Brexit (n) brexit: The Future of the United Kingdom and Europe

By Grace Shi

Britain’s vote to leave the European Union on June 23rd was a historical decision that will change the country’s position as a pillar of stability, rock the unity of Europe, and bring nationalism back to the forefront of Western political conflicts. On October 9th, Prime Minister Theresa May announced that Article 50 of the Lisbon Treaty—which formed the EU—will be triggered by the end of March 2017, marking Britain’s formal exit from the EU. Due to growing isolationist tendencies, UK will likely pursue hard Brexit, meaning that Britain will terminate its membership in the EU’s single market and no longer carry the obligation to abide by EU laws and regulations.

Before the referendum, polls showed that immigration was the single largest issue that would affect how the Brits voted. The older generation overwhelmingly voted to Leave, with 61% of voters aged 65 and above voting Leave, compared to 75% of voters aged 18-24 voting Remain. A generational gap is evident, where older voters were more hostile to multiculturalism and social change. The belief that limiting immigration will turn back the cultural clock reveals the deep-seated cultural anxiety felt by Leave voters.

Although advantages of limiting immigration may include higher overall employment for citizens, studies have shown that immigration is actually beneficial for the economy because it leads to higher labor productivity. Data shows that EU migrants contribute more through taxes than they take out through state benefits. With no free movement of people, British youth will have limited freedom to pursue education and employment in EU countries. Taking a hard line on immigration will also hurt the UK’s ability to attract talented human capital.

The results from the referendum reflected the growing belief that British money is better spent inside its own borders. With a hard Brexit, the UK will no longer be obligated to contribute to the EU budget. In 2015, Britain paid £12.9 Billion ($15.7 Billion) to the EU. By leaving the EU, the British government can better control uses for this money, which could go towards anything from increased funding for the National Health Service to improving infrastructure.

Exiting the Union would also mean that Britain can have the freedom to negotiate its own trade deals. Taking advantage of this opportunity, they are open to pursue relationships with dynamic Asian countries and to strike a deal with Canada. However, the UK will have limited access to the EU’s single market. This means Britain will take an outsider stance—similar to the US—and negotiate on World Trade Organization terms. The UK will then be subject to tariff and nontariff barriers—burdens it did not have to bear when it was a member of the single market.

Uncertainty regarding the direction of hard Brexit negotiations will lead to slower growth in the UK, at least for the next few years. By 2030, the UK’s GDP is predicted to be 5% lower than its GDP if it remains in the EU. This is due to decreased international trade—caused by increased costs of trade, decreased foreign direct investment, and stagnating immigration.

While the pound has been depreciating since the June 23rd referendum—due to the unexpected Leave vote—May’s indication in the beginning of October that the UK would pursue hard Brexit caused the currency to plummet dramatically. Although a depreciated pound has benefitted the UK’s manufacturing sector by making British goods cheaper for foreign buyers, barriers to trade will damage the UK’s service sector—which accounts for about 80% of the country’s GDP. Businesses will find it harder to deliver services to its major consumers—the EU countries— causing an increase in the UK’s trade deficit. London, which has been the main financial center of Europe, may have to cede its position to financial capitals in the EU, such as Frankfurt and Paris. As a result, Britain’s financial industry could lose up to £38 Billion ($46 Billion) in revenue and 75,000 jobs, resulting in fewer efficient synergies and create a negative pull on the economy in the UK.

To counter the economic effects of Brexit, the Bank of England cut interest rates to a record low of 0.25% and introduced term-funding programs, making it easier for households and businesses to borrow money for investments. Loose monetary policy avoided the possibility of a recession, and actually raised 2016 GDP growth prospects from 1.7% in July to 1.8% in October. The rise in the growth forecast suggests that the UK has weathered the aftermath of the referendum surprisingly well.

While the short-term prospects of the British economy are not as dire as economists expected, Brexit plans moving forward are concerning. Within the UK, Parliament has questioned May’s stance on hard Brexit, particularly her hard line on immigration and opposition to EU rules for single market access. While she claims new trade deals will be negotiated for “maximum freedom” to trade within the single market, it is evident that the Brexiters want the benefits of hard Brexit without regard for the consequences.

Many of the EU leaders have countered the UK’s stance on Brexit. French President Hollande has said scathingly that the UK wants to “leave but pay nothing.” One German official has said that negotiations are “not about friendship.” France and Germany, the two most powerful EU nations, want to make an example out of the UK for leaving the Union. The objective is to prevent other members from leaving by making the consequences clear. Many EU members depend on the Four Freedoms—particularly the free movement of people—and the uniform rules governing the single market.

Although the solution to this conflict of interests remains unclear, it is evident that Brexit will be a major impact on both the UK and the EU. The UK is the fourth-largest importer in the world, and the largest single export market of the EU. On the other hand, 44% of UK exports go to the EU. Both sides depend heavily on each other, and it is in no one’s interest to put too much pressure on trade relations. This conflict of interests will underlie negotiation talks, and pursuit of brinkmanship politics by both sides will make Europe vulnerable to outside threats and internal breakdowns.

Eastern Europe may become less stable, since Brexit could be a signal that Western Europe is abandoning its eastern counterpart. The UK as one of Europe’s most powerful militaries is critical to the Western alliance. If Britain pursues isolationism and limits immigration, terrorism creeping into the EU from the east may pose a more significant threat to the region. Within the country, some believe that as long as would-be immigrant terrorists are not admitted, the UK can wash their hands of the problem. Other nations may see this as an act of racism or religious discrimination, deepening the divide in Europe.

Brexit threatens to destabilize decade-old unity. Because of the interconnected and complicated global economic and political relationships that are at play here, one country cannot emerge on top while others are struggling. The nationalist notion that domestic British benefits supersede grave international concerns will likely weaken international relationships and cause irreparable damage globally if this every-man-for-himself ideology persists.

While Brexit can be seen as an attempt by Britain to rediscover nationalism and sovereignty, it can also be seen as radical isolationism. Although it is clear that growth in the UK will slow due to the initial costs of Brexit, it remains to be seen how much freedom the country is willing to forgo to maintain relations with EU nations and how much the EU values its current relationship with the UK.