What is Brexit?

The British withdrawal from the European Union, often shortened to ‘Brexit’ is a political aim that has been hounded by various individuals, advocacy groups, and political parties since the United Kingdom (UK) joined the antecedent of the European Union (EU) in 1973.

In 1975, a referendum was held on the country’s membership of the European Economic Community (EEC), later known as the EU. The outcome of the vote was in favour of the country continuing to be a member of the EEC.

On the 23rd of June, 2016, The UK electorate again addressed a referendum on the country’s membership. This referendum was arranged by parliament when it passed the European Union Referendum Act 2015. British citizens voted on the question, “Should the United Kingdom remain a member of the European Union or leave the European Union?”

(According to the BBC, eligible voters were “British, Irish and Commonwealth citizens over 18 who are resident in the U.K., along with U.K. nationals living abroad who have been on the electoral register in the U.K. in the past 15 years. Members of the House of Lords and Commonwealth citizens in Gibraltar were also eligible, unlike in a general election.”)

Polls closed at 10 p.m. London-time (5 p.m. Eastern), and then the official results were called about 9 hours later. The result of the referendum was in favour of the ‘leave the European Union’ group.

REMAIN                                                                                LEAVE

48%                                                                                          52%

16,141,241                                                                            17,410,742

Although, the result must still be ratified by parliament.

 

Why Brexit?

One of the foremost points in the conversation has been ‘immigration concerns’ particularly for young people in the UK. To them, deciding whether to leave the European Union was a bigger question of ‘national identity’.

Some Brits worry that the country’s employment market and social services will drown under the weight of too many new residents. They feel since joining the EU they have been getting a whole lot of mass immigration. Ergo, the “Leave” campaign represented a rejection of immigrants and foreigners and the “Remain” campaign represented a hopeful cosmopolitanism.

There was also the worry that upper-crust elites and Brussels bureaucrats are pushing for a continental identity that diminishes the U.K.’s own sense of self.

Until the final days before the referendum, much of the coverage outside of the UK discussed the “Brexit” in economic terms.  These economic arguments, although more often made by pro-exit politicians than by professional economists. Those politicians argued that the EU’s strong regulatory regime and its required contributions actually depress the U.K.’s growth potential.

 

What is Article 50?

The founding fathers of the EU did not envisage that any member state would ever leave – and so far, with the minor exception of Greenland, none had.

However, in the Treaty of Lisbon, which Gordon Brown signed on behalf of the UK in 2007, there is an Article 50 which sets out the rules should a country decide to leave.

Withdrawal from the European Union is a right of EU member states under Article 50 of the Treaty on European Union. Once Article 50 is invoked, a series of negotiations would begin about how to disentangle the U.K. from the many EU structures to which it is a party.

The process could take two years or more, if both the U.K. and the European Council agree to extend the discussion period. Some have suggested that British leadership could avoid invoking Article 50 all together, and would instead attempt to negotiate a different — not entirely separate — relationship with the EU.

 

How long will it take to leave the EU?

Now that the ‘leave’ alliance has won, the process of a British exit from the EU will begin. Some are of the opinion that it would take a minimum of two years for the UK to leave the EU, while others say the negotiations could take more than two years.

During that time, Britain would continue to abide by EU treaties and laws – however it would not take part in any decision making.

Moreover, the actual process of getting out will begin when the British government formally notifies Brussels that it is invoking Article 50. An argument is already starting over how soon that should be done, with the Labour leader Jeremy Corbyn saying it should happen immediately, and others urging caution and delay.

Although, one cause of delay will be a Conservative leadership election. Negotiations cannot effectively begin until they know who will be negotiating on the British side.

 

What will happen during that time?

According to a source, The UK would have to thrash out the terms of its departure. Issues would include what financial regulations would still apply to the City of London, trade tariffs and movement rights of EU citizens and UK nationals. The agreement would have to be ratified both by the European council and the parliament in Strasbourg.

According to The Telegraph, the Government would have to do three acts simultaneous: negotiate a new deal with Brussels, win a series of major bilateral trade deals around the world, and revise its own governance as EU law recedes.

Hundreds of Treasury lawyers and experts would have to be hired for areas – such as health and safety, financial services and employment – where Britain had lost competence to Brussels. Meanwhile, a Trade Ministry will be required, with hundreds of new negotiators, to establish new deals around the world.

 

How would Brexit impact the EU?

Some group in the EU community believe that Britain quitting its membership could encourage other nations to follow suit with referendums of their own – or demand tailor-made deals of their own.

