Brexit

An acronym for 'Britain' and 'exit,' and it alludes to the United Kingdom's (UK) withdrawal from the European Union (EU).

Brexit is an acronym for two English words: 'Britain' and 'exit,' and it alludes to the United Kingdom's (UK) withdrawal from the European Union (EU).

Brexit

Britain exiting the European Union was a drastic step from the point of view of international economics. It was a long-due discussion, but it was delayed due to several circumstances. 

But finally, on 1st Feb 2020, the decision was made, and Britain exited the EU after a long association with the body.

The United Kingdom and the European Union signed a temporary free-trade agreement on 24th Dec 2020, ensuring that the two sides can trade products without tariffs or restrictions. 

However, major aspects of the future relationship, such as trade in services, which accounts for 80% of the UK economy, remain unclear. This averted a "no-deal" Brexit, which would have been disastrous for the British economy.

On 1st Jan 2021, the UK parliament accepted a preliminary agreement. On 28th Apr 2021, the European Parliament approved it. However, while the Trade and Cooperation Agreement (TCA) permits tariff- and quota-free trade in products, U.K.-EU trade is still subject to customs checks, implying that trade is not as seamless as when the UK was a member of the EU.

London

The history behind

In 1951, European Coal and Steel Community (ECSC) was founded with 6 significant members, France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands. 

Britain was invited, but it declined since it focused more on the economic ties with the imperial countries in the Commonwealth.

In 1960, Britain joined a rival body known as the European Free Trade Association (EFTA), which helped remove trade barriers with the EEC (European Economic Community), but Britain had the option of choosing the EEC or being with the EFTA. 

Its economy was not doing so well, and there was a fear of being left behind since the countries under EEC were thriving and progressing. So, in 1961, British Prime Minister Harold Macmillan applied for the membership, which was vetoed by the French President, Charles De Gaulle, in 1963 due to several reasons:

  • The French and US relations were weak during the 1960s, and the French were afraid that upon entry of Britain (since Britain had a good relationship with the US) will affect the way the EEC works.
  • The entry of Britain led to weaker ties with the British Commonwealth, which De Gaulle thought was a vital part of containing communism.

Again, in 1967, Britain applied for membership, which French President Charles De Gaulle again vetoed because the British pound was too unstable, and Britain needed to devalue it before entering the EEC.

The year 1972 saw Britain finally entering the EEC. This time it was a result of the collective effort of multiple countries. A few years later, Britain also took an important decision regarding continuing its EEC membership. 

In 1993, the EEC became what we know today as the European Union (EU).

The History Behind: European Union

What is the European Union (EU) and what does it do?

The Organization of European Countries (OECD) was established in 1993 to monitor European countries' economic and political integration. The Maastricht Treaty established it, and all members of the European Community (EC), from which the EU sprang, ratified the same.

The successful EC had made its members more amenable to increased integration. Moreover, it offered a framework for member nations to act in concert on security and foreign policy issues and cooperate in police and justice affairs.

The European Union (EU) is a 27-country economic and political union in the present day. The EU is one of the world's most powerful economic bodies and supports democratic principles.

The Euro is the official currency of nineteen nations.

  • The main aim of the formulation of this Union was to promote peace and harmony and create a single currency (Euro) all over Europe.
  • Initially, 12 countries were a part of the EU. However, by 2013, the addition of several other European countries took the tally to a total of 28 countries.
  • In the early twenty-first century, the EU expanded to incorporate numerous nations from Central and Eastern Europe.
  • The European Community, the Council of Ministers (a forum for individual ministries), the European Commission (a bureaucracy), the European Parliament, the European Court of Justice, and the European Central Bank are the EU's main institutions.
  • The EU was awarded the Nobel Peace Prize in 2012.

For Britain

How did it affect the UK?

There is also a study on how the relationship between the UK and the EU will be affected after Brexit. The report studies the long-term effect on the UK economy (till 2030). 

Many reports have stated that it will leave the UK under the impression of having new trade barriers with different countries, which will lead to deteriorated trade in the UK economy.

But there are also some reports which showcase how it will leave the UK economy to boost the national income by larger than 4% in the coming 15 years if simultaneously it also adopts completely free trade.

On the contrary, several research reports showcase how Brexit may boost the national income of the UK. 

