Brexit Is Here, So What’s Next?
A week ago, few people expected Brexit to happen. Yes, most of us anticipated that the mood of discontent in some sectors of the United Kingdom would manifest in a sizeable protest vote. However, it only started to dawn on me at around 12:30am on Friday morning that something was amiss and that a seismic change was on the way. When the fifth district to report a result, Sunderland, came in with a significant proportion of people voting to exit the EU, I suspected that the game was up. The news only got worse after that and it culminated in a majority vote for the UK to leave the EU.
The impact of Brexit will be felt differently by different sectors and indeed by different countries. Take Ireland for example. The UK and Ireland joined the EU together 43 years ago, after many years of a common travel area and virtually unrestricted trade between the two close neighbors. With the UK leaving the EU, Ireland now finds itself isolated from Britain, which it relies upon as an export market in a number of key areas including beef (50% of exports), food and drink (42% of exports), timber and construction products (55% of exports). The level of trade is by no means one way and the UK exports more to Ireland than it does to China, India and Brazil combined.
The historic bi-lateral arrangements between Ireland and the UK are unlikely to feature as important to EU negotiators, as the EU moves to encourage a quick implementation of the United Kingdom’s exit from the EU. Ireland is not in a position to negotiate trade and travel arrangements with the UK anymore as the EU will now carry out negotiations with the EU as a whole. Given the population of Ireland versus the rest of the EU, Ireland is likely to have little influence over the new arrangements to come and its voice will be weak at a time when the direct impact on Ireland will likely be far greater than on any other of the European partners.
This will be further exacerbated by the mood of EU officials and leaders, who seem to want to punish the UK for walking away from their alliance with Europe. This is considered necessary to prevent the spreading of discontent amongst other EU members who might decide to run their own referenda to pull away from the EU project. Already, there are strong soundings from France that the National Front party wishes to run its own referendum for France to leave the EU.
An Ipsos Mori poll in March this year showed a majority of French and Italian people would be in favor of a vote on EU membership and that more people were in favor of holding a referendum on continued EU membership than not holding one in each of Germany, Spain, Belgium and Sweden. The fear of contagion reigns supreme amongst the mandarins in the European Commission and the European Parliament.
The Brexit supporters in the UK have managed to get what they wished for but they may live to regret it. In many ways, it was a vote of discontentment from certain sectors of the UK population that have suffered from austerity measures in recent years, an increase in immigration that could not be prevented due to EU laws on freedom of movement, and last but not least, enforced quotas of migrants from refugee countries in North Africa and the Middle East.
Working class voters, and particularly those over 50 years of age, voted in large numbers against remaining in the EU as a form of protest against falling living standards, poorer access to social services, and a perception that politicians do not care about their position or their concerns. Add in the general discontent with the situation where just 1% of the population controls 99% of the wealth in the United Kingdom and the country has created the conditions for a perfect storm.
Sew the wind and reap the whirlwind. Although many British people are enjoying a feel-good factor from having given the establishment a bloody nose, the harsh reality is that the EU exit has decimated the value of the British currency and it has rocked the values of publicly quoted companies in the last week. The prolonged process for exiting the EU, which takes a minimum of two years, and probably more when one considers that all new trade agreements will need to be negotiated with the EU and other countries, this becomes problematic. Brexit has created uncertainty and the markets remain volatile.
Some Possible Implications
- Continued volatility in the markets
- Further decline in the value of sterling currency, particularly versus the US dollar
- Fall in credit rating by rating agencies
- Reassessment by multi-national corporations (MNC’s) about their continued presence in the UK in the absence of EU membership and potential tariffs on trade into the EU block going forward
- Reduction in inward investment by MNC’s
- Downgrading of UK’s financial sector and move of euro-clearing operations elsewhere
- Structural funds will dry up and will no longer be available for UK projects
- Loss of EU’s agriculture subsidies and higher food prices
- Fall in investment of British firms due to uncertainty
- A possible dip into recession once again
- Higher transaction costs due to introduction of tariffs and customs clearance requirements
- Increase in oil prices due to lower value of sterling versus the US dollar
- Higher travel costs due to weakness of sterling
- Possible restrictions on air travel as UK may no longer be part of Open Skies Agreement
- Possible removal of freedom of movement for UK citizens wishing to live or study in EU countries
- Fall in demand and prices in the UK property sector
- Changes to legal framework as EU laws are removed from UK statutes
Should the UK look to emulate Norway’s membership of the European Economic Area (EEA), it will remain burdened with freedom of movement of people; it will have forced adoption of many EU laws; it will have to contribute substantially to EU budget to gain market access; and all of these restrictions will be applied while the UK will not have a seat at the negotiating table. It is hardly a palatable choice given the desire of the British people to sever their ties with the EU.
All in all, it’s a bit of a mess and it will be some time before the full impact of an impulsive but sizable cohort of the British voting public will be known. Some say that the Brexit vote may be responsible for the break up of the United Kingdom itself, with Scotland looking to continue its EU membership and perhaps break its direct ties to the United Kingdom. Beware of the law of unintended consequences!