How Brexit may impact economies across the globe?

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How Brexit may impact economies across the globe?

 

The European Union (EU) is a political – economic union of 28 countries, having specific trade agreements which are followed independently by the member countries. It is the largest trade union of its kind which was formed post the World War II to promote political and economic stability. In fact, this is the modern world’s primary attempt at creating a “super-state”. Britain is the second largest economy in the EU but it has had its own set of problems in being a part of the Union. As a consequence, the biggest news of the hour is that British is contemplating an exit from the EU – or Brexit.

A referendum will be held on the 23rd of June, 2016 in which the Britons will vote either to Leave or Remain as a part of EU and the fate of this country will be decided. The central reasons forwarded by the “Leave” side campaigners are regaining sovereignty, control over immigration and exercising independent influence over the trade relations with entities outside the European Union. Over the years, many Britons have found that the EU has not made any significant progress economically whereas the rest of the world especially Asia (India and China) has grown rapidly. They believe that the reason behind this is EU’s policies which render the UK government incapable of formulating policies in the interest of its own economy. On the other hand, the “Remain” side party, claims that staying with the EU is in the best interest of UK, as it will continue to enjoy the barrier and tariff free trade with all the EU countries, reduction in red tape policies and leaving might result in economic instability. The Prime Minister of UK – David Cameron went to Brussels in February 2016 to negotiate better prospects for UK in the EU, as promised in his election campaign. However, now the decision for Brexit solely lies within the public.

This is the first time that a nation state would be leaving the European Union, and Britain being one of the most important members, abandoning the Union will have a huge impact on not only UK and EU but on all the economies across the globe.

Let’s have a look at how the economies across the globe will be impacted due to Brexit.

Effect of Brexit on UK:

There is no doubt that the biggest impact of Brexit will be on UK itself. UK is the largest importer of goods in the EU market and this is why the EU does not want Britain to leave. However, if we look at the exports, then Britain’s exports to the EU make up 13% of its GDP, whereas the same figure for EU is 3%. It is evident that Britain would highly suffer from loss of free trade agreements with the EU. However cutting ties with the EU would now make it possible for UK to sign its own liberal trade agreements with any country in the world without any interference from EU. Some reports from experts predict that the UK GDP would range from 0.8 percent permanent loss to 0.6 percent permanent gain by 2030. This is not all – the economic instability and resulting insecurity has already led to a dip in the value of sterling in the Forex markets. On the positive side, Britain will be able to regulate the immigrants and have control over the type of skills possessed and work benefits received by them.

 

Effect of Brexit on the EU:

Losing one of its most important members will definitely not be well-received by the European Union. It will render the whole union unstable and will not do well for the esteem of EU globally. The biggest blow will come in the form of reduced FDI. UK being a large consumer and having significant influence around the globe, was a major reason for the influx of FDI in EU. After Brexit, large investors will be skeptical whether to invest in the EU or even in UK. Moreover UK can also compete the EU for FDI owing to its influence and fabricating undercutting taxation policies and business environment. Speculations exist that Brexit could lead to a domino effect and many other countries like Poland and Netherland would follow the lead of UK and exit the Union. People also fear that the exit of British would lead to single handed dominance of Germany in the EU.

 

Effect of Brexit on Asia:

The exit of Britain from the EU would cause political and economic stress between the EU, UK and ASEAN countries. ASEAN countries are on the verge of successful completion of trade deals with the Union which means that if Britain is on its own, then it will have to start the negotiations with ASEAN countries from scratch. On the flip side, some Asian countries are facing a lot of complications in making trade deals with the EU and are frustrated with the slow and tedious procedures. One such country is Singapore, which faced difficulties in getting a trade deal closed with the EU. However its deal with the EFTA (comprising of 4 non-EU states) was smoothly carried out. So it might be a chance for the Britons to capitalize on the trade deal with the big Asian economies which will be a win-win scenario for both the parties. Apart from trade, Asia based multinational companies having operations in the Eurozone would end up shifting their main base from London to Paris, resulting in a large amount of operational costs. Also the number of immigrants from Asia to UK might reduce and Asian workers might find it difficult to go to UK.

Effect of Brexit on USA:

The US President Barack Obama intervened in the Brexit debate and according to him anti-terrorism measures and economic growth would be more effective if British remained in the European Union. Britain’s role in Europe is of strategic importance to the US because it is America’s primary military ally, hence this might be an ulterior motive. A Brexit would see America forming new trade ties with the UK and also with the EU because in the end America just wants to see to it that it has smooth trade relations globally. However the only disadvantage that Britain would face is that EU already has trade deal with the US and Britain will have to start from scratch.

 

Effect of Brexit on the rest of the world:

Since this is the first time that a nation state is exiting from the European Union, its results are unpredictable. This had led to a lot of speculations and there are supporters on both sides. All of this has amounted to decreased stability and a pause in investments in the UK and Europe. The rest of world will just have to wait and watch that if at all a Brexit occurs, what exit policy will the UK employ. A lot depends on the type of agreement between Britain and EU and also on the policies of Britain post Brexit. Nonetheless, the referendum on 23rd June will be of historic importance as it will decide not only the fate of UK, but the fate of the entire global economies.

 

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