Impacts Of Brexit On The European Union

IMPACTS OF BREXIT ON THE EUROPEAN UNION

INTRODUCTION

Brexit simply means Britain Exit. It is the United Kingdom expected withdrawal from the

European Union. Referendum was held on 23 June 2016 in which 52% of those who voted

supported the Brexit idea with the voter turnout being 71.8% that’s about 30million people. The

British government intends to invoke article 50 of the treaty on European Union which stipulates

a formal method on how to exit the European Union by the end of March 2017 hence putting the

United Kingdom in a path of leaving European Union by March 2019.

However, the terms that will guide the United Kingdom withdrawal has not yet been

negotiated hence the European Union laws still stands in United Kingdom. Although the United

Kingdom as a whole voted for the exit some countries within the United Kingdom did oppose the

move through their voting trend. Scotland and Northern Ireland were against the idea of Brexit

with 62% of voters in Scotland being against the Brexit idea and 55.8% of voters in Northern

Ireland also voting against the idea. However, Wales and England were in support of the exit

with 53.4% of voters in England and 52.5% of voters in Wales being in support of the idea.

As a result of referendum David Cameroon the then prime minister resigned with Theresa

May taking over. There are 2 types of Brexit; the hard and soft Brexit. These terms are used to

express the expected relationship between the United Kingdom and European Union after the

withdrawal becomes successful. Hard Brexit means that the United Kingdom would trade with

the European Union like any other non-member of the European Union under the regulations of

the World Trade Organizations and they won’t be obligated to allow free movement of people

while soft Brexit means that the United kingdom will still remain a member of the single market

and still allow free movement of people.

IMPACTS

However when the British exit idea finally materializes it will have a lot of impacts on

the European Union. This will be mainly through these channels; trade, foreign direct

investment, liberalization and regulation, uncertainty, immigration, financial services, trade

policy, international influence and budget.

Liberalization and Regulation- upon the United Kingdom exit of the European Union,

the equilibrium in the council of the European Union on debates on policies on economics would

shift towards the illiberal group due to the loss of United Kingdom a big member state always in

support of liberalization. Germany specifically would find it more difficult to accumulate a

blocking minority or to act as a swing state on debates on regulatory issues. As a result Germany

will be more politically exposed by having to take the lead in opposing the illiberal measures.

United Kingdom is known to be one of the most liberal states economically. Together

with Netherlands and Ireland they have always formed a force that is always relied upon to

strongly oppose illiberal proposals in the European council. In accordance to the voting rules put

in place in 2014 the liberal states could easily garner 25% of the votes. With Germany being a

swing vote in case it chips in it has always been easy to achieve a 35% blocking minority.

However, with the British exit the power balance in the European Union council would shift

towards the illiberal states this due to the fact that the liberal nations will find it very hard to

assemble a blocking minority of 35% even with the full support of the Germans.

In addition the Germans have always relied upon the United Kingdom to counterbalance

France on debates on regulatory issues. This allows it to preserve itself during the policy debates

as a voice of reason that intends to seek a collaborative result. However with the United

Kingdom exit they will be left more exposed and even at times be forced into taking a more

adversarial position. Also the United Kingdom always played an important role in ensuring that

debate on policies took shape in ways that matter and in more liberal ways without necessary

considering their voting weight hence their exit will be of great impact mainly to the liberal

states in the European Union.

Immigration-business activities being carried out elsewhere in Europe but not within the

United Kingdom territory can majorly work around any regulation put in place by the United

Kingdom to restrict free movement of labour. However, the changes that might occur to labour

supply and remittance flow due to Brexit will have effect on some member states of the

European Union. Perhaps the major threat although difficult to predict is political contagion

elsewhere in Europe if United Kingdom decides to tighten the control of its boarders.

The largest cost from controls by the United Kingdom will be felt by the European Union

firms investing in United Kingdom as operations that are located outside the United Kingdom

can always substitute for UK labour. However, there are no limits for intercompany transfer

under Tier 2 for any salary above £40k. This would be of great help in reducing the negative

effects felt by the European Union firms that invested heavily in the United Kingdom. Countries

like Poland which have always been a major source of immigrants into the United Kingdom will

be slightly affected. The effect of this regulation would be felt more positively by these countries

when it comes to supply of labour and skills but will weigh more negatively when it comes to

remittance.

