Brexit: What happens now?

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By Bella Jones and Gabrielle Timm

On June 23rd, Britain held a historic referendum to decide whether to remain in the European Union and 52% of the British public decided to leave the European Union (EU). This significant and surprising decision produces many questions as to the future of the global economy in terms of not only the United Kingdom (UK), but the EU, and there are no clear answers for anything yet.

 

BACKGROUND: BRITAIN’S HISTORY WITH THE EU AND THE RECENT DILEMMA

The EU traces its roots to the aftermath of World War Two, with the idea that increased trade and cooperation would decrease the likelihood of nations going to war with each other. The European Coal and Steel Community was the first step, with six countries deciding to form a common market for coal and steel. This was followed by the formation of the European Economic Community (EEC), which was built on the idea of a common market and a customs union between the same six countries. While Britain was not one of these initial countries involved in building the foundation of what would become the EU, it was a part of the first wave of expansion of the EEC in 1973. Though Britain joined in 1973, the matter was submitted to public vote in 1975. At that time, Britain decided to join the rest of Europe with a resounding 67% in favor of EEC membership. However, several key factors were different at that time . The EEC was a much smaller and less bureaucratic organization than the current EU.  In the 1970s, Britain was economically weaker in comparison to other European countries, while today it is doing relatively well in comparison to other EU countries.

This context brings us to the recent debate over Britain’s participation in the EU. Those against Britain’s departure from the EU, the Remainers, argued that EU membership made trade with other EU members easier, benefitting the British economy. Furthermore, the influx of immigrants benefits the economy, as they are mostly young, looking for work, and help pay for public services. Finally, they argue that Britain will have more influence on the international stage as a member of a larger group than the country would as an individual actor. Those in favor Britain leaving the EU, the Leavers, argued that the EU imposes too many restrictions on businesses and that membership fees are large in comparison for what Britain gets in return. They also argue that Britain has lost control of its borders and want to reduce influx of immigrants, who they say are a threat to security and are straining public services. Finally, they argue that increasing size of the EU has diminished Britain’s voice in the discussion of international affairs, as well as its sovereignty.

 

WHAT HAPPENS NOW

In the short term, this will negatively affect the global economy. The value British pound plummeted by about 8 or 9%; it is currently at its lowest point in three decades. Though Britain never used the Euro,  the multinational currency has been affected as well with its value dropping about 3%. Stock markets around the world are also declining as a result, as investors shy away from uncertainty. Markets in Spain, Italy, France, Germany, and Japan have experienced the most serious turmoil in the day after the vote, with percentage point declines ranging from -13% percent to -7%.

However, Britain’s departure from the EU will not happen overnight as they begin to negotiate their exit from the EU, making long term tracking a bit murkier. David Cameron, the Prime Minister of England, who resigned this morning, had promised before the referendum that Britain would immediately invoke Article 50 of the Lisbon Treaty should Britain chose to leave the EU. This Article sets a two year timetable for negotiations of departure, which will be agreed upon by the other 27 countries in the EU without a British vote. However, due to Cameron’s resignation, Britain will likely wait to invoke this article, moving for informal negotiations with the EU before setting this specific time frame.

As for immigration, which was a major debate topic prior to the referendum, there is the question of how much immigration policy will actually change, and much of that has to do with how Britain negotiates its exit and future relationship with the EU. One possibility could be that Britain becomes a part of the European Economic Area (EEA), like Norway. However, in this scenario, along with contributing to the EU’s budget Britain would still be required to allow the free movement of people. The other possibility would be to opt out entirely and trade with the EU under the rules of the World Trade Organization, which would not benefit Britain’s economy. A third option would be negotiating an entirely new deal, of course, but that would take time. The EU’s trade agreement with Canada took 7 years and it still isn’t ratified. Britain faces a situation of extended political gridlock while dealing with economic downturns all the while.

In addition to new challenges with its external relationships, the UK faces internal political turmoil as well. In response to the British referendum results, leaders in Scotland and Northern Ireland have made calls to leave the UK. If you break down the numbers by region, 62% of the Scots and 55.7% of the Northern Irish voted to remain. Today, Nicola Sturgeon, the First Minister of Scotland, reaffirmed earlier comments, saying that it was “highly likely” that Scotland would call for another vote on independence from the UK. In 2014, the Scottish referendum for independence failed, with 55% of the population voting against leaving the UK.  For Northern Ireland, it will have the only border in the UK that touches the EU after the split. Currently, the free movement of people along that border is dictated by the Common Travel Area, which predates the EU, but there are questions of whether that will be able to continue without the agreement of other EU countries. Additionally, because the EU provides Northern Ireland with a great deal of financial support, Northern Ireland may face serious economic problems as a result of the departure. The vote has reignited anti-unification sentiments in both regions and may be a sign of internal political turmoil for the UK in the coming months.

In turn, this will also affect the internal politics of the EU in several ways. Britain is a large trading partner for a number of EU countries, notably Ireland, the Netherlands, and Luxembourg. These countries will likely experience some economic pains. France and Germany are also large trading partners, but can weather the shock better. For Luxembourg, France, and Germany, the potential relocation of some financial institutions could potentially benefit their economies. However, where the Brexit could hurt the EU the most is politically. Strong Eurosceptic voices, which have been growing in recent years, will be emboldened by Britain’s departure from the EU. Sweden, Denmark, and the Netherlands have the strongest Eurosceptic voices, with several right-wing parties now calling for referendums of their own. France’s resurging Eurosceptic voices will also receive a boost.

This unprecedented decision has brought with it many political and economic questions that will cause chaos for both Britain and the EU. For Britain, it will be a question of how it will now relate to Europe. For the EU, political unity and economic relationships will be affected by this departure. Only time will tell whether the long term effects of the Brexit will be worth the current turmoil for Britain and how successfully the EU will be able to respond to losing its first member.

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