BREXIT: ESTIMATED IMPACTS & WHAT HAPPENED SO FAR?

 

What is 'Brexit'

Brexit is an abbreviation of "British exit", which refers to the June 23, 2016 referendum by British voters to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. Prime Minister David Cameron, who supported the UK remaining in the EU, announced he would step down in October.

Arguments FOR Britain leaving the EU

1. A SOVEREIGN NATION AGAIN: Britain is a great nation with a proud history that has been forced into subservience to the unelected bureaucrats of Brussels. Outside the EU, Britain could resume its place as a powerful independent power. It is the world’s 5th biggest economy and 5th most potent military force with its own nuclear deterrent. It is a permanent member of the U.N. Security Council. Freed from restraints in Europe, Britain could rebuild ties with natural English-speaking allies in the Commonwealth and strengthen the Special Relationship with the United States.

2. THE EU IS STRANGLING THE UK IN BURDENSOME REGULATIONS: Critics like Johnson say the EU’s regulations have become increasingly onerous: “Sometimes these EU rules sound simply ludicrous, like the rule that you can’t recycle a teabag, or that children under eight cannot blow up balloons, or the limits on the power of vacuum cleaners. Sometimes they can be truly infuriating – like the time I discovered, in 2013, that there was nothing we could do to bring in better-designed cab windows for trucks, to stop cyclists being crushed. It had to be done at a European level, and the French were opposed”. Many British conservatives look at the European bureaucracy in Brussels the same way American conservatives view the Washington bureaucracy. Gove has argued that EU regulations cost the British economy "￡600 million every week" ($880 million).

3. The EU entrenches corporate interests and prevents radical reforms: This is the mirror image of the previous two arguments. Whereas many British conservatives see the EU as imposing left-wing, big-government policies on Britain, some on the British left see things the other way around: that the EU’s antidemocratic structure gives too much power to corporate elites and prevents the British left from making significant gains.

"The EU is anti-democratic and beyond reform," said Enrico Tortolano, campaign director for Trade Unionists against the EU, in an interview with Quartz. The EU "provides the most hospitable ecosystem in the developed world for rentier monopoly corporations, tax-dodging elites and organized crime," writes British journalist Paul Mason.

This left-wing critique of the EU is part of a broader critique of elite institutions more generally, including the World Trade Organization, the International Monetary Fund, and the World Bank. Brexit supporters on the left would have a lot in common with Americans who are against trade deals like the Trans-Pacific Partnership.

4. The EU was a good idea, but the euro is a disaster: The United Kingdom has had a significant faction of euroskeptics ever since it joined the EU in 1973. But until recently, this was a minority position.

The global recession that began in 2008 was bad around the world, but it was much worse in countries that had adopted Europe’s common currency, the euro. The unemployment rate shot up above 20 percent in countries like Greece and Spain, triggering a massive debt crisis. Seven years after the recession began, Spain and Greece are still suffering from unemployment rates above 20 percent, and many economists believe the euro was the primary culprit.

Luckily, the UK chose not to join the common currency, so there’s little danger of the euro directly cratering the British economy. But the euro’s dismal performance still provides extra ammunition to Brexit supporters.

Many economists believe that deeper fiscal and political integration will be needed for the eurozone to work properly. Europe needs a common welfare and tax system so that countries facing particularly severe downturns — like Greece and Spain — can get extra help from the center.

But that makes Britain’s continued inclusion in the EU awkward. Britain is unlikely to go along with deeper fiscal integration, but it would also be unwieldy to create a set of new, parallel eurozone-specific institutions that excluded the UK.

So, the argument goes, it might be better for everyone if the UK got out of the EU, clearing the path for the rest of the EU to evolve more quickly into a unified European state.

5. The EU allows too many immigrants: The intellectual case for Brexit is mostly focused on economics, but the emotional case for Brexit is heavily influenced by immigration. EU law guarantees that citizens of one EU country have the right to travel, live, and take jobs in other EU countries.