Some member states of the European Union e.g. Germany would be indirectly affected

due to the deflection of the United Kingdom immigrants into these countries with the economic

consequence depending on the scale and composition of the immigrants. Some countries e.g.

Spain which has been a home to a big number of British retired citizens stand to benefit from this

incase some rules of entitlement to services provided by the public are changed for the

immigrants from the United Kingdoms located in other European Union member states.

However the greatest risk for the remaining countries in the European Union is that the

restrictions by United Kingdom might increase hostility towards immigrants in other states both

due to deflection of immigrants and how the policies on immigration restriction implemented by

the United Kingdom would affect the debate elsewhere.

Trade in Europe- after the British exit from the European Union the outcomes that

would lead to an increase in the cost of carrying out trade or decrease the amount of trade

between the United Kingdom and Europe will be disadvantageous to the both sides. Although

the European Union single market is an important market to the United Kingdom, the demands

by the United Kingdom from the single market are extremely important in macro terms for many

member states of the European Union. As a result its exits will have a lot of impact on the

economy of these countries with final cumulative effect on the economy of the European Union

which depends on member state economy. The United Kingdom runs a big bilateral trade deficit

against many states within the European union in that it imports more from them than it export to

them hence forming a major market for the goods and services produced by this countries hence

its exit will be catastrophic.

The United Kingdom contributes to about 1/6 of the European Union economy with a

1/10 of the exports from the European Union going into the United Kingdom whereas half of the

export from United Kingdom goes into the European Union single market. However, the

disproportionality in the relationship between the United Kingdom and European Union in terms

of trade is due to the fact that UK is an important source of demand for goods and services from

the rest of European Union member states. This is proven by the fact that the trade deficit

between the United Kingdom and the European Union has continuously grown over the years

and was at €66bn in 2013. Hence its exit from the union will be a major setback for many

countries that depend on the UK as a trading partner.

As a percentage of the GDP the trade surplus by other countries within the European

Union who carry out trade with United Kingdom has proven to be very important. In countries

like Netherlands, Poland, Czech Republic, Belgium, Hungary, Latvia, Lithuania and Slovakia the

trade surplus exceeds 1% of the GDP proving how important the United Kingdom is to this

countries when it comes to trade hence Brexit will prove to be very costly to them.

Apart from being a major source of market for the goods and services from European

union member states United kingdom is also a source of some major goods and services needed

in some European union member states e.g. Ireland which runs a trade deficit with the united

kingdom approximating about 6.2% of their GDP as per the year 2013 hence Brexit will greatly

affect it. Also the United Kingdom companies are relatively important in the global supply chain.

Some of the important goods and services they provide into the international supply chain

include business services, financial services, mining and chemical products, transport and lastly

telecommunication services all of which are consumed by European Union member states.

Hence there exit from the European Union will be a major setback for countries depending on

this goods and services.

Trade policy- due to United Kingdom influence European Union has always had an open

and liberal approach to trade policy. In addition the UK has always put a top level political

weight more than any other state behind the negotiations regarding trade hence in case of Brexit

European union would become less attractive partner in terms of trade agreement due to the fact

that UK a crucial partners will no longer be part of the deal.

The GDP of the European Union is estimated to fall by around 15% as a result of Brexit.

Although the European Union will still remain an attractive trade partner its appeal shall have

reduced without United Kingdom. The remaining 27 countries in European Union would have an

external trade of around 15% of the global total compared to United Kingdom 4.3%. In addition

United Kingdom has always championed for liberal agendas in the European council and they

are acknowledged for launching of the Transatlantic Trade and Investment Partnership, they also

wanted an agreement of investment with china to lead to full negotiations on FTA and lastly it

has also been the major supporter of the Doha rounds hence its exit will be quit disastrous.

