RUNNING HEAD: BREXIT: CAUSES AND IMPACTS

Opal Ruiz

GR 509 Special Topics

Seminar on Global Finance

Instructor Craig Walker

International College of the Cayman Islands

BREXIT: CAUSES AND IMPACTS 2

Abstract

This paper seeks to provide in-depth information on the likely causes and potential impacts of

the Brexit vote. Additionally, this paper also aims to explore the probable effects of Brexit on the

United Kingdom and the remaining European Union member nations. This paper will, therefore,

discuss political and economic consequences on the impacted countries. Notably, there is a

probability for negative impacts on the UK economy due to the likely increase of trade and

investment barriers with the European Union, among other adverse implications. However, it is

important to note that Brexit can also bring about significant economic benefits for the UK as

European Union regulation will no longer constrain it, and hence will be able to set its policies

which are more aligned with its particular vision and objectives.
BREXIT: CAUSES AND IMPACTS 3

Brexit: Causes and Effects

Introduction

As reported by Oliver (2016), the vote by British citizens to depart from the European

Union, which is referred to as "Brexit" means that both the United Kingdom as well as the

European Union member nations will face unparalleled challenges. According to Kolcak (2017),

a total of 51.9 % of British voters endorsed the United Kingdom to withdraw from the European

Union, while 48.1% of the electorate opted for the UK to remain in the EU. Brexit would have

substantial impacts for the EU as it relates to European geopolitics as well as the structures of

European integration (Oliver, 2016). Additionally, the UK is now faced with an indeterminate

future (Oliver, 2016). Moreover, the Brexit vote by the UK to withdraw from the EU will result

in multiple impacts in Britain, the European Union as elsewhere globally (Oliver, 2016).

According to Oliver (2016), from a historical perspective England's membership in the European

Union has been dominated by concerns over its commitment to the EU and whether or not the

UK would one day seek to withdraw from the EU which is now known as Brexit.

Brexit Introduction

According to Oliver (2016), one of the initial issues that the EU faces as a result of Brexit

is the unique and first-time encounter of negotiating the extraction of a member state from the

EU. Even the very thought of a member state leaving the EU is taboo, as this represents a

challenge and reversal to the objective of the integration of Europe (Oliver, 2016). None the less,

withdrawal is not entirely unprecedented as overseas territories of member states have previously

left the EU, namely Algeria in 1962 and Greenland in 1985 (Oliver, 2016). As mentioned by

Oliver (2016), there is a protocol that is in place for withdrawal as outlined in Article 50 of the
BREXIT: CAUSES AND IMPACTS 4

European Union's Treaty. The Treaty was in part, developed by Lord Kerr who was a British

diplomat; it was designed as a mechanism for the potential British exit from the EU (Oliver,

2016). The Treaty specifies two years, or longer if both parties agree that additional time is

warranted (Oliver, 2016). As stated by Oliver (2016), the team that will be negotiating on the

EU's behalf are individuals approved by the Council and nominated by the Commission. Article

50 mandates that the terms of withdrawal of a member state must be agreed upon including the

framework for the post-withdrawal relationship between the EU and the existing county (Oliver,

2016). According to Oliver (2016), the exit deal will have to satisfy the remaining EU member

states through a vote in the European Council and receive the support of the European

Parliament.

Oliver (2016), reports that the post-withdrawal relationship between the EU and the UK

may require an entirely different process, which may be negotiated during a transition phase that

extends the two-year time frame of Article 50. Although, the final agreement may require the

approval of all member states via national ratification or possible national referendums (Oliver,

2016). Further to this, the final agreement will also need to be supported by British Parliament,

UK Government, and possibly the decentralized legislatures in Northern Ireland, Scotland, and

even the British people should there be sufficient agreements to require approval via a second

referendum (Oliver, 2016). Also, the potential involvement of the European Court of Justice

should not be ignored, as it could provide a mechanism in which private companies and

individuals could oppose the withdrawal itself or its post-withdrawal relationships (Oliver,

2016). Hence there are several challenges that the UK will need to overcome before it officially

withdraws from the EU or forms a new relationship with the EU.

