We have all heard the term ‘Brexit,’ and most of us understand that is stands for “British Exit” which is the result of a national referendum that voted in favor of leaving the European Union. The vote was cast on June 23, 2016, and will come into force on the end of March 2019, but, what does it really mean. I try to break down the issue in easy to understand sections, so a clear picture can be fully understood by this momentous move.
A national referendum, that was voted by 17.4 million UK citizens, 51.9% to leave the EU and 48.1% or 16.1 million voted to stay in. Overall turnout was 72.2% of the voting population, and in comparison, 53.4% of English voted for leaving, while only 38% of Scottish voted for leaving.
The process for leaving the EU was activated when Prime Minister Theresa May activated Article 50 of the Lisbon Treaty. The UK has 2 years to negotiate a relationship with the EU before they are no longer members.
The Treaty of Lisbon
“The Treaty of Lisbon (initially known as the Reform Treaty) is an international agreement that amends the two treaties which form the constitutional basis of the European Union (EU). The Treaty of Lisbon was signed by the EU member states on 13 December 2007 and entered into force on 1 December 2009.”
This article in the treaty of Lisbon defines how a member state withdraws from the EU.
“2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.”
The negotiations are headed by David Davis, a Yorkshire MP, while the EU’s is Michel Barnier, a French politician. Davis’s mandate is to negotiate how the UK leaves the EU as well as post-withdrawal relations. There are two kinds of withdrawal mentioned in the media, “hard” and “soft.”
The initial fine or bill for withdrawing is set between £35 billion to £39 billion. This will be introduced gradually as partial payments to the EU onset dates for the EU budgets in 2019 and 2020.
Hard or Soft Brexit
This refers to the borders between nations, as in a soft border between the UK and Ireland, where the order will remain soft, meaning that there will hardly any regulatory changes when crossing the border between the two countries. Soft Brexit supporters claim that the UK must remain within the EU’s customs union and the Hard Brexit supporters demand total withdrawal.
This refers to the rights of EU citizens living the UK and UK citizens living in the EU. According to statistical sources, there are 3.3 million EU citizens living the UK and only 1.2 million UK born citizens living in the EU. The issue of citizens rights is a major bargaining chip in negotiations. On December 8th, 2017, a decision was reached where “reciprocal protection for Union and UK citizens, to enable the effective exercise of rights derived from Union law and based on past life choices.” This decision must present by parliament come before the actual withdrawal date and be ratified by the houses of Commons and Lords to ensure its legality.
Northern Irish Border
The northern Irish border has been rife with war and violence during all of the 20th centuries. It is a religious war between Catholics (Irish Supporters) and Protestants (English Supporters). The final ceasefire occurred in 1998, called the Good Friday Agreement, this made the border between the two territories invisible, or soft, where only street signs change to show where the UK stops, and Ireland starts. In order to assure that conflicts do not re-occur, the discussions led to a decision where the border will not change, “the avoidance of a hard border, including any physical infrastructure or related checks and controls.” and “the integrity of [the UK’s] internal market and Northern Ireland’s place within it, as the United Kingdom leaves the European Union’s Internal Market and the Customs Union.”. The issues raised here are critical since they involve smuggling and money laundering. While both these commercial and trade issues are critical, the possibility that violence will erupt when re-instating borders led to a soft border decision.
The Leave Supporters
The UK as never a full member of the EU, where the currency was separated, the UK retained its pound sterling, and the UK was not part of the Schengen Area, which means that some borders are closed between the UK and other European countries. Another main issue that tipped the scales in the referendum is the issue of immigration, terrorism, and religion. Where the increase in Islamic attacks, a growth in Middle East immigrants and the war on ISIS all added to an economic concern and xenophobia.
The Stay Supporters
This group fears that leaving will lead to financial and commercial disaster since the UK relies heavily on inter EU trade and commerce. The Stay supporters cite the “four freedoms,” which are the free movement of goods, services, capital and people across borders. The loss of which will destabilize the UK and the region, and weaken both against Asia and America’s.
