This is the second part in the series on the Current Article titled “Brexit’ Issue: Explained”
For part one click here
In recently held referendum, British voters voted in favor of “Brexit” — British exit from the European Union. That means that the EU is on the verge of losing one of its largest and wealthiest members.
Britain’s decision to leave the European Union has created “significant uncertainty” that will have repercussions not only for UK and Europe, but the global economy including India.
Britain’s exit will affect the British economy, immigration policy, and lots more. It will take years for the full consequences to become clear. But here are some of the most important changes we can expect in the coming months.
Problems for Britain’s economy
- In the short run, uncertainty about Britain’s future relationship with the EU, its largest trading partner, could push the UK into a recession.
- And that volatility reflects market worries about more severe consequences in the months ahead. Britain’s prospects of negotiating a favorable deal with the EU could be weakened. The EU may decide to strike a hard bargain to discourage other countries from leaving the EU. Or the UK’s new leader might not be willing to accept the kind of restrictions that come with a Norway-style deal. And that could create serious problems for businesses based in the UK.
- For example, if you are a car producer with major production in the UK, before Brexit, the same safety standards and environmental standards allow you to sell everywhere in the European market. But after Brexit now, you would no longer be able to sell into other European markets, not because you face a small tariff but because you’d have to go through another set of safety certifications. This kind of thing would be repeated in every industry.
- The UK government has estimated that exiting the EU could cause the British economy to be between 3.8 and 7.5 percent smaller by 2030 — depending on how well negotiations for access to the European market ultimately go. Other reports have found smaller but still significant impacts.
Uncertainty for migrants
- One of the most important and controversial achievements of the EU was the establishment of the principle of free movement among EU countries. A citizen of one EU country has an unfettered right to live and work anywhere in the EU. Both Britons and foreigners have taken advantage of this opportunity.
- Currently there are about 1.2 million Brits living in other EU countries, while about 3 million non-British EU nationals live in Britain. Thanks to EU rules, they were able to move across the English Channel with a minimum of paperwork. Britain’s exit from the EU could change that profoundly.
- It’s possible, of course, that Britain could negotiate a new treaty with the EU that continues to allow free movement between the UK and the EU. But resentment of EU immigrants — especially from poorer, economically struggling countries like Poland and Lithuania — was a key force driving support for Brexit. So the British government will be under immense pressure to refuse to continue the current arrangement.
- At a minimum, that would mean that people moving to or from Britain would need to worry about passports and residency rules. And it could mean that some British immigrants may lose their right to continue living and working in the UK and be deported.
Further breakup of the UK
- Brexit could also change the United Kingdom in a more fundamental way. It’s called the “United” Kingdom because it’s made up of four “countries” — England, Wales, Scotland, and Northern Ireland. But with Britain now on its way out of the EU, there’s a danger it won’t stay united for very long.
- Scotland supported Remain by a margin of 62 percent to 38 percent. And the Scots in particular have never been entirely satisfied with English domination, as shown by the 44 percent of Scottish people who voted to make Scotland an independent country in 2014. They like having the UK be part of the EU in part because it provides a counterweight to English power within the UK.
- So Britain’s exit from the EU could strengthen the hand of Scottish separatists. A key Scottish leader has already signaled that she wants to hold a second referendum on Scottish independence. If that vote succeeded, Scotland would likely petition for admission to the EU in its own right.
- A similar, but possibly more troubling, situation could emerge in Ireland, which has long been divided between a protestant North that’s part of the UK and an independent Irish republic in the South. Tensions across the border have been minimized by EU rules guaranteeing the right to move across the border. But if the UK withdraws from the EU, the border could become more important and tensions over territory could flare up.
- Perhaps for this reason, voters in Northern Ireland supported Remain 56 percent to 44 percent. There’s a chance that a UK exit from the EU could provide renewed momentum for Northern Ireland to try to leave the UK and unify with the rest of Ireland.
English language may be dropped by EU
- The English language may be one of the casualties of Brexit as it emerged that no state other than the UK has registered it as a primary language among the 28 countries within the European Union.
- English has been the top choice for European Union (EU) institutions but Britain’s vote to leave the Union could trigger a ban on its use.
- Regulations would have to be changed to retain the language, requiring a unanimous vote from the 27 remaining states. The EU has 24 official languages but for daily business, the European Commission and council of ministers use English, French and German.
- EU documents and legal texts are translated into all 24 official languages of the bloc. If English were to lose that status, Britons would have to do the translation themselves.
The decision by the UK leaving the European Union has impact on India on multiple layers. However, economists and experts are of the opinion that the country need not be overly worried about the development as the transition is going to be slow and also more details are to be expected.
- Brexit would affect the rupee through both trade and the financial channels. According to one research firm, the UK and European Union account for 23.7% of the rupee’s effective exchange rate.
- After Brexit, the chances of investors departing from emerging market currencies and euro/pound investments would be more, which in turn will lead investors to store their funds in safe haven of dollar and US treasury, strengthening dollar against currencies.
- Above are speculations but in actual term, after Brexit, the rupee has depreciated by a lower extent against the US dollar compared to other emerging market currencies, that could well be owing to RBI’s intervention to stem volatility.
- For now, investors seem to be betting that Indian companies won’t be affected much. In fact, some market experts point to the sharp drop in oil and other commodity prices and say that a number of companies will benefit as a result.
- Indian companies have traditionally had substantial operations in the UK. Currently over 800 Indian companies function in that country, employing more than 100,000 people in all.
- UK has always acted as a gate pass for Indian companies to access the European companies, its more because of the access to financial markets in London and ease of doing business with Europe, from UK.
- Currency volatility will straightaway hurt revenue and profits for some of those doing business with the UK and Europe.