Brexit Economic Context Analysis

BREXIT: CAUSES AND IMPACTS 5

To have a comprehensive understanding of the probable impacts of Brexit, it is essential

to analyze Brexit in an economic context. As mentioned by Paun (2016), the United Kingdom is

a sovereign state which consists of England, Wales, Scotland, and Northern Ireland. The UK has

a population of 65 million people (22nd state globally) (Paun, 2016). In 2015, its Gross Domestic

Product (GDP) using the Power Purchasing Parity (PPP) was recorded at $2.679 trillion (9th

globally). According to Krugman, Obstfeld, & Melitz, (2015) Gross Domestic Product (GDP) is

equivalent to GNP minus net income from foreign countries and is a measurement of output

produced by factors of production within the country's national borders. Additionally, the Power

Purchasing Parity theory asserts that the exchange rate between two countries' currencies is

equivalent to the ratio of their price levels, as measured by the money prices of a reference

commodity basket (Krugman et al., 2015). As stated by Paun (2016), in 2015, the UK had a

corresponding GDP per capita of $41,259 (25th globally) and its 2015 nominal GDP was

recorded at 2.849 trillion (5th state globally). Therefore, this demonstrates on a global scale the

UK holds an important economic position.

The United Kingdom has a robust economic presence. As mentioned by Paun (2016),

regarding its business and financial landscape, the United Kingdom is globally one of the freest

countries. As reported in the Heritage economic freedom index, in 2015, the UK was ranked in

10th place, with Ireland being the only country from the EU to be ranked higher (Paun, 2016). It

is important to note that such economic and business freedom acts an incentive for foreign direct

investment. Remarkably, it is easier to initiate and grow new business start-ups in the UK than it

is in the US (World Bank Group, 2016). Or any other EU countries; with Denmark at ranked at

6th place being the only EU country above the UK at 7th place, and Germany ranked at 15th
BREXIT: CAUSES AND IMPACTS 6

place and France at 27th place (World Bank Group, 2016). Therefore, the UK is a substantial

economic force in the world economy as it relates to business and economic freedom.

UK Capitalization Market

According to Paun (2016), in 2015 the United Kingdom had a capitalization of $2.69

trillion and is the third largest capital marketing following the United States of American with a

capitalization market of 19.7 trillion, and Japan with a capitalization market of 3.0 trillion. This

demonstrates that the UK has a significant capital market and a strong economy. Also, the

capitalization of UK stock of 2.69 trillion greater than the combined capitalization for both

Germany and France at 1.19 trillion and 1.3 trillion respectively (Paun, 2016). In respect to

foreign exchange markets, the British pound is the fourth highest trading currency (Paun, 2016).

As stated by Krugman et al. (2015), the foreign exchange market is the market in which

international currency trades take place. The United Kingdom has an average of $5.3 trillion

dollars per day in currency trades, in fact, from a global perspective London is the most vital

foreign exchange FOREX market in the world (Paun, 2016). Due to the British pound being one

of the largest trading currencies, it is understandable why the effects of Brexit on the value of the

pound would be a major concern.

The European Union Overview

Likewise, to have a comprehensive understanding of the potential implications of Brexit,

it is essential to have background knowledge of the European Union. As stated by Paun (2016),

the European Union was established to facilitate cooperation and peace among European

countries. EU integration was accomplished by progressively eliminating barriers against the

circulation of capital and people which later evolved into a single market as well as removing
BREXIT: CAUSES AND IMPACTS 7

barriers to the trade and flow of goods and services which then evolved into a free trade area

(Paun, 2016). As mentioned by Paun (2016), the pivotal movements connected to the European

Union Single Market project was further enhanced via the introduction of the Euro. According to

Krugman et al. (2015), the introduction of the euro also gave rise to fixed exchange rates among

all economic and monetary union member (EMU) countries. The primary motives for the

adoption of the euro were to boost Europe's role in the world monetary system as to transform

the European Union into a truly unified market (Krugman et al., 2015). As the EU is a

combination of European countries in a single market, it is reasonable that the withdrawal of a

member state would result in considerable implications.