Immediate reactions were expected, where the British pound suffered from a massive fall until it stabilized. The Pound is now trading much lower then it was before the Brexit vote and is currently settled around the $1.3:1 mark. For comparison, the rate was 1.56:1 during 2014, and 1.36:1 today, which marks a 13% decline. The Euro also crashed and is now trading at 1.22:1 compared to 1.3:1 in 2014, which signifies a 7% drop.
Equity was also damaged momentarily, but the FTSE rebound and most of the major markets including the DAX and S&P are all up 14% after the Brexit vote.
Until the deadline is reached, Brexit is the hottest issue being debated in the UK today. Headlines are constant; political maneuvers are constantly being used to assure the Brexit leaver’s group wins every vote. That is why all appointments are now Brexit related, and all elections will be Brexit tainted.
The Scottish parliament wants to leave the UK, and become an independent nation. It will then stay in the EU. This means that the Scot’s must undergo another referendum to leave the UK, they already asked this question and voted to remain a part of the UK. However, since the majority of Scot’s want to stay in the EU, this could tip the next referendum in their favor. The separation means that Scotland will become like Canada or Australia, a part of the British Commonwealth, where the Queen is Head of State, but the country is a separate nation with its own government and legislature.
For UK manufacturers, a weaker pound means growing business, and it would increase their global presence, which suffered greatly when compared to other currencies. Britain is a major exporter of machines, pharmaceuticals, vehicles, electronics, military, aerospace, oil, medical devices, organic chemicals, plastics, and gems.
Most of these sectors will benefit from the Brexit and markets expect to receive large increases in productivity, leading to a growth in employment. Certain markets such as India and select countries that trade with the UK will greatly benefit from Brexit.
The Norway Model: Join the EEA
Some have suggested that the UK join the European Economic Area EEA and become a member of the Norway, Iceland and Lichtenstein group. Since the EEA is not a part of the EU, it does not conflict with Brexit. It also allows the UK and Norway to become a small powerhouse.
The Canada Model: A Free Trade Agreement
Some supporters of Brexit consider the Comprehensive Economic and Trade Agreement (CETA) which is a pact between the EU and Canada as a good option for the UK. Ad to this the fact that Canada is part of the British Commonwealth, I could be a useful loophole to enable allowing continued trading between the UK and the EU on the same lines before Brexit. However, CETA does not include financial services, which is one of the UK biggest exports to the EU
The Switzerland Model: Bi-lateral Agreements
This is not considered to be a useful model, where the UK would develop multiple bilateral agreements with different members of the EU, each agreement offering different variances on access to the Customs, Financial, Trade and Immigration sections of the EU.
You hear this name often when discussing Brexit. “Although he was a member of the European Parliament, Farage campaigned to leave the EU as a key figurehead for the British exit from the EU in 2016. Polls on the day of the vote suggested defeat for the left campaign, though they were successful with 52 percent of the vote. On 28 June 2016, Farage made a speech in the European Parliament in which he claimed that a hypothetical failure for the EU to forge a trade deal with an exiting UK would “be far worse for you than it would be for us,” to heckling and laughing by Parliament members. He insulted his fellow MEPs, claiming that “virtually none” of them had ever had done “a proper job” in their lives.”
Sources: http://www.telegraph.co.uk/news/2016/06/24/nigel-farage-has-earned-his-place-in-history-as-the-man-who-led/ and https://www.independent.co.uk/news/uk/politics/nigel-farage-european-parliament-speech-heckled-brexit-eu-referendum-a7107131.html
There are much more in-depth and comprehensive details to discuss, including the effect of Brexit on UK’s position with the World Trade Organization (WTO), and the effect of trade between the US and the UK, not to state the 63 third countries that are covered in agreements through the EU.
Brexit is a headache for the UK, but, if handled right will prove to be beneficial to them in so many ways. It can lead the UK to a better financial future, with absolute control over their own legislature, free of European Union considerations.