Brexit Consequences: For UK, EU, and U.S.

How Brexit Will Affect You

Brexit
Campaigners join Nigel Farage, leader of the UK Independence Party, in their support for the 'Leave' campaign for the EU Referendum aboard a boat on the River Thames on June 15, 2016 in London, England. Photo by Michael Tubi/Corbis via Getty Images

Definition: Brexit is the June 23, 2016, referendum where the United Kingdom voted to leave the European Union. The residents decided that the benefits of belonging to the unified monetary body no longer outweighed the costs of free movement of immigration. Brexit is the nickname for "British exit" from the EU. 

On March 29, 2017, the UK Prime Minister Theresa May submitted the Article 50 withdrawal notification to the EU.

That gives the UK and EU two years to negotiate all affected issues. They include the following six points.

  1. The UK does not want to continue allowing unlimited EU immigration.
  2. The two sides must guarantee the status of EU members living in the UK, and vice-versa. The same applies to work visas, which are not currently required.
  3. The UK wants to withdraw from the European Court of Judgment.
  4. The UK wants a "customs union" with the EU. That means they will not impose tariffs on each others' imports and impose common tariffs on imports from other countries.
  5. Both sides want to continue to trade.
  6. The EU will require a cash settlement from the UK to meet existing financial commitments. (Source: "Key Points from the Article 50 Letter," BBC, March 29, 2017.) 

The withdrawal plan must be approved the European Council, the 20 EU countries with 65 percent of the population, and the European Parliament. Then the UK will copy the EU laws into its own laws, which can then be amended or repealed.

 

The Hard Brexit means leaving the EU quickly with no restrictions other than a new free trade agreement. The Soft Brexit would retain complete access of capital with restricted access of people. That is similar to Norway's relationship with the EU. (Source: "What's the Best Brexit Theresa May Could Get for Britain?

" The Guardian, July 14, 2016.)  

Prime Minister May named David Davis as the head of Brexit. He wants to negotiate bilateral trade agreements with enough countries to replace the EU within the next two years. He believes the EU will allow tariff-free access without insisting on the free movement of people. (Source: "What's the Best Brexit Theresa May Could Get for Britain?")  

The Prime Minister's plan was thrown into disarray thanks to a snap election that she called. She felt a strong vote of support would strengthen her negotiating position with the EU. Instead, her Tory party lost control of Parliament. Some were even calling for her to resign her post. The Labour party won 40 percent of the vote. Labour supports a Soft Brexit. (Source: "Here's What You Need to Know About the British Election," The Guardian, June 9, 2017.)

On September 22, 2017, May acknowledged the increased likelihood of a Soft Brexit. She proposed a two-year transition period after the UK leaves the EU. It would allow continued access to markets. In return, the UK will continue paying its EU membership fees until 2020. (Source: "May’s Brexit Speech - What You Need to Know," WSJ City, September 22, 2017.)

Consequences for the UK

The main advantage for the UK is that it can again prohibit the free flow of people.

That was the primary reason people voted for Brexit. The were concerned about an increase in refugees from the Middle East. 

But the prohibition would hurt Britain's younger workers. Germany is projected to have a labor shortage of two million workers by 2030. 

Another disadvantage is the potential loss of Britain's tariff-free trade status with the other EU members. Tariffs raise the cost of exports, making British companies higher-priced and less competitive. It also raises import prices. That creates inflation and lowers the standard of living for UK residents.

Brexit would be disastrous for The City, the UK's financial center. It would no longer be the base for companies that use it as an English-speaking entry into the EU economy. That could lead to a real estate collapse in The City. Many new office buildings are under construction.

They may sit empty if The City's financial services industry moves elsewhere. (Source: "Brexit Could Be Great for the United States," Market Watch, June 26, 2016.)

The UK will lose the advantages of EU state-of-the-art technologies. It grants these to its members in environmental protection, research and development, and energy. On the other hand, the UK will be able to tax without following EU guidelines. It won't have to pay EU membership fees, either.

In addition, UK companies risk losing the ability to bid on public contracts in any EU country. These are open to bidders from any member country. The biggest loss to London is in services, especially banking. Practitioners will lose the ability to operate in all member countries. This could also raise the cost of airfares, the internet and even phone services.

Under Brexit, the UK may lose Scotland. First, it will try to stop Brexit by voting against it. But Scotland doesn't really have the authority to do that. It could then try to join the EU on its own, as some countries within the kingdom of Denmark have. Last but not least, Scotland's leader has also warned she may call for another referendum to leave the UK. (Source: "Can Scotland Block UK's Brexit?" Indian Express, June 28, 2016.) 

Consequences for the EU

It could take up to two years to negotiate the terms of a Brexit. Initially, some EU members asked for an earlier withdrawal. Germany's Chancellor Angela Merkel asked for patience to allow the best outcome for all.

The Brexit vote could strengthen anti-immigration parties throughout Europe. That could eventually lead to the destruction of EU. If these parties gain enough ground in France and Germany, they could force an anti-EU vote. If either of those countries left, the EU would lose its strongest economies, and would dissolve.

On the other hand, new polls show that many in Europe feel a new cohesiveness. The UK often voted against many EU policies that other members supported. International Monetary Fund Director Christine Lagarde said,“The years are over when Europe cannot follow a course because the British will object.” She added, “Now the British are going, Europe can find a new elan.”  (Source: "What's the Best Brexit Theresa May Could Get for Britain?")  

Consequences for the United States

The day after the Brexit vote, the Dow fell 610.32 points. Currency markets were also in turmoil. The euro fell 2 percent to $1.11. The pound fell. Both increase the value of the dollar. In the face of so much volatilitygold prices rose 6 percent from $1,255 to $1,330. 

That's because Brexit dampens business growth for companies that operate in Europe. U.S. businesses are the largest investors in Great Britain. They invested $588 billion and employed more than a million people. These companies use it as the gateway to free trade with the 28 EU nations. 

Britain's investment in the United States is at the same level. That could impact up to 2 million U.S./British jobs. It's unknown exactly how many are held by U.S. citizens.The uncertainty over their future will dampen growth. Brexit also sent the U.S. dollar up. That strength is not good for U.S. stock markets. That's because it makes American shares more expensive for foreign investors. (Source: "Brexit Could Send Shock Wave Across U.S. and Global Economy," Washington Post, June 18, 2016.) 

Brexit is a vote against globalization. It takes the UK off the main stage of the financial world. Brexit could take two years. That would create uncertainty throughout the UK as The City seeks to keep its international clients. The U.S. stability means London's loss could be New York's gain.  

Causes

Former Prime Minister David Cameron called for the referendum to stop pro-Brexit opposition within his Conservative party. He wanted to resolve the issue once and for all. Unfortunately for him, the anti-immigration and anti-EU arguments won.

Most of the voters were older, working-class voters in England's countryside. They were worried about the free movement of immigrants and refugees. They felt that EU membership was changing their national identity. They didn't like the budgetary constraints and regulations the EU imposed. They didn't really see how the free movement of capital and trade with the EU benefited them. 

Younger voters, and those in London, Scotland, Wales, and Northern Ireland wanted to stay in the EU. They were outnumbered by older voters who turned out in droves. (Source: "What Is Brexit and Why Does It Matter?" The Guardian, June 18, 2016.)