According to Paun (2016), the integration and formation of the European Union occurred

by steadily increasing the number of policies fields in the EU treaties and also by gradually

increasing the number of member states. The modern version of the EU looks different from its

initial projects/ambitions, as it appears that the EU is now more focused on social assistance and

redistributive mechanisms as opposed to internal market issues (Paun, 2016). Also, from 1978 to

2007 the EU implemented a total of 61,271 regulations and 4,162 directives with an annual

average of 2,181 per year (Paun, 2016). As reported by Paun (2016), of the 43.9 % of the

legislation enacted by the EU from 1987 to 2006, 20.8 % was attributed to agriculture, with only

19.6 % being allocated to the economy and 1.8 % to transportation (Paun, 2016). As mentioned

by Paun (2016), the UK is not an establishing member of this interdependent structure. The UK

only obtained membership in the EU in 1973, following a failed attempt at membership in 1963,

as the result of a veto voiced by France (Paun, 2016). Therefore, the UK's consensus to withdraw

from this highly-sophisticated collection of countries known as the European Union could be
BREXIT: CAUSES AND IMPACTS 8

debated and counter-debated, however, what it clear is that Brexit will produce substantial

consequences (Paun, 2016).

Brexit Implications

Kolcak (2017), states that once the Article 50 process has been invoked, it is anticipated

for the UK and the EU to negotiate and finalize the withdrawal agreement in accordance. The

withdrawal agreement as per Article 218(3) of the Treaty on the Functioning of the European

Union (TFEU), within the two-year time frame (Kolcak, 2017). If this agreement is finalized

within the term of two years, it would mean that the UK would exit the UK as per the exit terms

outlined in the agreement; however, if the agreement is not finalized within the two-year period

there are two possible outcomes (Kolcak, 2017). Firstly, the negotiation term can be lengthened

with approval for all EU member states (Kolcak, 2017). Or secondly, the UK can exit the EU in

the absence of any agreement if there is no consensus among the EU member nations to extend

the negotiation term/period (Kolcak, 2017). Further to this, UK Prime Minister Theresa May

declared her Brexit plan, which appears to be consistent with a hard Brexit approach (Kolcak,

2017). As stated by Kolcak (2017), this implies that the UK would withdraw from the EU single

market, and refuse to negotiate or compromise on issues such as the free movement of people. A

hard Brexit policy will mean that the UK will trade with the EU as if it was any other non-EU

country and while a soft Brexit policy would mean that the UK will still maintain some degree of

its EU membership (Kolcak, 2017).

Kolcak (2017), reports that Prime Minister May was publicly criticized by all of the

major opposition parties in Westminster. The Labor party said it disapproved of her approach

and that the party would not vote in favor for the final Brexit agreement between the UK and the
BREXIT: CAUSES AND IMPACTS 9

EU (Kolcak, 2017). Furthermore, the Liberal Democrats argued that there should be another

referendum based upon the final agreement that is made between the UK Government and the

EU (Kolcak, 2017). As indicated by Kolcak (2017), the Liberal Democrats also declared that

they would also vote against any hard Brexit deal that is proposed. Additionally, the SNP

requested for the UK to negotiate with Scotland in regards to having a second independence

referendum, while also maintaining that they would not support any future regulation that

formally repels the UK's EU membership (Kolcak, 2017). In the face of this division in

Westminster, in April 2017 Prime Minister May, upheld that the UK should have robust and

stable leadership in the perpetration of the commence Brexit negotiations with the EU (Kolcak,

2017). As stated by Kolcak (2017), Theresa May also called a snap general election with the

objective of fortifying a particular mandate for her Brexit plan. The government motion to hold a

general election was supported by the House of Commons (Kolcak, 2017). As stated by Kolcak

(2017), a substantial consequence of the Brexit referendum is the snap general election.

