The Measuring of Brexit

The European Union was established in 1993 and today consists of 27 different countries

in Europe. The roots of the EU go way back to 1957, where a war torn Europe realized that

countries could not possible survive on their own. Countries such as Belgium, Italy, Netherlands,

Italy, Luxembourg, and West Germany united their defense forces and removed trade barriers

and decided to work together (KERA, 2010). In 1973 the United Kingdom joined the alliance as

well. In 1993 the European Union was officially established and in 1999 the Euro was introduced

as the official currency (Euro Dollar Currency , 2012). However Tony Blair, the Prime Minister

at the time decided that the United Kingdom would not accept the Euro if it did not pass the

five-test rule. These tests were in place to keep the U.K.s business safe and secure, the Euro

did not end up passing these rules therefore they did not adopt the Euro and stuck with the pound

(INVESTOPIA, 2017). Fast forward to 2016, and the United Kingdom is considering pulling out

of the European Union. This resulted in the term being coined British Exit, or better known as

Brexit. Brexit was passed by British citizens with a very slim vote of 51.9 in favor and 48.1

against and more than 30 million citizens voting (Hunt, 2017). The reasons for leaving were

quite complicated and very conflicted; however there were some main arguments. The EU as a

whole has seen a 20 percent unemployment rate, and economic growth in the EU has stagnated

(Mauldin, 2016). Many people argued leaving the EU would result in economic collapse not only

of Britain but the EU as a whole, however, willingly being an economy going nowhere did not

seem to be a good solution to solving the problems the UK was facing. Another reason was a rise

of nationalism in Britain, many believed that the EU no longer served its purpose and didnt

allow the UK to function on its own; it felt to most that it was reliant on these other countries

when in reality other countries were leaching off of the UK. Being in the EU also forced
Britain to deal with and ongoing refugee crisis that it does not want to be forced to deal with, the

argument was that immigration is a national issue and not to be delegated by the EU.

Although the U.K. wont actually exit the E.U. until 2019, the United Kingdom has

already begun to experience changes in their economy since they voted to exit the EU in June of

2016. Immediately following the announcement of Brexit, business investments within the UK

began to drop due to the uncertainty of their future. It fell over 1% just within the last three

month of 2016. The value of the pound also dropped 15% and 12% lower than the dollar and the

euro, respectively. It went form from 1.475 to 1.325 dollars per Pound within 24 hours after the

voting results were announced, and has continued to steadily drop since then. The pound falling

in value has had several effects in the Great Britain economy. A positive effect has been that the

UK stockmarket has risen due to many taking advantage of investing in Dollars and then

converting it to Pounds.

Exports have also increased reducing their overall trade deficit. On the other hand, the

decrease in value of the pound has resulted in a decrease in imports since their prices are now

higher. The increase in the sales price of imported products, such as oil, have resulted in the

country experiencing a higher rate of inflation than what would normally be expected. Over the

last five years wages have increased at a higher rate than inflation so UK citizens experienced

virtually no inflation. However, the high rate of inflation, accompanied by a slower increase in

wages, has caused a drop in retail sales in the UK as many have cut back on expenses. Migration

in 2016 also dropped by 50,000 people compared to 2015. 596,000 people entered the UK,

down 24,000 from 2015, while 323,000 exited, up 26,000 form 2015. Many of those who left

were British citizens. The steadily increasing rate of foreign workers in the UK has also slowed

dramatically. It has dropped from 242,000 workers in 2016 to only 126,000 so far in 2017. Net
public borrowing also decreased in 2016 and was expected to continue to decrease. In an effort

to encourage borrowing and boost the economy banks decided to lower their interest rates. So

far, they have been successful as net borrowing has begun to increase once again in 2017. Lastly,

Brexit has had an effect in house prices. Prior to the vote, Great britain experiences about a 4%

increase in house prices per year. Since the vote there has only been a 2% increase.

Due to the exit of Britain from the European Union, many companies and investors will

more than likely evacuate the epicenter of the British-EU separation to avoid as much loss as

possible. These same companies and investors will push capital toward safe-haven markets like

ones in the United States, and in Japan. As a result of this influx of capital to these markets, it

will inevitably lower market interest rates, and raise relative currency values. While some might

view the U.S. Dollar and Japanese Yens increase in value to be a positive thing, it will actually

have the inverse effect. The increase in value for these currencies will have a negative impact on

the export sectors. This is because American-made and exported products will hold a relatively

more expensive price abroad, due to the weaker-comparative value of foreign currencies. This

same thing would hold true for any Japanese manufactured good or service that is exported to a

foreign market. Not only would this increase in currency value have an impact on exports, it too

would have an impact on newly emerging markets wishing to conduct business with the Dollar

or Yen as a vehicle currency. Any of these markets that wish to use these currencies will end up

paying relatively more to obtain them, which will strain their rate of growth. Britain, being one

of the smallest of the economic superpowers of the world (at only 3.9% of the total Global

Economic Output), any negative impact that an action by them would have is immensely smaller

than it would have if it were the United States or China in their position. Even though there are
negative impacts by the occurrence of Brexit, the impacts are quite a bit less significant as we

might imagine them to be as a result of this.

