16th July 2016: The British have shocked the financial, political and business establishment of the world by voting to leave (52%) the European Union in the important referendum of 23 June 2016. Briefly analysing the votes in the referendum, we see that while England and Wales opted to leave the EU, Scotland, Northern Ireland, and the city of London was strongly in favour of Great Britain remaining a part of the EU. Looking at the vote split (52 to 48), it can’t be said that either side won decisively. However, since the Britons have spoken, this democratic decision would have a huge impact on Britain, the EU and the world as a whole.
The immediate effect can be seen in the drastic fall of the pound. It was at its lowest in 30 years post the decision of the voting. Around £120 billion of value had been lost from the FTSE 100 index in the space of 10 minutes of the morning after. FTSE 250 showed a drastic drop as well, however, the recovery was not much relative to FTSE 100. Japan’s Nikkei 255 tumbled by 7.9% while Mumbai’s Sensex dropped by 3.6%. With one of the most important nation deciding to divorce from the 28 nation bloc, the looming uncertainty is prompting the investors to take their money out of the UK and put them into safe assets like gold. This has pushed the gold prices by about 8.1%.
In addition to the above immediate effects, some other issues might want our attention as well
• Depending on the trade negotiations the UK has with the EU, firms will have to rethink their strategy. A third of the Indian investment in the UK is in the IT and telecom sector. With Britain’s exit, a requirement for separate headquarters for Europe and Britain might crop up. Hence, if these have to navigate with the other firms to the continent, the Indian investment would be diverted to the EU. However, with Britain freed of strict EU regulations, one can only hope that it will be easier for India to engage in business with the fifth largest economy in the world.
• With the reactionary fall in the pound (at a 30 year low), the Indian investors stand to gain in the short run as they can acquire property in the UK at a cheaper rate.
• India is a great investment destination from the perspective of the emerging market. With the trade norms being dictated according to its own needs, UK is likely to invest more in India.
• Since one of the major reasons behind the exit was to control the immigration and have a tighter border control, more than anything, skilled migration to Britain would take a hit. This will affect every aspect of Britain’s functioning – from academia to industries. Additionally, free movement is going to become a major issue in Europe after the exit of UK.
• Brexit proves that the forces of nationalism and sub-nationalism do not die out just because of the creation of free trading unions and common markets. Economic gains do not always trump social and cultural concerns. Trade does not erase xenophobia and bigotry, which lie just below the surface.
• Britain will probably spend another year or more trying to negotiate the exit. Like the immediate effects show, the resultant uncertainty is likely to damage growth, dent the pound sterling, and slow down investment decisions in Britain. Taking an example of the companies, The Tata Group, which owns Jaguar Land Rover (JLR) and Tata Steel (former Corus Steel), will be affected by higher tariffs imposed by the EU against British imports.
• The unravelling of the EU market means uncertainty, having an impact on exports from all over the world. Studies extrapolate that Brexit would reduce British imports by 25% in the next two years.
• The most worrying issue is that this exit might prompt the other nations to go ahead with shifting the power back to the national governments in areas like immigration while maintaining the trading union.
• Backed by about 62% of Scotland voting to stay in the EU, there is a looming possibility of a second independence referendum.
For the moment it looks unlikely that the EU will disintegrate with Britain’s exit - but it will certainly not be the same anymore. The EU will have a tough fight to keep its relevance at world forums.
The EU is changing; it will rest on Brussels on whether that change is for the better.
Aashay is a Research Analyst at Outline India and works on quantitative research. He spent time pursuing his Masters in Economics at the University of Warwick, U.K. He has worked on the Economics of Happiness and Subjective Well-being under the supervision of Dr. Robert Akerlof. In this commentary he breaks down Brexit in simple terms and its implications for those of us living in India and macro implications worldwide.