Brexit Origins and Causes

According to Kokotovic and Kurecic (2017), Brexit can also be attributed to political

turmoil effects with the UK. It is inconceivable why the Conservative Party, specifically, the

former Prime Minister, ultimately decided to propose a referendum concerning the UK

withdrawal from the EU (Kokotovic & Kurecic, 2017). The former Prime Minister should have

been cognizant of the immediate negative effects that such a decision would have on the UK's

economy (Kokotovic & Kurecic, 2017). It is possible that David Cameron believed his views and

skepticism in regards to the EU and he saw the referendum as a solution to appease the right

wing of his Conservative Party while simultaneously trying to further the marginalize UKIP

(Kokotovic & Kurecic, 2017). Moreover, it is also possible that at the time of re-election,
BREXIT: CAUSES AND IMPACTS 10

Cameron didn't perceive that he would need to uphold his promise to hold a referendum on the

UK's membership of the EU (Kokotovic & Kurecic, 2017). As mention by Kokotovic and

Kurecic (2017), if that is the case then David Cameron is just as guilty of gross negligence as

those that mislead UK citizens to believe that there will be no negative economic impacts from

Brexit. Furthermore, former Prime Minister, David Cameron's 2013 infamous speech was

conceivably the most sweeping change in policy from the Tory party about the European Union

since the first EU referendum in 1975 (Kokotovic & Kurecic, 2017).

According to Paun (2016), Brexit was initiated by a nation with stated economic

concerns. The economic condition of the United Kingdom when it entered as a member of the

European Union in 1973, is significantly different from its economic situation today (Paun,

2016). As reported by Paun (2016), the UK's accession to the European Union halted a period of

economic decline which occurred for a few decades after the World Wars. However, the UK's

membership of the EU did not further advance with continued economic growth in later years

(Paun, 2016). Paun (2016), reports that this is due to economic freedom benefits being reduced

because all member states are required to pay social indirect and direct cost to this modified EU

project. Furthermore, there has been a distinct deterioration in the satisfaction and confidence of

the citizens of the EU member nations (not only the UK), within the last ten years (Paun, 2016).

In particular, the decline of the UK's satisfaction went from 54% to 44% between 2004 and 2016

(Paun, 2016). Additionally, Paun (2016) advised that the decline of satisfaction from Germany

went from 58% to 50%, and France also saw a significant decrease from 69% to 38% (Pew

Research Centre, Global Attitude Survey, 2016). Europeans are becoming increasingly less

convinced in the reality of net benefits from EU membership (Paun, 2016). The decline in
BREXIT: CAUSES AND IMPACTS 11

satisfaction with the EU from member nations poses a significant concern for the future of the

EU.

As mentioned by Paun (2016), in 2014 the UK contributed 11.3 billion Euro to the EU's

budget, which is 52% of the UK's Gross National Income (GNI). In contrast, the UK received

6.98 billion Euro, which is 32% of the UK's GNI (Paun, 2016). According to Paun (2016), 63%

of funds sent by the EU to the UK in 2013 was appropriated to agriculture with only 23% being

allocated to economic growth and job creation (Paun, 2016). As reported by Kolcak (2017),

British voters eventually supported the UK to pull out from the UK on June 23, 2016. It is

important to note that there was no consensus across the UK on the leave vote: 53% of England

and 52% of Wales supported the leave vote (Kolcak, 2017). On the other hand, 62% of Scotland,

56% of Northern Ireland, and 96% of Gibraltar voted to remain in the European Union (Kolcak,

2017). Moreover, in Scotland, there was a nation-wide support to stay in the EU as local

authority areas reported remain majorities (Kolcak, 2017). According to Paun (2016), the British

voter turnout in the Brexit referendum was important as a total of 33,551,983 or 51.9% of British

voters voted to leave the EU while 16,141,241 or 48.1% of British voters voted to remain in the

EU. The difference between remain and leave the EU votes was substantial with 1,269,501 more

voters in favor of leaving the European Union (Paun, 2016).

Short-run Impact of Brexit on London Stock Exchange

As mentioned by Kokotovic and Kurecic (2017), the short-term economic impact of

Brexit can be observed based on the value of deviations in the indexes of companies trading on

the London Stock of Exchange. Therefore, values preceding and following Brexit, on the London

Stock Exchange indexes will be discussed. As reported by Kokotovic and Kurecic (2017), FTSE
BREXIT: CAUSES AND IMPACTS 12

200 lists the value of 101st to the 351st largest firms and FTSE SmallCap list the 351st to the