Without the United Kingdom the European Union may become a harder partner in

negotiations that is able to better extract good deals. This is mostly true with china where Britain

is criticized for rushing without getting any prior commitment to launch negotiations. Also with

United Kingdom exiting the European Union the balance would move towards the active use of

trade remedies. Although this would be advantageous for some firms due to the fact that it will

help encounter unfair competition it would be harmful to consumers and those firms that rely on

intermediates that are imported especially from the emerging markets. This will also risk a

protectionist response.

International Influence-with the exit of the United Kingdom, the European Union

would lose their influence and effectiveness in foreign policy and military terms, this is due to

the fact United Kingdom which is one of the top European powers besides France and also who

is a permanent member of the Security Council in the United Nations will no longer be its

member.

Soft power is the ability of a state to change how other state behaves through an attractive

and persuasive means rather than the coercive or payment means. Culture, diplomacy and

political values are the primary sources of this soft power. United kingdoms is currently ranked

very highly in surveys carried out internationally when it comes to soft powers and this has been

of great influence to the European union. With United Kingdom exit the soft power asset of the

European Union will not only be diminished but also its perceptions will be damaged hence

proving to be very disadvantageous towards its international influence.

United kingdom is also enriched by the hard power assets that include the military

services, financial services and foreign policy which is an added source of influence hence its

exit will have a lot of negative impacts on the European union. Currently United kingdoms is

ranked as the fifth largest spender on military services and the second biggest funder of

development at $18bn per year just behind united states this explains its enriched hard power

assets.

The rest of the member states of the European Union have always been in better position

to benefit from the position held by United Kingdom in different institutions internationally e.g.

G8, World Bank, IMF etc. In Europe its international influence is only matched by France.

United Kingdom being a member of these international institutions it has always given the

European member states leverage when they carry out sanction applications especially those that

are related to the financial sector. Anyway, with Brexit all this will be lost. In addition the United

Kingdom steps with France which were aimed at increasing the joint defence procurement would

be curtailed if the United Kingdom decides to work more with the United States who have more

security concern resulting into a lot of boarder implications for the defence industry.

Budget- with the exit of the United Kingdom the European Union will lose an important

contributor to its budget. However, it might decide to fill this gap by asking for higher

contributions from member states remaining or by spending less. United Kingdom is also an

important budget disciplinarian in European Union. However, with its exit there would most

likely be a move towards support for increase spending in the European council at the expense of

spending with an aim of ensuring growth which was mostly advanced for by the United

Kingdom.

United Kingdom is currently the second biggest net contributor to the budget used for

operations of the European Union in absolute terms just behind Germany. It is also the fourth

largest contributor as a percentage of the GNI just behind Sweden, Denmark and Germany. It

contribute to about 5.8% of the total European Union expenditure hence it withdrawal will have

great effects on the European Union budget.

In the last budget negotiations United Kingdom was strongly opposed to the unnecessary

spending’s. However, with its exit other countries of similar ideology within the European Union

will have to put up more pressure on the need to continue with the budget discipline or accept the

increased spending spree over a period of time. This would result in higher contributions from

member countries in order to fund this increased spending spree. Anyway, this debate would

most likely shift towards the countries advocating for increased spending spree e.g. France,

northern and eastern priorities who will now be more in number and influence compared to

budget disciplinarians e.g. Germany and Netherlands who shall have lost their friend when it

comes to decision making on budget issues. Lastly during the last budget negotiations United

Kingdom had advocated for the shift of spending from administration and support of agriculture

to spending on programs that support growth and innovation however this was partly successful

during that time but with the united states exit it will become more difficult to achieve.

Foreign Direct Investment- a lot of big corporates in Europe have heavily invested in

the United Kingdom and the commercial logistics behind these investments will be greatly

affected by Brexit. The cost incurred during adjustment by this corporates in Europe as a result

of Brexit should also be considered. Also after the Brexit the United Kingdom may seek to

compete very aggressively for more investment by undercutting the European Union on taxation

and business environment hence presenting a bigger challenge to the European Union in terms of

foreign direct investment.