British people have increasingly felt the impact of this rule since the 2008 financial crisis. The Eurozone has struggled economically, and workers from Eurozone countries such as Ireland, Italy, and Lithuania (as well as EU countries like Poland and Romania that have not yet joined the common currency) have flocked to the UK in search of work.

Immigration has become a highly politicized issue in Britain, as it has in the United States and many other places over the past few years. Anti-immigration campaigners like Nigel Farage, the leader of the far-right UK Independence Party, have argued that the flood of immigrants from Southern and Eastern Europe has depressed the wages of native-born British workers. Some voters are also concerned about immigrants using scarce public services.

6. The UK could have a more rational immigration system outside the EU: While many Brexit supporters simply want to reduce the amount of immigration overall, others argue that the UK could have a more sensible immigration system if it didn’t have the straitjacket of the EU.

EU rules require the UK to admit all EU citizens who wants to move to Britain, whether or not they have good job prospects or English skills.

"Leave" advocates argue that the UK should be focused on admitting immigrants who will bring valuable skills to the country and integrate well into British culture. They mention the point-based immigration systems of Canada and Australia, which award potential migrants points based on factors like their language and job skills, education, and age. That, "leave" advocates argue, would allow the UK to admit more doctors and engineers who speak fluent English, and fewer unskilled labourers with limited English skills.

7. The UK could keep the money it currently sends to the EU: The EU doesn’t have the power to directly collect taxes, but it requires member states to make an annual contribution to the central EU budget. Currently, the UK’s contribution is worth about ￡13 billion ($19 billion) per year, which is about $300 per person in the UK.

While much of this money is spent on services in the UK, Brexit supporters still argue that it would be better for the UK to simply keep the money and have Parliament decide how to spend it.

Arguments for Britain staying in the EU

1. Jobs: Around 3.5 million British jobs are directly linked to British membership of the European Union’s single market – 1 in 10 British jobs. Brexit will have adverse effect on these jobs.
2. Exports & investment: The EU buys over 50 per cent of UK exports (54 per cent of goods, 40 per cent of services). Over 300,000 British companies and 74 per cent of British exporters operate in other EU markets. American and Asian EU firms build factories in Britain because it is in the single market. Brexit can cause either moving away of these companies to other countries or part of their operations to remain in EU, which may cause huge job losses in Britain.
3. Trade: The EU negotiates trade agreements with the rest of the world. Outside the EU Britain would have to renegotiate trade deals alone. While the EU is the world’s largest market, a UK outside the EU would not be a high priority for other counties to negotiate a trade deal.
4. Equal pay and non-discrimination: Equal pay for men and women is enshrined in EU law, as are bans on discrimination by age, race or sexual orientation. This benefits Britain and British people who live in other EU countries.
5. Peace and democracy: The EU has helped secure peace among previously warring western European nations. It helped to consolidate democracy in Spain, Portugal, Greece and former Soviet bloc countries and helped preserve peace in the Balkans since the end of the Balkans War. With the UN it now plays a leading role in conflict prevention, peacekeeping and democracy building.
6. Influence in the world: As 28 democracies, and as the world’s biggest market, EU is strong when it works together. Britain is represented in many international organisations in joint EU delegations – giving Britain more influence than it would have alone. The EU has played a major role in climate, world trade and development.
7. Safety First: It’s an uncertain world out there. Western democracies are under threat from a resurgent Russia, unrest around the Middle East, terrorism, nuclear rogue states. Is this really the right time to cut ties with your closest allies and create a new focus of international uncertainty? Britannia no longer rules the waves, and Britain is stronger working with France, Germany and the others within the EU on diplomacy, development and building democracy around the world. Washington wants Britain to stay in the EU and strengthen the European pillar of NATO. Outside the EU, Britain would lose global clout.
8. Freedom to work and study abroad – and easy travel: if Britain leaves the EU’s free trade zone and new tariffs and controls are introduced, Brits could lose the freedom to travel, study, live and work in the other 27 EU countries. That’s bad news for anyone wanting a cheap, hassle-free European holiday, not to mention the over 2 million Brits currently residing elsewhere in the EU.
9. Better Together: In all sorts of ways the EU makes life better –from lower credit card fees to cheaper roaming charges when you call family on holiday, to compensation for flight delays. The EU guarantees safety standards on everything from food and toys to nuclear power plants. Its environmental protection is the highest in the world. As the world’s biggest economic bloc, the EU’s leverage is unmatched in global talks on climate change. Brussels’ anti-trust authorities protect consumers against abuses by multinational companies. The EU guarantees equal rights and labour standards. It helps the fight against international crime through Europol and the European arrest warrant.