619th largest companies listed on the London Stock Exchange. Imperial research indicates that

the FTSE 250 index exhibits a declining trend for the majority of 2016 following the Brexit

referendum (Kokotovic & Kurecic, 2017). As mentioned by Kokotovic and Kurecic (2017),

there was a substantial decline in the FTSE 250 value in February 2016 which coincided with the

initiation of the Brexit campaigns. After that, the FTSE 250 maintained stabilization which could

be attributed to the market regaining confidence since up until one month before the referendum,

the majority of polls indicated that the remain vote would take precedence (Kokotovic &

Kurecic, 2017). However, the FTSE 250 index dropped sharply by more than 7% on July 24th,

2016 (Kokotovic & Kurecic, 2017). However, since then the market has somewhat recuperated

(Kokotovic & Kurecic, 2017). According to Kokotovic and Kurecic (2017), the smaller firms

also appear to have had an adverse impact resulting from Brexit as well. Furthermore, it is

evident that Brexit had an adverse effect on all indexes analyzed on the London Stock Exchange

(Kokotovic & Kurecic, 2017).

Brexit Implications for the UK and the EU

The most significant consequence of Brexit is that it impacted the EU's unity, and this is a

major concern of various national debates and decision makers (Oliver, 2016). As mentioned by

Oliver (2016), the unity of the EU has faced substantial pressure during the migration and

Eurozone crises. Although thus far, the EU has remained unified, and these crises may have

resulted in a push for greater integration. Although, the Eurozone is still considered to be

vulnerable and future impacts on its unity cannot be overlooked (Oliver, 2016). As stated by

Oliver (2016), if the UK withdraws from the EU and can overcome the economic turmoil of

doing so, while the EU/Eurozone economy continues to struggle, the UK's withdrawal could
BREXIT: CAUSES AND IMPACTS 13

result in other leading EU member nations to reconsider their membership and the commitment

to integration. This could, in turn, obstructs/hinders integration and this could single the

beginning of the end of the EU (Oliver, 2016). None the less, Oliver (2016) reports that the

constitutional, political, economic, and diplomatic uncertainty created by the Brexit vote have

resulted in increased support for the EU as per some opinion polls, and this is an example of how

Brexit could potentially improve support for the EU, at least in the short-term.

As per research from Oliver (2016), a crucial component to the EU in the wake of Brexit

and other issues will be Germany. In regards to the potential disintegration of the EU, Oliver

(2016), states that Germany is the EU's primary paymaster, influencer, and indispensable nation.

As indicated by Oliver (2016), the impacts of Brexit, coupled with another crisis in the Eurozone

or the Schengen Area may cause an unparalleled impact on EU unity. Impacts from Brexit could

negatively impede commitment to the EU from Germany and other member nations (Oliver,

2016). A domino effect such as this would result in the UK's actions to appeal to far right and

left wing groups (Oliver, 2016). Notably, in some Southern and Eastern EU member states,

further contributing to the issue that that Eurozone crisis has caused for fixing these countries

into the European mainstream (Oliver, 2016). Oliver (2016), states that this can perhaps appeal

to Northern and Western European grounds including France's Front National. By the same

token, if the United Kingdom does not flourish or grow economically after withdrawing from the

European Union, then the influence to leave the EU would be limited, and this would ultimately

strengthen and reinforce the EU's position (Oliver, 2016). As a result, Brexit may potentially

impact the unity and dynamics of the relationship between EU member nations.

Geo-economics Implications
BREXIT: CAUSES AND IMPACTS 14

Oliver (2016), advises that there are potential geo-economics implications and economic

costs of Brexit for both the United Kingdom and the European Union. As mentioned by Oliver

(2016), the UK holds a significant economic place in the EU. Britain accounts for 17.6% or

approximately one sixth of the EU's economic area and also accounts for a total of 12.8% of the

EU's population (Oliver, 2016). In 2012, exports from Britain was attributed to 19.4% of the

European Union's total exports (Oliver, 2016). Moreover, Britain is the EU nation with the

largest trade deficit in goods and services of approximately 28 billion a year in 2011 (Oliver,

2016). Furthermore, Britain's trade deficit with the EU increased to 61.6 billion in 2014 (Oliver,

2016). Oliver (2016), reports that the effect of the UK's withdrawal from the EU is highly

debated within the UK. In this respect, some Eurosceptics believe that since Britain has a trade

deficit with other EU nations, it means that the EU needs the UK more than the UK needs the EU

(Oliver, 2016). However, this belief is uncertain since approximately half of Britain's trade is

with other EU member states (Oliver, 2016). According to Oliver (2016), this could potentially

leave the UK in a situation where Brexit could negatively affect its general trade with the rest of

the EU (Oliver, 2016). Nonetheless, the UK's withdrawal from the EU would result in significant

damages to the economic connection between both parties (Oliver, 2016).

