5 Key Questions about Brexit

Brexit has become a long drawn out, contentious process, with only a tentative end date in sight. Since the June 2016 referendum, a split between those who want to stay in the EU and those who want to sever ties has only increased. This bitter division on how the future of the UK should look like has caused political instability.

Former Prime Minister Theresa May’s government drafted a withdrawal agreement in 2018, which was rejected in Parliament three times. She resigned from her post in June 2019 and was replaced by the Conservative leader, Boris Johnson, who is a staunch supporter of Brexit, deal or no-deal. Johnson did what his predecessor couldn’t. He came up with a withdrawal agreement, supported by the EU, as well as Parliament, to a great extent. But just as it looked as though the UK would finally leave the European Union on October 31, 2019, Parliament forced Johnson into requesting for yet another extension.

Now, the revised Brexit date has been set for January 31, 2020. Meanwhile, Britain faces a general election in December 2019, so that the country can finally end this political stalemate. Brexit developments over the past couple of years could leave even the most ardent news follower with questions. Here are 5 of the most common of those questions answered.

1.      Why is the UK so Interested in leaving the EU after so many years?

Over 52% of British voters decided in favour of Brexit in the 2016 referendum, surprising almost everyone. Supporters argue that the relationship with the EU impinges on the UK’s sovereignty. In economic terms, the EU hampers the UK’s trading ties with other countries globally. Trade deals apparently take more time to negotiate with the EU as the middleman. Without the EU, Britain might be able to strike better deals, on its own terms. Many have also expressed concerns over the UK bearing the brunt of the EU’s credit crisis.

Rise in immigration is another factor. The EU added eight Eastern European countries to the bloc in 2004, which has caused more people to migrate to the UK in search of jobs than ever before. For instance, in 2011, foreign born residents in England and Wales were double the figure in 1991, at 13.4% of the population. This is believed to have caused a strain on public services.

Apart from the reduction in available jobs, UK citizens have complained about a gradual lack of control over local economies and dilution of the local culture and language. None of these complaints are substantiated by evidence, though. In fact, the UK is at a risk of losing 40 trade agreements in 70 countries, if it leaves the EU without a deal.

2.      What is the difference between a hard Brexit and a soft Brexit?

Countries that are part of the EU customs union are exempt from both tariff and non-tariff barriers. The single market ensures frictionless movement of people, goods and services through the EU member nations.

Hard Brexiteers, those who want to leave the EU, even with a no-deal Brexit, want the UK to completely get out of this union and single market, so that the nation can gain control over its own trade policies. This would mean that the UK would cease to enjoy the free movement of services and goods within the EU, and new trade deals would need to be inked with every single EU nation.

These terms would fall under the ‘old’ World Trade Organisation (WTO) rules, which means that tariff would be applied on UK exports. This is likely to lead to inflation. The Organisation for Economic Co-operation and Development (OECD) says that a hard Brexit will likely cut 3% off UK’s economic growth over the next 3 years. It could even lead the country into a recession.

However, over the last 3 years, people have realised that the UK cannot afford to lose its largest trading partner overnight. They call for “soft Brexit,” where the UK will retain some benefits of the customs union and single market access. However, it will not have any say over how these laws are formulated or where they are applied. This quest for a sound withdrawal agreement is what has caused so many issues.

3.      Will the Pound Sterling collapse after Brexit?

Once a symbol of economic power and prestige, the British Pound Sterling has suffered a lot in the last 3 years. After the referendum in June 2016, the Great British Pound (GBP) fell 8% against the US Dollar and 6% against the Euro. Supporters argue that a weaker currency would increase exports, raise demand for UK goods and services and create jobs.  But, in the last three years, the UK’s trade deficit has only widened.

A weakened GBP has made imports expensive. Britain does not really export any large amounts of raw materials, but imports finished goods like cars. The sudden rise in import prices has led to a reduction in wages and therefore, a fall in consumer demand. Economists predict that, should the UK leave the EU without a deal, the Pound Sterling could fall to levels within the $1.10-$1.19 range, which is a quarter of its pre-referendum value. A lot will depend on the general election in December. If a soft-Brexit favouring party comes to power or a party with full majority wins, the value of the GBP could surge. The currency market is likely to continue to remain volatile until then.

4.      Could the UK slide into a recession after Brexit?

This depends on the terms of the withdrawal agreement. The cost of a no-deal Brexit would be huge for the British economy. The Bank of England (BoE) says that without a trade agreement, the economy would shrink by 8%, leading to an employment crisis. In Q3 2019, the UK recorded its slowest economic growth in 10 years, narrowly missing recession. Businesses have stalled their investment activities and consumer spending has declined, due to the persisting uncertainty. Major companies, like Goldman Sachs and Deutsche Bank, have moved some parts of their businesses outside the UK. Airbus has said that it might leave the country, in the event of a no-deal Brexit.

In short, the UK economy might be weaker in the immediate future. A lot will depend on the trade agreements reached.

5.      Will Brexit affect other global economies?

An economic downturn in one country creates ripple effects all through the world, in this era of globalisation. After the Brexit referendum, the Dow Jones fell 600 points, erasing $2 trillion from the global markets. The US and UK have a lot of investments in each other’s domestic economies. A sharp rise in the US Dollar versus a weakened Pound Sterling and Euro would hamper US exports. This could cause a strain on the US manufacturing sector, already burdened by the trade war with China.

Along with the US, Japan might also see a surge in the value of the Yen, since investors tend to flock to its domestic currency, which is considered a safe-haven asset. China could be caught between two of the largest export markets, the EU and US, and might need to lower the value of the Yuan further, in order to deal with a rising US Dollar. The European Central Bank would be forced to increase its market interventions, owing to a rise in risk premiums across the region.

The UK is a significant market for 10% of each EU country’s exports. On the other hand, half of Britain’s exports is consumed by the EU. Germany, the EU’s star economic performer, is already suffering from a slowdown. The dent in the Eurozone’s structure could lead to further weakening of its fragile expansion cycle.

Overall, the cost of Brexit is likely to be far-reaching, not just for the UK and the EU, but for the global economy.

Reference Links

• https://www.vox.com/world/2019/4/10/18283027/brexit-news-uk-eu-questions
• https://www.foxbusiness.com/politics/brexit-chaos-all-of-your-top-questions-answered
• https://www.independent.co.uk/voices/brexit-pound-sterling-fall-no-deal-boris-johnson-trade-a9145701.html
• https://www.cnbc.com/2015/05/27/why-would-the-uk-want-to-leave-the-eu.html
• https://edition.cnn.com/2018/11/28/economy/brexit-economic-impact/index.html
• https://www.forbes.com/sites/baininsights/2016/06/29/the-potential-impacts-of-brexit-on-the-global-economy/#35f4fe2f7b48