Brexit Definition

Explanation

Whether you liked the news or not, you may have come across this word of late – Brexit because the larger-than-life-announcement made may sound like a terrible thing happened like a bomb blast or a midway disappeared airplane into a journey. But, in reality, it is not that bizarre. Brexit explained that Great Britain left the European Union (E.U.) earlier part of the E.U. So, if you like to use another fancy word, you can say that Brexit is the opposite of Bremain.

Just for the record, can you tell me who is Britain’s Prime Minister? Not David Cameron, as he resigned post-Brexit. Theresa May was the first woman Prime Minister of the U.K. after Margaret Thatcher (second overall). She vouched for the U.K. to remain in the E.U. instead of supporting Brexit. This post is not why she was elected to be the Prime Minister when she endorsed Bremain. This post seeks to give thoughts on the fundamental questions regarding Brexit.

Why did Britain leave the E.U.? What happened between them? How did the U.K. feature in the E.U. in the first place? We will examine these issues and explain Brexit in simple terms for students and professionals.

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The European Union

In 1967, formed the European Community (E.C.) This economic project in Europe existed before the E.U. was established; six years later, the U.K. joined them. That was created to overcome World War II, so trade binds different nations and thus can prevent future wars and bring cooperation.

Since then, many things have happened, and in 1992 the members of the E.C. signed the Maastricht treaty, which led to the formation of the E.U. The focus was to establish a single common currency for the member nations. Economic trade and cooperation were also an important part of the E.U. However, the U.K. wanted a modification in this area of the agreement. They tried to keep their currency (GBP – Pound Sterling) and not incorporate it with the common money. Earlier, each country in Europe had its currency – the French- Francs; the Germans-Deutsche Mark; the Italian – Lira, and so on. While these nations agreed on a common currency, the U.K. opted out of this clause but desired to be part of the E.C.

The E.U. was formed in 1993, and nine years later, the ‘Euro’ was established as the common currency among the E.U. member nations. The E.U. evolved such that member nations became like a ‘single market’ where trade/goods, services, and people were freely (without tariffs) able to move from one country to another like all nations were a single country.

The Vote

It decided to hold a referendum in the U.K. on June 23rd, 2016, and those eligible to vote. While the media, notable people in business and political experts were calm and confident, they believed that the U.K. would not vote to move out of the E.U. However, the people who were the voters having a real say of things to come did the opposite and shocked the whole world. Whether they knew what they were doing or not is a different topic to discuss, but in reality, they had voted 52% for ‘leaving’ the E.U. as opposed to 48% to ‘stay/remain.’

Is the U.K. out of the E.U.?

No. The E.U. has 28 members since the U.K. was voted out of the E.U. On June 23rd, 2016, they had two years to leave and negotiate several things before leaving. So, you know, it is not as if they are being boxed out of a match and walked out! The laws of the E.U. still govern the U.K.

Still, The U.K. has two years. The current Prime Minister, Theresa May, has mentioned that the exit process will fully flow from 2017 onwards. Meanwhile, negotiations on trade, immigration, etc., will do the rounds. What is likely to be the outcome no one is aware of, but it is safe to assume that Britain and the E.U. can lose out on some areas and gain in others – they both may take the best out of the agreement to benefit their nation(s). To make things worse, given that there are 28 members in the E.U. of which the U.K. is one, 27 have to agree on the terms of the U.K.’s exit.

Is Brexit for good – Why did people vote such?

Currently, no one is aware of whether Brexit is good or not. If anyone claims they do, it is a lie. Before the referendum, many ‘knew’ that Brexit would not happen until it did! Let us try to understand the possible reasons why the people of England voted for them to leave the E.U.

  • That did not mention this earlier, but each member nation of the E.U. pays an amount to the E.U. annually to continue their membership. Regarding the U.K., the amount is approximately $12 billion (converting it to dollars – about £9 billion). It may be even more in Sterling Pounds now since the historic vote has depreciated a lot. So, this big annual commitment can be one possible reason for electing ‘leave’ to spend domestic spending. That would also be able to reduce its budget deficitBudget DeficitBudget Deficit is the shortage of revenue against the expenses. The budgetary deficit could be the sum of deficit from revenue and capital account. read more.

  • Immigration is another factor. London is the financial capital of Europe, and there are people from different nationalities working in the U.K., not only in London. Many of these would-be immigrants who work probably live there – they are probably residents of the U.K. as they may have lived for five years in the U.K. One of the many principles laid out while forming the E.U. was being free members to freely move and live in another E.U. nation without the barriers of getting a visa. It is believed that almost 1 million people migrated to the U.K. due to free labor laws. Britain also provided child benefits and thought many of these migrants were transferring that money to their children who were not living in the U.K.

There might be many other reasons why the voters made such a choice. Of course, one could just be voting for fun! But, believe it or not, quite many voters said that if given a chance to re-vote, they would have voted for the ‘stay’ campaign since they did not know the consequences.