The Center of Power in the EU could Shift

Oliver (2016), reports that Germany's existing position could be further reinforced with

implications for the Franco-German axis. In some instances, Britain has played a role in this two-

pronged mutual relationship (Oliver, 2016). As mentioned by Oliver (2016), this would leave

France in an EU in which Germany's system of restraint of geo-economics notions over the

geopolitical, influences the EU's international position. Nevertheless, Germany could also be left

in an uncomfortable position after the withdrawal of its ally the UK, both of which have
BREXIT: CAUSES AND IMPACTS 15

previously contributed to the economic liberal and free-market scheme (Oliver, 2016).

According to Oliver (2016), the geographical and political focus of the EU may also shift

southwards and eastwards. Furthermore, some EU member countries may benefit from Brexit, in

viewing it as an opportunity to improve their standing within the EU (Oliver, 2016). Also, Oliver

(2016), states that some countries including the Irish Republic that have strong connections with

the UK may face considerable challenges.

Brexit Trade Implications

The potential impacts of Brexit have already been observed concerning the European

Union -Canadian trade agreement as well as the United States European Union, Transatlantic

Trade, and Investment Partnership which is also known as TTIP (Oliver, 2016). As mentioned by

Oliver (2016), Britain has been at the center of pushing to develop and implement both trade

agreements. There is a risk that the British may attempt to use the TTIP as a bargaining tool in

negotiating its withdrawal from the EU (Oliver, 2016). Oliver (2016), also indicates that while

TTIP negotiations have advanced, it is uncertain if the US Congress or EU member states might

encounter issues ratifying the agreement. Although a TTIP with the absence of the UK is not

impossible, the EU and USA have cautioned that this could happen (Oliver, 2016). Oliver

(2016), reports that Britain has a significant political and economic with the US at a level that is

greater than any other EU member states.

As a consequence, it would result in a less lucrative and beneficial trade agreement if

secured, and would probably be more challenging to get a favorable decision from the US

Congress (Oliver, 2016). As indicated by Oliver (2016), since the goal of the TTIP is to

eventually develop to include other countries such as Canada, a UK apart from the EU could
BREXIT: CAUSES AND IMPACTS 16

most likely obtain some partnership. However, the type of TTIP agreement and countries

included has not yet been established (Oliver, 2016). According to Oliver (2016), it is also not

clear if the EU would permit the UK to hold a meaningful role in the TTIP agreement. In respect

to the European Union, the agreement would be a joint one between Brussels and Washington

(Oliver, 2016). Therefore, Brexit could impede trade agreements between the EU, UK and other

nations such as Canada and the USA.

Brexit Impacts on the UK and the EU

According to Paun (2016), the withdrawal option of the United Kingdom from the

European Union has not yet been established. Additionally, the withdrawal of the UK will result

in tense negotiations among politicians from both the EU and the UK (Paun, 2016). As reported

by Paun (2016), the impacts of the withdrawal could be isolated to decisional or political issues,

or it could encompass economic implications such as fundamental freedoms or participation to a

single market. The potential implications and consequences of Brexit could be synthesized as

follows: economic decline due to increased barriers, decline in investments due to uncertainty,

potential trade diversion, improved border and migrant control, increased economic freedom in

business environment, cost savings with net contribution to EU budget, global position of the

UK, and a shift in the economic development model among other potential implications (Paun,

2016).

Economic Decline Due to Higher Trade / Investment Barriers

Research by Paun (2016), indicates that Brexit is likely to result in economic decline as a

result of increased trade and investment barriers for British multinational firms with a business

presence established throughout the European Union. Export from British firms to the European
BREXIT: CAUSES AND IMPACTS 17

Union makes up approximately 50% of the total exports (source: International Monetary Fund

Direction of Trade Statistics, 2014). If countries that apart of the free trade agreement, although

not officially EU members, are included total British exports increases to 63.6 % (source:

International Monetary Fund Direction of Trade Statistics, 2014). As stated by Paun (2016),

trade between the UK and the EU is more vital for the EU than it is for the UK. Furthermore,

countries such as Spain, Italy, Portugal, and Ireland have a strong trade imbalance with the UK

exporting more to these countries than it imports from these countries.