What happens now?

For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty.

Cameron or his successor needs to decide when to invoke this - that will then set in motion the formal legal process of withdrawing from the EU, and give the UK two years to negotiate its withdrawal.

Mr Cameron has said he will be stepping down as PM by October.

The article has only been in force since late 2009 and it hasn't been tested yet, so no-one really knows how the Brexit process will work, according to BBC legal correspondent Clive Coleman.

EU law still stands in the UK until it ceases being a member - and that process could take some time.

The UK will continue to abide by EU treaties and laws, but not take part in any decision-making, as it negotiates a withdrawal agreement and the terms of its relationship with the now 27 nation bloc.

Early Line Impact of BREXIT

Investment and productivity:

• It's clear that the rules of trade between the U.K. and the EU will have to be renegotiated, but how those negotiations may turn out is far from clear. This uncertainty and loss of confidence in the future will translate into less investment in the U.K., fewer new businesses and less willingness to engage in long-term contracts and relationships.
• That will result in lower output, lower employment and lower productivity. It's not clear how long this uncertainty will last; at some point the new trading relationships and other details associated with Brexit will be clarified. But it does appear that the uncertainty will persist for a considerable amount of time.

Financial sector and asset prices:

• London's financial institutions rely, in part, on free access to European markets and financial institutions. As these relationships become more difficult, British-based financial services are likely to shift to other countries in Europe. That will reduce economic activity in London and in Britain more generally.
• In addition, the fall in the price of British assets such as housing and stocks will reduce wealth and make U.K. households less willing to consume goods and services, exacerbating the other negative effects from the Brexit vote.

Currency values, imports and exports:

• It seems unlikely that Britain will be able to negotiate the same degree of access to European markets it enjoyed as a member of the EU. If not, exports from Britain to EU countries will fall. The drop in the pound's value will make British exports cheaper and offset the fall in trade with Europe to some extent, but Britain will likely face ongoing losses.
• Paul Krugman calculated a "sustained 2 percent of GDP loss; this is in the same range as other calculations. The number isn't at all a hard fact -- it could be smaller, but it could also be bigger -- but the direction is completely clear."

Economic impact on the U.S.:

• The main impact for the U.S. comes from financial linkages such as investors fleeing the risks associated with Brexit and seeking a safe haven though the purchase of U.S. Treasury securities or other dollar-denominated financial assets. This could cause the dollar to appreciate. Still, the effects on the U.S. economy are likely to be minor unless substantial disturbances hit the financial markets, induced by events such as the exit of more countries from the EU and the euro.
• However, the Federal Reserve's plans for future interest rate hikes may have to change as members of the rate-setting committee wait for the Brexit waves to ease.

Will other countries leave the EU -- and the U.K.?

• One big question is whether Brexit will induce additional countries to exit the EU and whether countries within the U.K., i.e. Scotland, will attempt to sever the relationship with the U.K. and perhaps re-join the EU.
• The biggest danger is that one of the countries within the EU, Greece for example, is emboldened to leave and abandon the euro. If that were to happen, fears of Greece defaulting on the debt it has incurred would skyrocket, provoking the potential for bank runs and other financial disturbances.
• As former Fed Chair Ben Bernanke noted: "The challenge for European leaders will be to keep the overall integration process on track, while finding ways to meet the concerns of potential leavers. One issue that could be revisited is the EU's commitment to the absolutely free movement of people across borders, which seems more a political than an economic principle; the perception that the U.K. had lost control of its borders was one of the most effective arguments for 'leave,' and secessionist movements elsewhere have also seized on the issue."