The push to leave the EU was supported by the UK Independence Party and not the prime

minister. UKIP argued that being a part of the EU was restrictive for the country. EUs primary

initiative is free movement within the region, so UKIPs main argument was centered on

regaining border control and reclaiming business rights. This push by the party has some

potentially devastating effects on the EU. For the extreme right, brexit was first significant

foreign policy victory. This adds fuel to the ideology of far rights that the white race is becoming

extinct, and wanting to put Britain first to maintain it. Britains vote to exit the EU, was

supported by a populist, anti-establishment xenophobia, that is taking the world like a wildfire.

During the same year as Brexit (2016), Germany had taken the spotlight with its refugee policy

due to the amount of violent attacks, Frances Marine Le Pen rose in presidential polls; Austria

came very close to electing far-right leader, and Italy rejected reforms for lack of radicalism,

which forced its leader to resign.Aside from a negative political impact, the economic impact of

brexit is drastic. Trade between EU & UK is substantial to the respective economies. The trade

between both of them account for 306 billion of exports from EU to UK, and 184 billion of

imports. In terms of GDP, EU exports to the UK make up 2.5% of GDP, whereas UKs exports

to EU account for 7.5% of its GDP. The amounts for services are quite large too: EU exports to

UK amount to 94 billion and imports to 122 billion, this creates a surplus for the UK. Taking

into consideration the previously stated transactions between EU & UK, the degree of

dependence in terms of GDP on the UK market is much higher for the smaller states in the EU

that have geographical or historical proximity/relations. Not only are trade and services an

important relation between the UK & EU, Foreign direct investments also amount to a large sum.
EUs FDI stocks in the UK is estimated at 985 billion (8.3% of GDP), however, the UKs FDI

stock in the EU are less than 683 billion (26.6% of GDP). The effects of brexit is likely to leave

a gaping hole of about 9 billion annually. This loss can be offset to a certain extent if the UK

continues contributing in terms of a secure a high degree of market access.

Ever since the decision was made to leave the EU, it is true that the pound dropped from

$1.475 to $1.325 as previously stated. This does drive up the cost of input prices to companies

which in turn make it more expensive to produce.By increasing the input prices, the cost of good

sold will naturally increase. Including the currency drop in strength, the uncertainty with the final

outcome to the negotiation of Britain's future policies will lead companies into a tough spot to

ponder their next move. Unlike the pound, the stocks were not as heavily affected in a negative

light as it is given a value by the FTSE 100. The FTSE 100, Financial Times Stock Exchange

100 Index, includes the top hundred companies with the highest market capitalization. The

hundred companies are listed on the London Stock Exchange and it is seen as a way to gauge the

relative success of companies that are regulated by UK company laws. The importance of the

index is that, as Britains benchmark share index, it had risen above its previous location on the

day of voting. Despite the stock prices, it is should be noted that most of the companies listed

primarily operate overseas rather than in Britain. For the overall effect on corporations, the

answer is that the effects will vary for each corporation. One main reason for such an answer is

that the negotiations are still underway with very few unsure of what is to come. In those

negotiations, there are important matters to Britain such as the availability of foreign workers

and access to the EUs single market. If foreign workers have to relocate due to the finalized

negotiations, then businesses that require a lot of additional help such as restaurants will need to

hire workers to fill in their positions. As mentioned previously, companies might have to relocate
their finance staff. It is estimated that it will be around 10,000 due to one possible change, the

loss of access to the EUs single market. The single market provide numerous benefits such as

free trade. For finance jobs, it provides the benefit of an EU passports that allow for them to

provide services throughout the EU freely. The possible changes are enough that large firms such

as Goldman Sachs, JPMorgan, and Morgan Stanley are going to lessen their risk by planning to

move their jobs to Europe in the coming years. There is also the inverse in that there are

companies that stand to benefit. For one specific example, Dyson reported a sharp increase in

profit as they mainly produce high end houseware items such as vacuum cleaners. Given the low

price of the pound, there will be companies that will thrive overseas. Just like many of the

companies listed in the FTSE 100, the price of exports will be rather cheap. Other businesses

with increasing sales are the alcohol companies, international sales by Paypals research, high

end luxury items to the foreign market, and more.

Despite the turbulent times ahead for Britain, there are still companies that seek and have

invested large amounts of time, money, and resources into Britain. The important thing to note is

that they have only done so after they received assurance from the Prime Minister of the UK,

Theresa May, that companies will not suffer any negative consequence from Brexit. Overall the

UK took a problematic hit due to Brexit and its negative effects.

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