cooperation, despite his objection to the TTIP agreement.
Overall, the bottom line result is simple: under all probable scenarios, Brexit is more likely to make Britain poorer compared with remaining in the EU. The long-term economic and political consequences of Brexit will depend on whether or not Britain will see a positive trajectory in its economic growth so that it can provide the resources needed to support its credible role as an independent international power. The greatest task for the UK government is to establish guiding principles for a strategy to remain a viable economic and political influencer worldwide. The UK will need time to proceed positively with Brexit negotiations, and the most important constituent in protecting British interests, prosperity, and security now is resilient political leadership.