Regulation

• One of the motivations for "Leave" proponents was the ability to get out from under regulations that come with EU membership. However, as Britain renegotiates trading relationships with the EU, it will be forced to agree to re-impose many of these regulations because the EU will have a strong hand in the negotiations. Thus, the ability to escape these regulations may not be as great as proponents have implied.
• In addition, to the extent that Britain is able to deregulate, the economic benefits may not be very large. For example, there's certainly room for doubt about the economic benefits from deregulation in the U.S., and whatever benefits there were must be balanced against the financial crisis that grew out of the deregulatory effort. There's little reason to expect Britain will be any different.
• It' difficult to predict how large the negative economic consequences will be for the U.K. given all the uncertainties at this point in time, including the distant chance that Brexit won't happen at all. But it does seem clear that Britain will experience lower output and employment growth, lower productivity and reduced influence in global financial markets as a result of the Brexit vote.

Impact on the rest of Europe

• A major implication after an exit is that the UK would no longer be included in any trade agreements that non-EU countries have negotiated with the EU. While economists predict market and currency instability in the short-term, long-term consequences on many key business proceedings rely greatly on how the UK chooses to disengage itself from the EU. These include issues regarding trade, unhindered movement of labour across borders, economic growth and credit availability.
• Another primary concern is that other EU countries will follow suit, possibly overturning years of expanded global integration and free trade. This, in turn, could have a negative impact on global economic growth in the short and long term.
• Also it is assumed that Brexit will create more uncertainty in European Markets and it will have impact on banks earnings, it is assumed that Banks struggle to raise more capital just as capital requirements increase leading Banks to sell risk weighted assets instead of raising new equity.

Impact on Recruitment Industry

 One of the most crucial aspects of the debate is the impact on jobs and recruitment. Under EU law, the UK cannot prevent any person from another member state coming to live in the country, and conversely, Britons enjoy the right to live and work anywhere else in the EU. The uncertainty has led to a jump in UK citizenship applications from European citizens who live and work in the UK, and immigration lawyers are warning that a Brexit vote could mean that some EU nationals would need to apply for the right to live and work in Britain. 

A large number of personnel management specialists in the UK are involved in international recruitment, and cross-border assignments are very common, especially for clients that have locations in multiple EU countries. 

The recruitment industry has made extensive use of the EU free movement regulations, which have greatly broadened the selection of global executives who are available to corporations in the UK. This legislative framework has fostered the identification and hiring of talent that fits the culture, values and strategy of UK-based businesses, and the influx of fresh executive blood has contributed substantially to the strengthening of revenue streams. If the UK left the EU, these employment relationships would continue, but there is a risk of isolation. In addition, leaving the EU could result in extra unwelcome regulations for corporations.

According to the international law firm CMS, “It appears likely that even if the UK does vote to leave the EU, the UK would ultimately retain a strong European influence in order to both protect its trade position internationally, and to continue certain protections afforded to employees.” 

Investors are traditionally cautious before a referendum, and recruiters are nervous in turn, delaying decision-making until after the referendum result. Although recruitment specialists are keen to assure their clients that they will continue to be able to attract and retain foreign talent with as few red tape issues as possible, analysts point out that decisions are being delayed at senior levels of the recruitment industry due to the unclear situation, and the market is markedly different from what it was at the same time in the previous year. 

Brexit supporters argue that Britain’s economy will be able to handle any challenges and problems that arise. They say that an independent Britain would flourish without the constraints of EU regulations, which they see as a huge burden. Norway is frequently held up as a solution for the post-Brexit UK: the Nordic state has access to the European single market, but is not subject to EU legislation on areas such as agriculture.

 The Economist argued that “if Britain were to join the Norwegian club, it would continue to be bound by virtually all EU regulations, including the working-time directive and almost everything dreamed up by Brussels in future.” Remain supporters also point out that Norway is obliged to pay contributions to the EU, but has no say in how it is run. 

