Brexit: Repercussions for the UK and a Wake-Up Call for the EU

Bob Harvey|| Creative Commons Attribution-Share Alike 2.0 Generic

Few days after the referendum, the topic of Brexit is widely debated in the media. Would it be better for the United Kingdom to leave or not? At first glance, Brexit seems a rational move. UK uses its own currency, it doesn’t belong to the Shengen area, it is a wealthy country hence it doesn’t receive any financial help. These aspects were used by David Cameron in his election campaign as he promised to set up a referendum about whether the UK shall stay in the European Union (EU). However, the exit from EU could not be as beneficial as it seems and could cause a wide variety of negative effects.

Membership in the EU gives the member countries opportunities to benefit from favorable agreements. EU is ranked first in GDP among other partnerships, including superpowers (such as US or China), as well as in foreign trade. This is even more admirable if we take into account that EU doesn’t rank first in population or territory. After UK exits the EU, EU loses this position which causes both UK and EU to lose their influence, which would be greater if they stayed together.

The EU is considered a very important trade partner of UK. British exports to EU contribute 12% to the British GDP and make up 45% of the exports. As UK exits EU the trade will be regulated according to the Most Favored Nation terms, which would prescribe imposition of taxes. This would also mean that UK will lose all agreements that EU negotiated. As previously mentioned, UK benefited from the favorable trade deals made by the EU. The EU currently maintains 36 agreements with 53 countries. After Brexit UK would try to establish new trade agreements (it is estimated that the negotiations would start in 2019), however they may not be as favorable as before. The negotiations may take up to three years, so the problems with the implementation of tariffs cannot be solved in the short run.

One of the sectors which deserve special attention is the financial sector. It greatly benefits from the access to the Single Market. The financial sector helps to balance the current account balance. UK has a deficit in the trade of goods, but there is a surplus in the trade of services. The financial services make up to 7% of the economic output and are responsible for 4% of all the jobs in the British economy. From the total amount of financial services, 40% of the services are exported to the EU, although if the UK leaves, the amount of financial services exported may not fall as much as expected. Despite the fact that Switzerland isn’t a member of the EU, it is able to export 45% of it financial services to the EU. However, in this case it should be noted that Switzerland was able to negotiate unusually good terms of international trade with the EU.

Brexit can also have an impact on other aspects of UK and its economy. One which would greatly affect UK is the impact of Brexit on migration. Brexit would slow the inflow of migrants down, what would play an important role in the British economy. It would also affect the British government as well as foreign direct investment.

Furthermore, Brexit would negatively affect the exporters. This may result in lower tax revenue gained from exporters. This impact can be much bigger if we take into account the British budget deficit. In 2015, UK had a deficit of 96.2 billion, which is 5.2% of British GDP. This is the biggest budget deficit since 1948. Brexit can also make it harder to pay off public debt. The British public debt is increasing. In 2014 UK had a debt of 90% of UK GDP. One quarter of this debt is borrowed from foreign subjects. Moreover, Brexit would negatively affect the foreign exchange. The lower value of the British pound can result in inflation in the industrial sector.

Brexit would also make UK less attractive for foreign investors. UK is currently rated as one of the most attractive countries for investors, which can be backed up by the fact that it is ranked first in terms of FDI. Foreign investors (either from the EU or outside the EU) recognize the aces to the European Single market as an important factor that makes UK attractive. In case of Brexit, the amount of foreign investments would decrease resulting in lower productivity and technological innovation. The investments that would be invested in UK, will simply move to other EU member countries.

As it was already mentioned, another trend that would change if the UK would exit the EU is migration. The migrants form EU highly contribute to the British GDP. European migrants show a higher rate of employment that any other group of migrants and are also better educated. This can also be supported by the fact that from the 2.5 million of new jobs, which were created between years 2005 and 2015, 2.2 million were filled with migrants, 60% of which were from the EU. After the UK exits, migration could decrease. Although the migration helps the British economy, it’s being viewed negatively. This can be explained by the low growth in wages caused by surplus of low-cost labor. Brexit would also lower the inflow of highly-skilled labor which is essential for creation of new technologies.

Brexit can start a crisis the likes of which the European Union didn’t get the chance to experience so far. For the first time, the process of economic integration, which went on continuously since the year 1951 when the European Coal and Steel Community was established, will stop. The result of the referendum for Brexit sends a clear message that the EU has to start solving its problems, otherwise there may be other referendums in the future.

Filip Bolco