According to one research, the referendum outcome increased UK inflation by 1.7 percentage points in 2017, costing the typical British household £404 per year. In addition, the outcomes of the Brexit referendum lowered British national revenue by 0.6 percent and 1.3 percent, respectively. 

Analysts say that the withdrawal's uncertainty lowered company investment by 6 percentage points and resulted in a 1.5 percentage point loss in employment.

From June 2016 onwards, the withdrawal-induced uncertainty about the UK's future trade policies decreased British overseas commerce.

A trade deal was negotiated between the EU and the UK at the end of the transition period. It resolved several concerns to safeguard commerce between the UK and the EU, which is an important trading partner for the UK but does not provide the same benefits as EU membership to eliminate bureaucracy and facilitate trade.

How Did it Affect The UK?

Benefits to Britain under the EU

The European Union offered certain distinct advantages to the UK. Let us discuss some of them to understand UK's implications after further leaving the EU.

  • Free trade policy – No tariffs and free trade were some of the many advantages available to the EU members. The problem of imports and exports was less since all countries acted as one union and helped each other grow.
  • One currency – EU focused primarily on having one currency followed by all nations to ease the hassle of exchange rates and have fluid trade.
  • Job opportunities – EU uplifted the restrictions related to work opportunities. The citizens of the EU are free to travel and work anywhere in any of the member nations.
  • Free mobility – there is free mobility of capital and labor across the EU. This helped the labor of one country to work in another and earn good wages.
  • Security – the nations under the EU have a sense of security and unity amongst themselves to protect them from the threats of other nations. Increased international peace often results in economic prosperity for such countries. Drawbacks to Britain under the EU:

Britain's decision to withdraw from the EU was partly because of some of the drawbacks mentioned below :

  • High Fee – EU charged a high amount of fees to Britain for being a part of the union, and Britain realized that the advantage derived from being a member was relatively less.
  • Immigration Problem – 2015 saw the infamous refugee crisis, which led to the migration of many refugees into European nations, especially the UK. The United Kingdom was unclear regarding the job opportunities they would be able to provide to these immigrants, as they had to cater to their people.

Even though the UK did not see a major job-market crisis because of this event, the people of the UK were vocal in raising their concerns regarding the same. 

  • Decision-making – The European Union often commands supreme economic powers when it comes to its member nations. This became problematic for Britain as they wanted to have full authority over their economy.

The Impact of Brexit on UK's economy

It was also a major event in the history of the UK. The chain of events is expected to slow down the economy as trade will dry up, at least in short to medium term.

However, according to several research organizations, the UK economy might pick up the pace if it follows a well-structured import-substitution policy. This could help the UK soften the blow of dampened trade relations.

The effect on the UK economy has also been analyzed by using the Center for Business Research (CBR) macroeconomic model in which two different scenarios are taken

  1. Milder scenario
  2. Severe scenario

If (1) is taken, there is a comparatively lesser permanent loss of GDP (around 1%) till 2025. The GDP per capita will most likely remain unchanged with higher inflation and a better job market.

If scenario (2) is taken, then the permanent loss of GDP is severe (around 4% of GDP), and there is also a significant impact on the GDP per capita, which may dip by 2.5-3%. Along with both inflation and unemployment may rise.

Post - effect on the UK after 2020

Britain-EU relations have not been at their best recently, especially since the emergence of coronavirus in 2020. So let us look at the recent developments regarding the same.

  • The post-relationship between the United Kingdom and the European Union is in serious jeopardy. As a result of the UK's decisions, new border and immigration procedures between the UK and the continent have disrupted commerce and labor supply.
  • Due to new border procedures and red tape, the UK's exit from the EU's Single Market and Customs Union has caused significant commercial disruption, notably for UK exports to the EU. It's been difficult to tell the difference between the impact of withdrawal on shortages and the coronavirus outbreak at times.
  • London and Brussels have fought on several topics, including diplomatic representation, exports of coronavirus vaccines, and, most importantly, new arrangements for Northern Ireland, where post-withdrawal negotiations over the divorce deal protocol laying out the rules are still underway.
  • After winning a majority of seats in the 2021 elections, separatist parties called for another independence referendum, escalating post-withdrawal tensions in Scotland.