According to Robertson Associates Brexit can affect Recruitment Plans of Companies in following ways:

• Companies need to need to recruit executives that can thrive in political uncertainty and have an awareness of current events
• When exactly will the United Kingdom ultimately exit the EU? What sort of trade agreements may the EU and the UK develop? How will the vote impact foreign workers inside of the UK? How will it impact UK citizens working inside of the EU?No one knows the answer to any of these questions with any certainty.An awareness of politics and current events has always been a core competency for successful senior executives; executive team will need to know how to translate a shifting political paradigm into your strategic and operational tactics. 

Recruiting may have just become harder

• Due to instability by Brexit people less likely to make a major change—like switching jobs which make things tough for recruitment industry.

• It is estimated that the business climate and the hiring industry in the United Kingdom is going to be extremely volatile—particularly negative in the banking and financial sector
• HSBC, JP Morgan, BNP have already indicated that may begin relocating thousands of jobs to Paris and other European cities almost immediately. Representing more than 25% of the nation’s GDP, a weaker “City” could be catastrophic to the British economy—and that damage may begin almost immediately.

One month on, what has been the impact of the Brexit vote so far?

 What we know so far: 

• FTSE 100 & 250: The FTSE 100 has shrugged off a brief post-referendum dip, and is currently at levels not seen since August 2015. But there is a caveat – many companies on the index generate their revenue overseas, and so the fall in sterling will boost their earnings power. Also, the index’s recovery is much less impressive if you price it in dollars

The FTSE 250 includes a greater proportion of companies that derive more of their income domestically, and has not recovered as strongly as the FTSE 100 from losses the morning after the referendum. Nevertheless it is still at a comparable value to much of last year. 

• Value of the Pound: The pound was worth $1.50 on 23 June. It is now trading at around $1.30 – down about 13%. Sterling has not been at levels this low against the dollar since the mid-1980s.The pound has also lost ground on the euro. On 23 June the pound was worth €1.30. It is now trading at around €1.19. Bloomberg reported on 8 July that the pound had overtaken the Argentinian Peso to become the world’s worst performing currency in 2016.However, a lower pound makes exports more competitive, and some analysts have suggested that the pound was overvalued prior to the referendum in any case. 
• Economy appears to be shrinking: Markit’s PMI report on Friday suggests that the UK economy is shrinking at a quarterly rate of 0.4%. Services and manufacturing sectors have both suffered a big hit, reporting that output and new orders have fallen this month. 
• Interest rates: Despite some expectations of a cut, and the former chancellor George Osborne’s claim that a vote for Brexit would drive up mortgage rates, interest rates have been kept at 0.5%, where they have been since May 2009.
• New trade deals: There have not been any new trade deals. Liam Fox has taken up a position as secretary of state for international trade and president of the board of trade in order to develop new international trade. Iceland, India, Australia, New Zealand and Ghana are among the nations reported to have expressed interest in a deal. Mexico has gone as far as writing a new draft trade deal.
• The presidency of the council of the EU: Although Britain will almost certainly not have actually left the EU by July 2017 when it was due to assume presidency of the European council, it has been decided that the UK will not take up the role.

What we don’t quite know yet

• Inflation: The latest inflation results for June 2016 indicate there was a 0.5% rise in the consumer prices index. This compares prices in June 2016 to prices in June 2015.Next month’s release, due on 16 August, will be the first to show us what inflation was like in a month fully after the referendum vote.
• Housing and property: The Bank of England’s regional agents survey found that there was a dip in housing market activity after 23 June, but that transactions had so far proved to be more resilient than some had expected.UK average house prices had increased by 8.1% in the year to May 2016. It will be September before ONS data on average house price movements begins to cover the post-referendum period.The Royal Institute of Chartered Surveyors has recently reported a significant drop in confidence and investor demand affecting commercial property since the referendum.
• Unemployment: The most recently published unemployment figures show there were 31.7 million people in work and 1.65 million people unemployed. However, these figures are based on comparing the three months to February 2016 and March to May 2016.November will be the first time we see unemployment figures fully calculated post-referendum, comparing July, August and September 2016 with the months prior to the vote.

 

What we won’t know for some time to come

• Will there officially be a Brexit recession?
• When will the UK actually leave the EU?
• What is the impact on immigration?
• What is the cost of Brexit?