Brexit Consequences for the U.K., the EU, and the United States

How Brexit Affects You

Brexit
••• Photo by Michael Tubi/Corbis via Getty Images

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 U.K. Prime Minister Theresa May submitted the Article 50 withdrawal notification to the EU. It gave the U.K. and EU until March 29, 2019, to negotiate an agreement.

On March 19, 2018, the United Kingdom and the EU agreed to a 21-month transition plan that is similar to a "soft Brexit." It is a backstop in case a formal agreement doesn't occur before the deadline. A "hard Brexit" would have meant leaving the EU quickly with no restrictions other than a new free trade agreement.

On November 14, May's cabinet approved the plan. On November 15, three members resigned, opposing the deal. The defection may embolden opposing members of Parliament to call for a vote of no confidence in her leadership.

The Prime Minister responded to her critics with an outline of the three choices facing her country:

  1. Keep the deal. The U.K. doesn't have the economic clout to negotiate a better one.
  2. Leave with no deal. That's similar to the hard Brexit option.
  3. No Brexit. As the negotiations have dragged on, many people are campaigning to remain in the EU by having another referendum. They argue that voters did not understand the economic hardships that Brexit would be impose.

Brexit Plan Summary

The UK remains within a "customs union" with the EU for a unspecified period. This continues the trade that both parties wanted. The two sides will not impose tariffs on each other's imports. They are free to tax imports from other countries. On the other hand, the customs union prevents the UK from negotiating separate trade deals with other countries.

The U.K. retains complete access to capital but can restrict the flow of immigrants. European nationals can continue to live and work in the country without work visas.

The U.K. would also abide by the European Court of Judgment and EU laws without being allowed to vote. That is similar to Norway's relationship with the EU. 

Since the U.K. remains in the EU customs union, it prevents a "hard border" between northern and southern Ireland. Northern Ireland part of the U.K. and southern Ireland is an independent country and a member of the EU.

The UK will pay a 50.7 billion euro "divorce bill." It fulfills any remaining financial commitments.

The deal is similar to the "Jersey deal" offered by the European Council on August 9, 2018. The would keep the U.K. in the single market for trade while allowing it to restrict immigrants. In return, the U.K. must abide by all EU environmental, social, and customs rule. The deal is what the British dependency of Jersey already has. It would avoid borders between Northern Ireland and the U.K. or Ireland.

Next Steps

The Prime Minister must next get the plan approved by the British Parliament. That's likely to happen in December. It must then be approved by the European Council, the 20 EU countries with 65 percent of the population, and the European Parliament.

Once those major hurdles are overcome, then the United Kingdom will copy the EU laws into its laws, which can later be amended or repealed. In March 2018, Prime Minister May said many laws would be similar to EU laws so the U.K. can keep trade and capital access.

If the deal falls through before the March 2019 deadline, Britain could experience food shortages due to customs delays. The U.K. is vulnerable because an extreme heat wave and summer drought caused by global warming has already reduced food output.

Consequences for the UK

The main advantage for the United Kingdom is that it can again prohibit the free flow of people from the EU. That was the primary reason people voted for Brexit. They were concerned about an increase in refugees from Africa and the Middle East. 

Brexit's biggest disadvantage is that it's slowing the U.K.'s economic growth. Most of this has been due to the uncertainty surrounding the final outcome.

Uncertainty over Brexit has slowed the U.K.'s growth to 1.3 percent in 2018. U.K.'s Treasury Chief Philip Hammond reported that it would slow to 1.9 percent in 2019, and 1.6 percent in 2020. A resolution should allow the economy to improve to 2% in 2019. The British pound is 14 percent lower than before the referendum. That helps exports, but increases the prices of imports. The pound should strengthen once the deal is approved.

Critics say the U.K. must still follow EU guidelines and pay EU exit fees. But, since it's no longer a member, it won't be able to vote on those guidelines.

Consequences of a Hard Brexit

Critics would prefer a hard Brexit. That would means the loss of Britain's tariff-free trade status with the other EU members. Tariffs would raise the cost of exports, making British products higher-priced and less competitive than other EU countries' exports.

A hard Brexit would also increase prices of imports into the United Kingdom. One-third of the U.K.'s food comes from the EU. Higher import prices would create inflation and lower the standard of living for U.K. residents.

A hard Brexit would be disastrous for The City, the U.K.'s financial center. It would no longer be the base for companies that use it as an English-speaking entry into the EU economy. The City of London reported that 5,000 jobs could be lost. 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. Housing prices have already started to fall.

The United Kingdom would also lose the advantages of EU’s state-of-the-art technologies. The EU grants these to its members in environmental protection, research and development, and energy. 

Also, U.K. companies would also risk losing the ability to bid on public contracts in any EU country. These are open to bidders from any member country. The most significant 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.

A hard Brexit would hurt Britain's younger workers. Germany is projected to have a labor shortage of two million workers by 2030. Those jobs will no longer be as readily available to the U.K.'s workers after Brexit.

Trade and travel in the island of Ireland would become more complicated. Northern Ireland would remain with the United Kingdom, while southern Ireland remained a part of the EU. Prime Minister May rejected the EU proposal that there be a customs border between Northern Ireland and Great Britain. The United Kingdom is Ireland's second biggest export destination.

But a customs border between Northern Ireland and the Republic of Ireland could reignite The Troubles. It was a 30-year conflict in Northern Ireland between mainly Catholic Irish nationalists and pro-British Protestants. In 1998, it ended with the promise of no border between the north and south Irish island.

It would also force 35,000 people who commute across the border to go through customs on their way to and from work. The EU insists that the United Kingdom propose a solution. Otherwise, it must agree to the backstop of no customs border on the Irish isle. That would put the border between Northern Ireland and Britain.

Under a hard Brexit, the U.K. could lose Scotland. First, Scotland will try to stop Brexit by voting against it. But Scotland doesn't have the authority to do that. It could then decide 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 United Kingdom. 

Consequences for the EU

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

The Brexit vote is strengthening anti-immigration parties throughout Europe. As a result, Germany's Chancellor Merkel has already announced she will not run for re-election. 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 most robust economies and would dissolve.

On the other hand, new polls show that many in Europe feel a new cohesiveness. The U.K. 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.” 

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 increased the value of the dollar. That strength is not good for U.S. stock markets. It makes American shares more expensive for foreign investors. As a result, gold prices rose 6 percent from $1,255 to $1,330. 

Brexit dampens business growth for companies that operate in Europe. U.S. businesses are the most significant 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 is a vote against globalization. It takes the United Kingdom off the main stage of the financial world. It creates uncertainty throughout the U.K. as The City seeks to keep its international clients. U.S. stability means London's loss could be New York's gain.  

Causes

In June 2016, Former Prime Minister David Cameron called for the referendum. He wanted to stop pro-Brexit opposition within his Conservative party. He thought the referendum would resolve the issue in his favor. Unfortunately for him, the anti-immigration and anti-EU arguments won.

Most of the pro-Brexit voters were older, working-class voters in England's countryside. They were afraid of 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 see how the free movement of capital and trade with the EU benefited them. 

Younger voters and those in London, Scotland, and Northern Ireland wanted to stay in the EU. They were outnumbered by older voters who turned out in droves.