Unless you have been living under a rock for the last three months… then you know that on June 24th, 2016 that the citizens of the United Kingdom voted to depart from the European Union (EU). The referendum vote was very close too. Only 52% of the voters chose to exit the EU.
While the exact timetable for the UK’s exit is unknown, Article 50 of the Lisbon Treaty stipulates that a seceding nation must negotiate a withdrawal agreement between themselves and the union. Unless, extensions are agreed upon, this process must be completed within two years of their formal announcement to the European council.
However, until Article 50 is invoked by the UK, they will remain part of the European Union with no ability to start formal negotiations until then. UK Prime Minister, Theresa May, has even made it clear that the nation still needs to prepare for Article 50 negotiations “and the United Kingdom will not invoke article 50 until our objectives are clear.” PM Theresa May has even decided to push the initiation of this process until 2017; a move which was backed by German chancellor, Angela Merkel.
Of course, a lot needs to happen between now and then within the UK. There is much dissent as to whether PM May can invoke article 50 without an Act of Parliament.
Effects of Brexit Vote
British Pound Devaluation
The effects of the Brexit Vote to leave the European Union were many. For starters, The British pound value crashed to its lowest levels in 31 years overnight as a result of the referendum. It dropped from around $1.44 versus the U.S. dollar to $1.32. It’s only now trading for $1.44 versus the U.S. dollar. This devaluation. This means that items and services priced in U.S. dollars and other popular currencies (British pound lowered versus other currencies as well) will cost more for consumers in the UK.
UK consumers are a big force in purchasing goods among the EU trading bloc and from the U.S. and Canada. The devaluation of the pound will force UK consumers to reduce their purchases from overseas.
Due to the fact that UK businesses are unsure of the consequences of the Brexit, due to uncertainty of what the post-Brexit relationship with the EU will be and what that means to their businesses, there is quite a bit of market volatility.
Businesses are cutting back spending due to risk of economic disruptions resulting from the exit from the EU. Putting off major business investments on things like real estate, construction, and other major spending projects.
Possible Implications of the EU Exit
We’ve established that the deals made between the UK and EU are unknown. Anything beyond this point of this blog post is purely speculative.
Possible effects will be in relation to regulations, trade costs, immigration, and consumer confidence.
The exit of the UK from the EU will undoubtedly mean a change to a lot of regulations that directly relate to trade costs.
Tariffs will likely increase between the UK and the EU, causing prices to rise. Also, prices will likely increase between the EU and countries that it has no tariff agreements with due to possible changes in border control and new regulations.
At this stage it’s too early to tell what changes will be made to the immigration policy between the UK and the EU. As most are aware the current policy is that anyone with a passport from an EU country can move freely among the EU. This may or may not still be the case for UK citizens after the exit.
Assuming that is not the case, there could be many implications.
For example, estimates are that close to half a million members of the UK retail, restaurant, and hotel sector are non—UK citizens. Changes to Visa requirements could potentially mean that these workers would have to leave the UK.
Although, this would be a positive for citizens in the UK who need jobs, it will be costly to businesses. Businesses will need to train new employees and it’s likely that labor costs could rise as there will be more competition and recruitment costs could also rise because of the competition.
Not only that, but the talent pool in the tech industry of the UK is already limited as it is, with a large number of workers coming from outside of the UK from countries like Poland. If these people are forced to leave the UK, even temporarily, it will lead to a shortage of workers in this industry.
If the UK exits the EU then it will no longer be required to comply with EU Consumer Law and thus adopt their own regulations. It is possible that that the UK could adopt many of those consumer laws. However, it’s not likely that they will adopt them all. If the citizens of the UK view these changes unfavorably then the consumer confidence will decrease. A decrease in consumer confidence leads to a reduction in spending. Something like this could drastically effect an economy.
There is a long road ahead of the United Kingdom on their path to exiting the European Union. The current effects have been limited to currency devaluation and market volatility as a result of future uncertainty. The post-Brexit effects have only been speculated but some of the things that we’ve discussed that can be effected are trade costs, immigration, and changes in consumer confidence.
What is actually agreed upon between the UK and EU in order to facilitate the UK’s exit remain to be seen. Let’s hope that the positives outweigh the negatives for Brexit.