Brexit

Brexit Definition

Brexit refers to the combination of Britain and Exit, which signifies the withdrawal or exit of Britain from the E.U. or European Union and it is the residents of Britain who actually voted for the exit of Britain from the E.U. and these votes were split amongst the constituent nations of the UK, for asking the stay of Wales and England and exit of Northern Ireland and Scotland.

Explanation

Whether you like the news or not, you would have come across this word of late – Brexit. Because of the larger than life news is made, it may sound like a terrible thing that happened just like a bomb blast or an airplane that disappeared midway into a journey. In reality, it isn’t that bizarre. Brexit explained simply is Great Britain leaving the European Union (EU) as it was earlier part of the EU. If you would like to use another fancy word, you could say that Brexit is the opposite of Bremain.

Just for the record, who is Britain’s Prime Minister? Not David Cameron as he resigned post-Brexit. It is Theresa May, the first woman Prime Minister of the UK after Margaret Thatcher (second overall) and guesses what, she vouched for the UK to remain in the EU as opposed to supporting a Brexit. Now, this post isn’t on why she was elected to be the Prime Minister when she supported a Bremain. This post seeks to give thoughts on the basic questions regarding Brexit.

Why did Britain leave the EU? What happened between them? Wait for a second, how did UK feature in the EU in the first place? We will look at these issues and explain Brexit in very simple terms for students and professionals.

Brexit (main)

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The European Union

In 1967, the European Community (EC) was formed. This was an economic project in Europe that existed before the EU was formed and the UK joined them six years later. This was basically formed to get over World War II so that trade binds different nations and thus can prevent future wars and bring co-operation.

Many things happened since then and in 1992 the members of the EC signed the Maastricht treaty which leads to the formation of the EU, the focus is that a single common currency is established for the member nations. Yes, the topic of economic trade and co-operation was also an important part of the EU. The UK wanted a modification in this area of the agreement. They wanted to keep their currency (GBP – Pound Sterling) and not club it with the common currency. Earlier, each country in Europe had its own currency – the French, Francs; the Germans, Deutsche Mark; the Italians – Lira and so on. While nations like these agreed for a common currency UK opted out of this clause but wanted to remain part of the EC then.

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

The Vote

It was decided that a referendum would be held in the UK on June 23rd 2016 and those eligible to vote would do so. While the media, notable businessmen and political experts had stayed calm and confident, they clearly believed that the UK would not vote to move out of the EU. The people who were the voters having a real say of things to come did exactly the opposite and shocked the entire world. Whether they knew what they were doing or not is an entirely different topic, but the fact is that they had voted 52% for ‘leaving’ the EU as against 48% to ‘stay/remain.’

Is the UK out of the EU?

No. The EU currently has 28 members and since UK had voted out of the EU on June 23rd, 2016, they have two years to leave – they have to negotiate certain things before leaving. You know, it’s not as if they’re being boxed out of a match and just walk out! The UK is still governed by the laws of the EU.

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

Is Brexit for the good – Why did people vote such?

For now, no one knows whether Brexit is for the 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 as to why the people of England voted for them to leave the EU.

  • This was not mentioned earlier but each member nation of the EU pays an amount to the EU annually to continue their membership. As regards the UK, the amount is around $12 billion (converting it to dollars – around £9 billion). Well, this would be even more in Sterling Pounds now since it has depreciated quite a lot since the historic vote. This big annual commitment could be one possible reason for a ‘leave’ vote where the money can be spent for domestic purposes. This 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 UK, not only in London. Many of these would-be immigrants who work there probably live there – they are probably residents of the UK as they would have lived for 5 years in the UK. One of the many principles laid out while forming the EU was that of being free members where people can freely move and live in another EU nation without the hurdles of getting a visa. It is believed that almost 1 million people have moved to the UK due to free labor laws. Britain also gives child benefits and it is believed that many of these migrants are transferring that money to their children who aren’t living in the UK.

There might be many other reasons due to which the voters made such a choice. One could just be voting for fun! Believe it or not, quite a number of voters said that if given a chance to re-vote, they would have voted for the ‘stay’ campaign since they did not know the ramifications that would befall.

Post-Brexit impact – Short term

Regarding the long term impact of Brexit, I doubt if anyone is sure about anything yet. As I said earlier, no one really knows. But we have already seen the short-term impact:

  • The value of the UK’s currency plummeted to extreme lows. The GBP was falling ever since the word about the referendum was made. It was a possible clue we can say in hindsight, about the fear of an actual Brexit apart from crowded currency trades. Here’s a chart indicating how much the Pound Sterling fell. By the way, such a fall was only expected if Brexit happened which wasn’t expected!
graph Brexit

