Possible Implications of a Brexit

One of the top headlines these days is the issue of a Brexit or a British exit from the European Union. As it turns out, some Britons and political leaders believe that the EU policies are already infringing on UK sovereignty and its stance on immigration might not be the best for all its members. With that, euro-skeptic political parties like UKIP campaigned for a Brexit, leading Prime Minister David Cameron and the Conservative Party members to set a referendum for June.

As it is, the very idea of a Brexit is weighing on the British pound’s price action, with investors moving funds out of the UK in anticipation of more financial and economic uncertainty. Forex traders are also pricing in these potential implications of a Brexit on the UK economy.

Brexit: Yay or Nay?

The pro-Brexit camp believes that leaving the EU would enable to the government to save taxpayer money, result in stricter immigration controls particularly with the influx of refugees from Syria, and reduce the economic burden of complying with EU policies. For them, the UK economy is faring much better than the rest of its EU peers so it makes sense to stand on its own feet without having to shoulder the economic problems of other member nations.

On the other hand, the anti-Brexit folks think that exiting the EU region might derail the feeble UK economic recovery and result to higher joblessness. Among the biggest concerns is the close trade ties with EU nations, as more than half of UK exports are distributed to the region. Economists have estimated that removing these trade agreements could shave off around 6-9% of the UK GDP.

Enter EU Deal

Since Prime Minister Cameron isn’t too sold on the idea Brexit, he decided to come up with a compromise with the leaders of the EU. This draft deal addresses four major issues namely economic governance, sovereignty, competitiveness, and immigration.

European Council President Donald Tusk went over this deal and made a few revisions of his own, but other EU members will still evaluate these proposals ahead of the supposed Brexit referendum in June 23. The bottom line is that the UK wants to keep its own currency, decide whether or not to participate in bailout programs, undergo less red tape in the EU, not be forced to commit to political integration, be able to challenge EU legislation, and restrict immigration and social benefits as they wish.

Short-Term Impact

At the moment, economists and analysts are still crunching the numbers on how these changes might affect the UK. For now, it looks like the risk aversion amid all the uncertainty is winning out, discouraging investors from putting more funds in the UK economy and even leading forex traders to liquidate their pound and euro holdings.

So far, there have been no concrete plans on future trade agreements between the UK and other economies, which makes investors concerned about where the nation’s exports might go. Because of that, surveys indicating a higher chance of a Brexit have been yielding losses for UK stocks and the currency.

As it is, the UK economy is still on shaky ground, with wage growth still feeble and consumer spending struggling to recover. Leaving the EU could mean that the UK has to fend on its own, possibly erasing some of the progress seen over the past year. For one, losing its trade ties with the EU would mean that nations would be free to impose high tariffs on UK goods and services, thereby dampening demand.

Long-Term Impact

In the long-run, however, a Brexit might actually be positive for the UK economy and the pound, assuming that its leaders are able to iron out agreements that could help them maintain their strong growth prospects. Keep in mind that the UK has been paying a membership fee of around 12 billion GBP a year on average just to stay in the EU, and these funds could be put to better use later on.

If the UK economy is indeed able to stand on its own and do without the red tape that businesses typically encounter in transacting with other EU nations, it could be free to engage in bilateral trade with other major economies, opening up a larger market for its products.

Also, abandoning the EU ideal of free movement within its borders might prove to be safer for the UK, allowing its jobs sector to prioritize its own citizens when it comes to employment. However, roughly 3 to 4 million Britons are employed all over the EU, so leaving the region might result to a large wave of joblessness unless the rest of the member nations don’t see the need to let go of these positions.

Based on calculations from folks at Open Europe, the UK GDP could be 2.2% lower by 2030 if a Brexit pushes through and the UK is unable to come up with a plan against protectionism. In a best case scenario in which the UK maintains liberal trade agreements with EU nations while pursuing other deregulation moves, it might actually end up with a 1.6% gain on its GDP.

However, the Open Europe report also states that a more realistic range would be somewhere between a 0.8% dent to a 0.6% gain, accounting for all the other uncertainties involved. As for the EU, the outcome could also go either way, as letting go of the UK would mean doing away without one of its strongest performing economies, thereby resulting to a potential dent on overall growth as well.

As it is, the euro is also losing ground with all these Brexit speculations, especially since the euro zone has been struggling with weak growth and inflation. In fact, the ECB is mulling additional easing measures just to keep the economy afloat while the BOE has stepped away from its plans to increase borrowing costs sometime this year, hinting that an economic and political shakeup might do more harm than good.

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