Brexit, the tumultuous and obscure decision that has gripped all of Europe, stemmed from several complex issues detailed in our first post. The exact consequences of Great Britain’s break with the European Union, especially cultural consequences which will be discussed in a later entry, are still unclear. However, the most damaging effects can and will be seen in the British economy. Britain’s departure from the EU has begun to destabilize the British economy, and may begin to affect other sectors of the economy and other global economies in time.
Since November 1993, the European Union has joined economic forces to strengthen the continent as a whole. One of the key advantages of being part of the EU is the free trade between its members. This free trade agreement has expanded the production capabilities of Europe, allowing products to reach a greater market. The EU has also prevented war by financially connecting many European countries. Another large advantage of joining the EU is removing tariffs from imported goods and in turn exporting goods to a large market for lower prices. In short, members of the EU are better off because they can buy and sell their goods without paying international taxes. It also sets a common tariff for all outside trade, so nations would pay a set tax on outside goods, thereby promoting internal trade (European Union, 2016). By leaving the EU, it is possible that Britain will not enjoy any of these trade benefits going forwards.
In fact, after withdrawing from the European Union, certain economic figures have emerged that reveal the potential downfall of Great Britain's decision. The British pound has been valued at around $1.60 against the American dollar for the past 5 years. It currently stands at $1.22 (Rodionova, 2016) and could fall further. After the referendum, Britain immediately began evaluating how trade will function without EU membership. In 2014, the last year with full economic analyses, Britain’s exports were worth $472 billion, and imports were worth $663 billion, resulting in a deficit of $191 billion (Simoes, n.d.). As an island nation, Britain is highly dependent on trade and withdrawing from the EU will undoubtedly raise living costs. The combination of higher tariffs and a reduction in exports means the deficit is likely to grow. Prime Minister Theresa May is currently starting negotiations to analyze withdrawing from the EU, and trade is at the top of the list of economic concerns. If trade begins to falter and the market shrinks, other sectors of the economy will be impacted. Unemployment may already be on the rise: Google’s data analysis shows that people were searching for “jobseekers” insurance, akin to American unemployment insurance, about 50 percent more in July than they were in May (“Straws in the Wind,” 2016). The public has seen the impact of higher costs on employment, and it is reasonable to expect that the effects will only become more severe. The economy was dependent upon European Union connections and freedoms; withdrawal will have drastic changes upon the nature of the British way of life.
International business is another major concern. Many international corporations have investments in UK affairs, which allowed them access to European free trade, previously allotted to the UK through the European Union. China’s investments in the UK alone total over $38 billion (Davies. 2016). No longer having free trade in the United Kingdom will have significant effects on the health of the global economy. The added costs of trade and business evaluations will be felt by British consumers, and eventually consumers outside the UK. The United States and China take the remaining two spots of largest economies in the world, if the combined economies of the European Union are considered an economy. The need to reset trade agreements and investment negotiations could obstruct growth until further clarity is reached; Theresa May has only just begun negotiations, so this clarity may not arise for months. This period of uncertainty will likely decrease confidence in the UK’s economy; these uncertainties will heighten the volatility of the country’s current financial situation and reduce activity from businesses and investors alike (Rosenfeld. 2016).
So, why does all this matter? As we watch these events unfold in the UK, consumers will notice an effect on living costs. Without free trade, the costs of importing and exporting goods will rise, which will hike up the prices that the average consumer needs to pay. Economic tension and trade negotiations could increase interest rates and reduce spending from both consumers and producers. This has a ripple effect. The reduction of spending will increase unemployment and drive the economy into a contractionary or recessionary period. An uncertain financial future drives people to saving, reduced spending and saving, and an overall lack of trust in the economy. Leaving the EU could drive Britain into a recession in a world still recovering from the United States 2008 recession. Soon, this huge change in trade balances may affect consumers all over the globe.
References
Davies, R. (2016, August 9). Chinese investors pump money into the UK, but what big brands do they own? The Guardian. https://www.theguardian.com/business/2016/aug/10/chinese-investors-pump-money-into-the-uk-but-what-big-brands-do-they-own
European Union. (2016). In Funk & Wagnalls New World Encyclopedia. Chicago, IL: World Book.
The EU in Brief (n.d.). europa.eu. Retrieved October 15, 2016 from https://europa.eu/european-union/about-eu/eu-in-brief_en
Rodionova, Z. (2016, October 22). Pound value drops below $1.22 as May faces tough opposition at EU summit. Independent. Retrieved October 21, 2016, from http://www.independent.co.uk/news/business/news/pound-value-dollar-drops-sterling-currency-exchange-theresa-may-eu-summit-a7374336.html
Rosenfeld, E. (2016, June 24). Brexit 101: What just happened and why it’s important for Americans. CNBC.http://www.cnbc.com/2016/06/24/brexit-101-what-just-happened-and-why-its-important-for-americans.html
Simoes, A. (n.d.). OEC - United Kingdom (GBR) Exports, Imports, and Trade. The Observatory of Economic Complexity. Retrieved October 21, 2016, from http://atlas.media.mit.edu/en/profile/country/gbr/
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