- Indian conglomerates like the Tata Group, for instance, have massive operations in the UK.
- Indian pharma industry which has more exposure towards Europe, will also be affected.
- Reports say that EU trade agreements with other nations will cease to apply to Britain, which will have to renegotiate with each country in its own capacity.
India’s Trade with EU and UK
- Trade is expected to go down after Brexit, as European Union is among the largest trade partner of India, embracing 13% of its trade, which surpasses China (9.6%) and US (8.5%).
- Currently, India has positive trade surplus in terms of bilateral trade with Britain. Even if trade with Britain increases, there is no certainty that a UK outside of Europe would drive bilateral trade.
- A re-negotiation of the EU-UK agreement following Brexit would mean further uncertainty for India since a conflict of interest could arise, restricting UK from adapting certain deals with India.
- Brexit can affect India’s flagship IT sector given that the UK accounts for 17% or one-sixth of the sector’s global exports while continental Europe accounts 11%. For one, Brexit will increase overhead costs, setting up new headquarters, perhaps in both Europe and Britain.
- If we look at exports from India to UK, the major exports are textiles and clothing, followed by machinery and auto ancillaries. India’s major exports in terms of pharma are US, UK followed by Europe. After Brexit, the companies which have income from UK and Europe are going to be hit, at least for shorter term.
- On the other hand, the imports from UK will be getting cheaper on the event of Brexit, mainly rough uncut diamonds, spirits etc.
- Higher education is an important domain which is likely to see major changes after Brexit, particularly for Indian students aspiring to study in the UK and EU.
- According to experts, in the immediate short-term, direct cost of studying in the UK will be declining due to currency devaluation. However, uncertain prospects for finding work opportunities will make it (difficult for students to) recover direct cost and hence overall cost of study in the UK will still increase.
- If the pound remains weak against students’ home currency, these students ultimately will find themselves better off when they pay tuition in sterling.
- However, if universities suffer financially after Brexit, whether due to a lack of EU funding or fewer EU citizens deciding to study at UK universities, they may decide to increase fees for international students to make up for the deficit.
- Among Indian students, UK has always been a more popular country than all the EU nations put together.
- Britain’s exit from the European Union will not have any immediate impact on India’s trade and investment with the U.K. and the EU, but the proposed India-EU Free Trade Agreement (FTA) will see some “modifications and moderations
- India has been negotiating a free-trade agreement with the EU since 2007 and a “yes” vote for Brexit will have a direct bearing on this. After Brexit, now India will need to negotiate a separate pact with the UK.
- Britain’s exit from the EU will certainly affect India’s interests on those tariff lines where concessions were being considered on account of Britain. India will undertake a study of those Britain-related tariff lines that are part of India-EU FTA talks.
At this point, no one could have foreseen the exact sequence of events, however, a few immediate consequences seem highly likely:
- The immediate effects of “Brexit” will flow almost entirely through financial markets. Investors will rush to safety and precipitate unpredictable moves in global markets as capital moves from risky assets (possibly emerging markets) to safer havens.
- The financial market reaction will also feed into the far-flung macroeconomic consequences of Brexit. For example, a sharp and sustained rise in the value of the U.S. dollar versus the euro will put added pressure on the weak U.S. manufacturing sector just as it seemed to find a new footing. This puts additional downward pressure on historically weak U.S. growth momentum.
Global Growth Prospects
- It could undermine global growth prospects. The EU is the largest trading partner for many countries such as India and China. Any unravelling of the EU market means uncertainty as it is an export destination and this is likely to have an impact on exports from all major parts of the world. For example, at present exports to the UK account for 0.7 % of Asian countries’ GDP. Some studies estimated that a Brexit would reduce British imports by 25% worldwide within two years.
- Much of the EU’s money comes from its member states. And the UK is one of the larger contributors. A British exit from the EU would rock the Union by ripping away its second-largest economy with one of its top two military powers and by far its richest financial centre.
Banking operations in Europe
- The European Central Bank will be compelled to raise its level of intervention yet again, as risk premiums across the region rise.
- Among the larger Eurozone members, Italy is in a particularly vulnerable position—now made more vulnerable. Each blow to members of the Eurozone periphery also further make Germany’s outperformance in the Eurozone even more unsustainable.
Increase in EU skepticism
- The Brexit vote will undoubtedly embolden other EU skeptic parties, particularly in the Eurozone heart of the EU. Other exit referendums may arise in the coming months to years. The U.K. itself may face an additional exit referendum from Scotland.
- Brexit would increase the protectionism and anti-immigrant sentiment worldwide. This could also give rise to more nations contemplating exit from the EU. Greece, for example, held a referendum last year when its citizens overwhelmingly rejected EU’s bailout norms. Many Britons working within the vast EU bureaucracy would have to look for alternate employment.
U.S. and Japan
- After Brexit, the chances of investors departing from the euro/pound investments would be more. This will push capital away from the region and toward key safe-haven markets including the U.S.—especially Treasuries—and to Japan. This will further lower market interest rates and raise relative currency values.
- A higher U.S. dollar and Japanese yen are negative to both economies’ export sectors. In the case of Japan, this is particularly unhelpful to its efforts to reinflate and reinvigorate the economy after decades of deflation.
- For the U.S., the negative impact on exports is relatively small compared with trends in domestic demand, but the deflationary pressure on tradable goods will widen the divergence between reasonably strong inflation in the services sector vs. reasonably strong deflation in the goods sector.
- The higher U.S. dollar also triggers additional pressure on China to float the yuan lower, as it is caught in the divergence between its two largest export markets—the EU and the U.S.
However, actual exit of the U.K. from EU will take time of around two years because of the Treaty of Lisbon. Thousands of details will have to be worked out in the process of unwinding the ties that bind Britain with the EU.
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