Brexit: The Fiscal Uncertainty

On June 23, 2016, the United Kingdom held a referendum to decide whether or not to leave the European Union. Ultimately, 51.89% of citizens voted in favor of leaving compared to the 48.11% who wished to remain in the Union. The release of the results left social media in a frenzy, with Facebook posts, shared articles, and the hashtag "Brexit" trending on Twitter. While this event undeniably reverberated throughout Europe and the rest of the world, the decision's aftermath is still murky. Although the media fanfare has died down in the last few months, processing the economic effect on the U.K. and the E.U. will shape an understanding of its future influence.

According to CNN, the British pound fell to $1.33, the lowest in 30 years, and the euro dropped to $1.10 following the ruling. This descent was not only felt in Europe, as U.S. stocks plummeted after the results, the DOW losing over 611 points, and the Nasdaq going down 10% from its most recent high. Such change left investors and those who wanted the U.K. to remain an E.U. member fearful that Brexit would hurt and possibly, destroy the United Kingdom's economy. Yet, in the year after the infamous Brexit ruling, there hasn't been a drastic financial shift across Europe.

So what happened? Why didn't the European economy come to a complete halt? To answer those questions, one must look to the timeframe for the U.K.'s decision and the actions taken to move the E.U. secession forward. Article 50 of the Treaty on the European Union states that "a Member State which decides to withdraw shall notify the European Union of its intention…the Union shall negotiate and conclude an agreement with that State, setting out arrangements for its withdrawal." Though notifying the Union and drafting withdrawal plans takes approximately 48 hours, the overall process on both sides is a longer, more strenuous process, especially when covering delicate issues such as trade relations and immigration. All of these negotiations and approving the terms of agreements will take up to two years, all while the UK is still a contributing member to the E.U.

These factors don't mean that the United Kingdom and the Union will be left unscathed from this decision. By leaving the E.U., the U.K., logically, will not have as much trade access to Europe as before. This would lead to barriers with British exports, European tariffs on trade, and potential financial industries and banks moving jobs to other capitals and financial centers in the Union. In the future, reductions of exports and commercial investments in the United Kingdom could trigger pound depreciation and higher import prices, resulting in straining the U.K. and Europe's future trade deals, and for that matter, their relationship.

For now, it is too early to tell whether or not these predictions will ring true. For Britain and the remaining 27 member states, Brexit's true impact will not peak for at least two years. Until then, Europe and the global economic market will have to wait for the outcome.

Sources

European Union. “Title VI Final Provisions: Article 50,” 26 October 2012. Consolidated Version of the Treaty on European Union. Official Journal of the European Union. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12012M050. 

Ebell, Monique, and Warren, James. “The Long Term Economic Impact of Leaving the EU.” National Institute of Economic Review 236, no. 1 (May 2016): 133. doi: 10.1177/002795011623600115. 

Forgione. Sam. “Sterling Hits 31 Year Low on Brexit Vote Aftermath, Euro Slides.” Reuters.

http://www.reuters.com/article/us-global-forex/sterling-hits-31-year-low-on-brexit-vote-aftermath-euro-slides-idUSKCN0ZC17J

Gillespie, Patrick, Kottasova, Ivana, and Mullen, Jetrho. “Dow Plunges Over 600 Points as U.K. ‘earthquake’ crushes global markets.” CNN Money. . http://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html.

Goodman, Peter S. “Beginning Brexit and Bracing For Impact.” The New York Times. https://www.nytimes.com/2017/03/30/business/brexit-britain-eu-economy-banks.html

Lee, Jasmine C. “What are the Next Steps for Brexit Now That Article 50 Has Been Invoked?.” https://www.nytimes.com/interactive/2016/06/23/world/europe/brexit-european-union-process.html

“Results of the United Kingdom European Union Membership Referendum, 2016.” Wikipedia. https://en.wikipedia.org/wiki/Results_of_the_United_Kingdom_European_Union_membership_referendum,_2016.

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