However, leaders fear that Brexit could trigger a domino effect as the bloc without Britain becomes less attractive to liberal, rich northern states such as Denmark and the Netherlands, where demands are growing for copy-cat referendum. The Dutch elections are held in March next year, the French in April and May and Germany in the Autumn, therefore, If an independent Britain proves to be a success, the bloc could quickly unravel.

 

What does the Queen think of Brexit?

In early March, with a headline that screamed “QUEEN BACKS BREXIT”, a British tabloid The Sun (NWSA) reported that Queen Elizabeth II was in favor of the United Kingdom detaching from the European Union. The story quoted a source who attended a lunch with both the Queen and former Deputy Prime Minister Nick Clegg in 2011, where the queen allegedly said that the “EU is going in the wrong direction.”

Immediately, Buckingham Palace went on the defensive, lodging a formal complaint against the tabloid with the U.K.’s press watchdog (the Independent Press Standards Organization) saying that the Queen does not engage in politics, indicating that the Palace was adamant on staying out of the Brexit political dispute.

More to the point, since the English monarchy has no political power, the Queen has basically stayed quiet on political issues and her true thoughts on the topic remains unknown.

I think the real question should be, does Brexit threaten the royal family’s power? The precise answer is No. The Queen will remain the leader of the U.K., the Commonwealth, Canada, Australia, New Zealand and 12 other countries regardless.

According to Fox business, what Queen Elizabeth might have to be worried about, though, are future referendums. A report from Business Insider claims that when the Queen who is currently 90 years old dies, countries ruled by the monarchy who support the institution simply based on personal attachment to the Queen, might decide to separate.

Her territories have been threatened before, with Australia holding its failed referendum in 1999 to separate from the Queen’s rule. And also Scotland’s 2014 referendum to separate from the U.K. it was widely believed that the Queen was not in favor of the country voting to leave.

 

Global implications?

Nearly every market move over the last two weeks has been attributed to the upcoming British referendum on whether the United Kingdom should remain with or leave the European Union.

Although some have dismissed those analyses as “rotten propaganda,” most mainstream economists overwhelmingly agreed the move would be bad for the U.K. in fact, Global markets are moving wildly, and currencies are making big moves. Brexit has increased the amount of uncertainty in markets.

In the more immediate term, markets are going to react in a big way. The Brexit has no historic precedent, which spells volatility in markets, probably on a global scale. Equities futures across the globe will take a dive, with the Dow implied to open down more than 700 at one point.

Asia was also rocked by the referendum, with Japan’s Nikkei index down about 8 percent. Important British trading partners — including India and China — indicated they were worried that the exit would create regulatory and political volatility that could harm the economies of everyone involved.

And it’s not just trading desks who cared about Thursday’s referendum. Federal Reserve Chair Janet Yellen said earlier this month that a British exit from the EU “could have consequences in turn for the U.S. economic outlook.”

Perhaps the greatest effect from the leave victory, however, was felt in British pound sterling, which plummeted to a 31-year low against the dollar.

According to Reuters, the dollar index, meanwhile, rose 3 percent at one point, setting it up for the biggest daily gain since 1978.

Treasuries also felt the Brexit, with the U.S. 10-year hitting 1.507 percent — its lowest level since Aug. 3, 2012 when the 10-year yielded as low as 1.471 percent. In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.

The U.K.’s Treasury itself reported that its’ analysis showed the nation “would be permanently poorer” if it left the EU and adopted any of a number of likely alternatives. “Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU,” a summary of the report said.

As the overall economy weakens, the British government would see weaker tax receipts than otherwise, and those losses would vastly outweigh the benefits of reduced contributions to the EU, according to the analysis.

Moreover, The Bank of England, the International Monetary Fund, and others have warned of the long-term negative effects of a British exit. The general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly so they can readily access the free-trade corridors the U.K. enjoys with the rest of the European Union. So since the U.K is leaving, many of those companies could see drastically reduced profits.

“A U.K. exit from Europe’s single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.” The IMF said in an April report.

Futhermore, with all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies. Investors have already begun to dive out of the British pound and into cash that’s perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU.

The fallout from those currency moves could be another source of short- and medium-term economic tumult.

However, Mario Draghi, the president of the European Central Bank, has said it is ready to intervene to steady the markets. Central bankers from Japan to Switzerland have also offered to step in to provide additional liquidity – a measure not seen since the financial crisis.

Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports. Therefore, a slowdown there would mean a global slowdown. One that could last months, if not years, and have a long term effect.

 

 

I.Ofe

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