Post-Brexit impact – Short term

Regarding the long-term impact of Brexit, it is not easy to mention if anyone is convinced about anything yet. As we said earlier, no one knows. But we have already seen the short-term impact: –

  • The value of the U.K.’s currency plummeted to extreme lows. The GBP has been collapsing ever since making the word about the referendum. In hindsight, it was a possible clue we can say about the fear of an actual Brexit apart from crowded currency trades. Here is a chart indicating how much the Pound Sterling flatten. One only expected a drop if Brexit happened, which was not expected!

source: bloomberg.com

  • Stock markets across the globe shoot down due to panic selling. Not a single stock market was spared in the process. The U.S. Treasury yield dipped to lows not seen for a long time in the bondBondBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more markets and tumbled below 1.50% on the 10-year bond. Whereas the ten years German Bund fell into negative territory. Gold had a massive rally post-Brexit, and all other commodities were slashed. Not to mention that the Pound Sterling had a dramatic fall versus the U.S. Dollar and Japanese Yen in particular. So anyone buying stocks anywhere in the world got an opportunity to ‘buy the dip’ as so-called ‘experts’ say!

  • Another issue is that the U.K. consists of England, Northern Ireland, Wales, and Scotland. Brexit was the ‘leave’ vote of all four. Still, Scotland and Northern Ireland had voted to continue with the E.U. Scotland felt it unacceptable to be pushed out of the E.U. since they had voted for the ‘stay’ campaign. It is now likely that they will have a second referendum to vote to stay in the E.U. Northern Ireland has the choice to move for another referendum to stage their will to continue in the E.U. So, now only England and Wales have been voted out of the E.U.!

  • The English economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more is not in a good frame. Interest rates have been low, with the policy rate at 0.5% for quite a long, inflation subdued, and growth. However, Brexit has caused uncertainty as their economy flows forward or backward. The rumors have indicated that a Quantitative EasingQuantitative EasingQuantitative easing (QE) is an advanced monetary policy of central banks to stimulate growth in a stagnant economy by large scale buying of government bonds and other assets.read more program may be on the cards if the U.K.; weakens. On the other hand, if Brexit eventually strengthens the U.K., they could be on the edge of higher rates soon affecting mortgages.

  • Britain lost its sovereign credit rating of being an AAA nation. They were downgraded to A.A. with a negative outlook by S&P and Aa1 with a negative outlook by Moody’s, two leading credit rating organizations. That makes it expensive to raise government debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more and, in the process, leads to a higher hurdle rateHurdle RateThe hurdle rate in capital budgeting is the minimum acceptable rate of return (MARR) on any project or investment required by the manager or investor. It is also known as the company’s required rate of return or target rate.read more of interest the deeper we go down the risk ladder.

  • Rumors have also stated that France, the Netherlands, and several others may opt for their referendum, taking a cue from Brexit. That is distressing because the E.U. may be at stake if member nations opt out of it.

  • Just when so many thought that Brexit had caused a collapse in global growth, harmed Britain’s economy, and so on, markets have stabilized. After the initial pounding in stock markets worldwide, these markets have touched record highs of late. Right from the S&P 500 to the BSE Sensex, we have seen record highs being connected, implying that the repercussions of Brexit fears are no more, whether this conclusion is true or not.

  • Many big companies have to determine their plans for a business unit in the U.K. Tata Steel, an Indian major, had to reconsider its plans for selling its U.K. unit. Several other companies have had to evaluate their plans.

  • Students from abroad who are studying in the U.K. may also be affected. That may be part of the immigration reduction campaign mentioned earlier. In addition, the students may have to pay a higher fee to be international students. Visa restrictions may also add to their woes, given that the U.K. has some of the most prestigious universities like the University of London, where the London School of Economics (LSE) is a part, and several other universities may also get impacted apart from the students due to their reasons. Currently, more than 1,00,00 students outside of the U.K. are studying there.

Conclusion

Brexit has affected multiple economies, not just the U.K.’s economy. Although its after-effects seem to have stabilized, it remains to be seen if this smooth and low volatility Volatility Volatility is the rate of fluctuations in the trading price of securities for a specific return. It is the shift of asset prices between a higher value and a lower value over a specific trading period. read moreenvironment will prevail for long. Once the negotiations get deeper and more information comes out in the media, all are almost bound to see explosive reactions across economic, political, and financial centers. The globalized economy we all live in reminds us that one economy can affect other economies. Systemic effects have never been so close for long. As time progresses, we can look at different charts to better indicate what Brexit did. Wait for time to reveal what is to come. After all, what one can do is wait rather than make a wrong prediction!

The article is a guide to Brexit with a simple explanation for students and professionals, whether is good or bad, and its short-term and long-term impacts. You may also have a look at the following economics articles for further learning: –

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