Foreign direct investment located in United Kingdom comes disproportionately from a

small number of member countries within the European Union namely; France, Germany, Spain,

Ireland, Netherlands and Luxembourg. The European Union FDI is more into the energy sector,

retail and wholesale trade, manufacturing sector and the transport sector than in the financial and

professional services. The united kingdoms has been very successful in attracting FDI projects

and jobs and this may create opportunity and risk for other European union member states when

Brexit occurs since their main competitor will be gone. Whether the European countries will

make good use of the opportunity will depend on how well they will respond to the loss of

United Kingdom competitiveness. One of the major challenges would be how they can attract

European headquarters for multinationals away from the United Kingdom although this will

depend mainly on the business environment created by these countries.

However, the United Kingdom will most likely find ways of restoring their

competitiveness in the FDI offers even when they are out of the European Union. They might do

this by undercutting the European Union further on social regulations and taxation with an aim

of maintaining their strong competitive ability. Anyway, from the above discussions it can be

concluded that Brexit would have impact on the European union as long as FDI is concerned in

two ways; first it could be of benefit to other firms located elsewhere in Europe union to the

extent that the government of other European union member states will be forced to be liberal

and take steps in improving the business environment hence investment or it would deform

location choices and draw investments that were located in the rest of Europe away over a

period of time.

Financial Services- United Kingdom withdrawal from the European Union would also

have effects on the location, liquidity and financial services cost in Europe in case they

underestimate the competitive position of London. Brexit would prove to be costly for the

business and household located in Europe. Most of the biggest banks of Europe have majority of

their activities in London which could be costly to relocate. However only a small number of

financial centers located elsewhere stands to benefit as a result of Brexit.

The United Kingdom is largely incorporated into the European financial services. It

claims around $880bn on the EU15 alone with credit mostly to the household and firms, but

some also to government and interbank lending. Banks in Europe are even more greatly exposed

to the UK at $1.7tn in total hence it would be very costly for this banks to relocate their

wholesale banking activities from London. London also has a dominant position when it comes

to many product areas hence acts as an international center. However this would be damaged in

case a big number of businesses by other European countries migrate following Brexit. As a

result there is a risk that more mobile business activities may quit Europe altogether.

Also as a result of Brexit some cities within the member states of European Union will

most likely benefit, this cities include; Paris, Frankfurt, Amsterdam and Dublin. However, they

are not in the position to replicate the advantages of the London ecosystem that supports the

financial services including market infrastructure, skilled staff and legal services. Also

competition between them as a result of the new barriers to trade introduced in London would

cause a lot of disruptions hence proving to be costly. In addition business activities located

elsewhere in Europe would lose due to products that are of poor quality, charges that are higher

than normal and reduced liquidity.

Lastly as a result of Brexit there will be a change in the financial regulatory debate

balance in Europe. United Kingdom always takes a more risk-averse and interventional approach

to regulation as it tries to avoid interventions motivated politically. However with Brexit

financial transaction tax and cap on banker bonuses initiative which were strongly opposed by

the UK would be easily implemented.

Uncertainty-the prolonged Brexit procedure would cause a prolonged period of

uncertainty that would lead to loss of confidence and appetite for the investors to do both

domestic and inward investments in the European Union. However the major problem might be

political contagion with Brexit acting as an encouragement to other unsettled political forces still

remaining in the European Union.

Uncertainty would have great impact on the trade policy. Deals like TTIP with the USA

will be much harder to be concluded since the USA will still be unsure of who the other party

involved in the agreement will be. It may also bring a lot of complications to very crucial policy

areas e.g. the financial services being that this is always supervised by United Kingdom

nominated commissioners.

Brexit would also lead to a political contagion if incase the United Kingdom leave on

some favorable terms or if it succeeds with its operations outside the European Union. However,

as a result of this fear the European Union might decide to increase the cost of exit by not

accepting to negotiate a special deal for the United Kingdom or by inhibiting United Kingdom

operations in some parts of its single market.

CONCLUSION

In conclusion, it can be easily noted that in case the Brexit idea comes to light there

would be a lot impact on the European Union as a whole although this will depend on the type of

model they decide to use, whether it will be the soft or hard Brexit. These impacts will follow the

following channels; trade, foreign direct investment, liberalization and regulation, immigration,

financial services, uncertainty, trade policy, international influence and budget. Due to this, the

European Union need to strategies on how they will be able to curb this challenges that they will

occur as a result of Brexit.

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