source: bloomberg.com

  • Stock markets across the globe fell due to panic selling. Not a single stock market was spared in the process. As regards the bond markets, US Treasury yield dipped to lows not seen for a long time and fell below 1.50% on the 10-year bond whereas the 10 years German Bund fell into negative territory. Gold had a massive rally post-Brexit and all other commodities fell. Of course, not to mention that the Pound Sterling had a dramatic fall versus the US Dollar and Japanese Yen in particular. Anyone buying stocks anywhere in the world got an opportunity to ‘buy the dip’ as so-called ‘experts’ say!
  • Another issue is that the UK consists of England, Northern Ireland, Wales, and Scotland. Brexit was supposed to be the ‘leave’ vote of all the four but Scotland and Northern Ireland had voted to remain with the EU. Scotland felt it unacceptable to be pushed out of the EU since they had voted for the ‘stay’ campaign – it is now quite likely that they will have a second referendum so that they can vote to stay in the EU. Northern Ireland has the choice to go for another referendum to stage their will to remain in the EU. So, right now only England and Wales have voted out of the EU!
  • The English economy isn’t in good shape. Interest rates have been low with the policy rate at 0.5% for quite long, inflation being subdued and growth is flat. Brexit has caused a cloud of uncertainty on where their economy is going – forward or backward. 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 UK weakens. If Brexit eventually leads to a strengthening of the UK, they could be on the verge of higher rates soon affecting mortgages.
  • Britain lost its sovereign credit rating of being an AAA nation. They were downgraded to AA with a negative outlook by S&P and to Aa1 with a negative outlook by Moody’s, two leading credit rating organizations. This makes it costlier to raise government debt 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 made news by saying that France, the Netherlands, and a few others would opt for their own referendum taking a cue from Brexit. This is worrying because the EU would be at stake if member nations opt-out of it.
  • Just when so many thought that Brexit has caused a collapse in global growth, harmed Britain’s economy and so on, markets have stabilized. After the initial pounding in stock markets world over, these markets have of late touched record highs. Right from the S&P 500 to the BSE Sensex, we have seen record highs being touched in a way implying that the repercussions of Brexit fears are no more whether this conclusion is true or not.
  • Many big companies have to figure out their plans where they have a business unit in the UK. Tata Steel, an Indian major had to rethink its plans for selling its UK unit. Several other companies to have had to figure their plans out.
  • Students coming from abroad who are studying in the UK would also get affected. This could be part of the immigration reduction campaign mentioned earlier. Students would have to pay a higher fee to be international students and visa restrictions would also add to their woes. Also given that the UK 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, they would also get impacted apart from the students due to their own reasons. Currently, there are more than 100,00 students outside of the UK studying there.

Conclusion

Brexit has affected multiple economies and not just the UK’s economy. Although it’s after-effects seem to have stabilized, it remains to be seen if this smooth and low volatility environment will prevail for long. Once the negotiations get deeper and as more information comes out in the media, we are almost bound to see volatile reactions across economic, political and financial centers. Given the globalized economy that we all live in, this is a reminder to all of us that one economy can have implications on other economies. Systemic effects have never been so close for long. As time progresses we can look at different charts to give us a better indication of what Brexit has done. Wait for time to give you an indication of what is to come. After all, what we can do is only to wait rather than make a terribly wrong prediction!

This has been a simple explanation of Brexit for students and professionals, is it good or bad and its short term and long term impacts. You may also have a look at these following economics articles for further learnings –

Reader Interactions

Comments

  1. Cassandra Ooi says

    thank you, clearly presented!

    • Dheeraj Vaidya says

      thanks Cassandra!

  2. TONY THOMAS says

    Nice article with perfect conclusion

    • Dheeraj Vaidya says

      thanks Tony!

  3. Shri Hari Agrawal says

    Crisp and clear. Good job:)

    • Dheeraj Vaidya says

      Thanks Shri Hari!

  4. Cindy Njoga says

    A quick one Dheeraj:
    Could you please do an article as well as an illustration of financial modeling for a “start up” in the Agric sector in relation to impact investing.Thanks

    • Dheeraj Vaidya says

      Thanks Cindy for the suggestion. Will make note. Hope to release one such financial model soon.

  5. Cindy Njoga says

    Nice one Dheeraj!!!

    • Dheeraj Vaidya says

      Thanks Cindy!

  6. Muhammad Nadeem Bhatti says

    Beautifully presented. Regards

    • Dheeraj Vaidya says

      thanks Muhammad!

  7. Tendekai Hove says

    Excellent article like Ravi said. I am not a qualified finance guy but your website has helped me consult and made me look intelligent among the gurus. Keep up the good work

    • Dheeraj Vaidya says

      thank you Tendekai :-)

  8. Suhendra Wahid says

    nice article, give me new perspective about brexit … thank you Dheeraj

    • Dheeraj Vaidya says

      Thanks Suhendra!

  9. Rajan Singh says

    Really good article…:)

    If you can give your insight on effect of BREXIT on different sectors, it would useful.

    • Dheeraj Vaidya says

      Thanks Rajan for this excellent idea. Will try to publish one!

  10. Biswajit says

    Excellent way to explain brevity. Specifically try to figure out reasons regards Biswajit

    • Dheeraj Vaidya says

      thanks Biswajit!

  11. Mankirat says

    Nice article.

    • Dheeraj Vaidya says

      thanks Mankirat :-)

  12. Kiran patil says

    In depth information about Brexit. Great job Dheeraj. looking forward to read more such blogs

    • Dheeraj Vaidya says

      thanks Kiran!

  13. wasiu amusa says

    Nice piece; It’s quite insightful.

    • Dheeraj Vaidya says

      thanks Wasiu!

  14. MILIND VADJIKAR says

    Very lucid, concise & informative article/s. GR8 HELP!

    • Dheeraj Vaidya says

      thanks Milind!

  15. Ravi Kiran says

    Excellent article. Very thorough and in a layman language. Keep going Dheeraj :)

    • Dheeraj Vaidya says

      thanks Ravi!

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