The Impact On UK's Economy

Looking at the different categories of how Brexit will impact the UK economy, we may see it as:

  1. Fishing Sector: The government pledged significant measures to assist the business in regaining control of UK waters and increasing quota shares, but the reality is far different. Despite official claims that it will result in hundreds of thousands of tonnes of additional catch for UK fishers, the analysis found that by 2025, the increase will only be 107,000 tonnes per year or 12.4% by value for all species.
  2. Aerospace Sector: The advanced sectors such as Aerospace will be hit hard. Their competitiveness in the global market would decline because of the economy's recession due to Britain leaving the EU and may lower government investment in the defense industry, harming the aerospace industries.
  3. Employment: The UK job market will also take a hit. There are few sectors in which the losses of jobs are likely, and some sectors will also see a mild boost in their employment levels. A study by the University of Leuven has predicted that job losses in the UK could be around 140,000 for a soft impact and 526,000 for a complex impact model.
  4. Businesses: Around 1 out of 5 businesses are considering moving or relocating their business outside the UK.
  5. Public Finances: The UK's public finances will benefit from this as it no longer has to pay the fees for the EU. This will help the UK save on its current payments to the EU budget. In addition, it will strengthen the UK's public finances by around £8 billion a year just by cutting the fees given to the EU.
  6. Foreign Direct Investment (FDI): The increase in uncertainty in the short run and the fall in FDI and trade in the long term will dampen investor sentiment in the country.
  7. Migration: Examining the recent trends and developments, there is still a strong connection between the EU migrants in the UK and the UK citizens residing in the EU. It will surely have a massive impact on migration, and these uncertainties are dependent on the UK's future.
  8. Labor supply: With the implementation of this strategy, the shortage of unskilled labor workers in the UK will increase.

FAQ

FAQs

It was the United Kingdom's (UK) exit from the European Union (EU) on 31st Jan 2020. The United Kingdom is the only sovereign country leaving the European Union.

  • When did Britain join the EU?

The European Communities Act 1972 was passed by Parliament on 17th Oct, and the UK's instrument of ratification was placed the next day (18th), allowing the UK to join the EEC on 1st Jan 1973.

  • How can it affect businesses?

Businesses with continental European suppliers or consumers would be harmed. At the same time, commerce with non-EU nations will be hampered by the loss of access to the EU's present free trade agreements and any customs delays.

  • How has it affected customers?

Travelers will suffer as a result of higher prices and fewer routes available. In addition, uncertainty over nation entry at airports and ports, combined with a new set of border restrictions, might generate delays for travelers passing through customs.

  • How did it affect retail inflation?

The expense of importing even essential supplies like fresh meat, milk, eggs, and vegetables would cost merchants more, resulting in substantial price increases in supermarkets.

  • Can EU citizens work in the UK after Brexit?

Yes, EU people can work in the United Kingdom, but they must apply through the Skilled Worker Visa or the EU Settlement Scheme (EUSS).

  • How does the withdrawal affect other countries?

Higher tariffs and other non-tariff trade obstacles will hurt the least-developed nations, especially if the UK leaves the EU without an agreement.

  • How did the withdrawal affect Europe?

With the departure of a country with significant global significance, the EU lost around one-sixth of its economic power and a significantly higher percentage of its foreign and security policy weight.

Key Takeaways

  • The chain of events will lead to slow growth in the UK, but eventually, it is expected that the economy will recover and grow at pre-Brexit levels. 
  • There has been a significant drop in the unemployment after the first referendum held in 2016, and it has been decreasing ever since
  • In 2018, the UK had to provide £4.5 billion, while in 2019, the net contribution was £9.4 billion. So, instead of contributing to the budget, the government may use this money for internal advancement after Brexit, which would promote the country's growth and development rather than slow it down.
  • Europe is the most significant source of foreign investment for the United Kingdom, and its participation in the EU has aided London's status as a worldwide financial center.
  • Major corporations have threatened to leave the United Kingdom. According to government projections, It would hit the nation's GDP by approximately 4-9%. 
  • A successful withdrawal might benefit the working class, who perceive immigration as a danger to their employment; nevertheless, young Britons who want to study overseas are concerned.
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Researched and authored by Ankit Sinha | LinkedIn

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