In contrast, the opposite is true for Germany (Paun, 2016). According to Paun (2016), the

UK's trade balance is in equilibrium with countries such as the Netherlands and France. The

UK's total export to GDP ratio was recorded at 29% in 2014 (Paun, 2016). The UK's trade is

focused on a few EU countries (Paun, 2016). As indicated by Paun (2016), the UK's withdrawal

from the Single Market could considerably make it more expensive to trade and also to expand

the supply chain for UK firms. The most delicate will be the export of financial services that are

provided via British financial intermediaries including stock market financing, insurance

policies, audit, and financial portfolio management (Paun, 2016). As stated by Paun (2016) from

this perspective, trade is considerably imbalanced as financial services account for approximately

8% of the annual British GDP.

Decrease in Volume of Investments due to Higher Uncertainty

Paun (2016), advises that the European Unions is the most vital investor in the British

economy at approximately 46% of the UK's total foreign direct investment (FDI). According to

Krugman et al. (2015), in foreign direct investment, a firm that is predominantly owned by

foreign capital expands or acquires a subsidiary factory or firm that is located in the host country.
BREXIT: CAUSES AND IMPACTS 18

Foreign direct investment is a recognized as an important source of increasing a country's capital

(Krugman et al., 2015). As stated by Paun (2016), the largest investors in the UK's economy are

France, Netherlands, German with the top industries being wholesale, retail, transportation,

utilities, and mining, with very high EU participation. In particular, 90% of investments in the

utility industry is received from EU investors (Paun, 2016). As mentioned by Paun (2016),

central UK industries rely on this EU participation/investment. As a matter of fact, currently the

UK is a significant beneficiary of EU foreign direct investment; hence many European firms will

be substantially impacted by any shift in the business environment (Paun, 2016).

Possible Trade Diversion and Decline of the Pound Sterling

According to Paun (2016), another potential implication of Brexit is the possible

diversion of trade. If the UK replaces its efficient trade flows from EU nations with other trade

flows that are located within or outside the UK that is less effective, this will adversely impact

the UK's economic environment and will eventually affect the wealth of British consumers.

Furthermore, Brexit also has an adverse relationship with the value of the pound sterling. As

mentioned by Cox, Chu, and Rodionova (2017), the most drastic economic effect of Brexit

occurred on the night of the referendum. Currency traders predicted that the UK's withdrawal

from the EU would result in significant long-term and enduring cost in Britain and this led to the

pound suffering its greatest drop against the dollar on record (Cox et al., 2017). Although the

pound is beginning to recover, it is still 14% lower than the level that it was previously, on June

23, 2016 (Cox et al., 2017). Hence, it is evident that Brexit may have an impact on trade

diversion as well as the value of the pound sterling.

Better Control on Migration for the UK

BREXIT: CAUSES AND IMPACTS 19

As reported by Paun (2016), another future impact of Brexit for the UK is improved

migration control and improved migration policies. At present, the UK's immigration policies are

heavily regulated by EU provisions (Paun, 2016). Paun (2016), reports that heightened control on

the flow of immigrants into the UK could enhance the migration policies to reduce the number of

poorly educated migrants and to enable entrance for more educated ones. According to Paun

(2016), the leading suppliers of labor/employees to the United Kingdom are from Italy, Poland,

Ireland, Germany, Lithuania, and France. Hence, migration to the UK is predominantly intra-EU

migration, in contrast, migration in the majority of other EU 27 countries are mostly extra-EU

(outside of the EU). Therefore, if successful in Brexit negotiations, the UK would be able to

establish a migration policy that is more aligned with its economic requirements and priorities

(Paun, 2016).

More Economic Freedom for the Business Sector in the UK

Another implication of Brexit for the UK is increased economic freedom within the

business environment (Paun, 2016). As mentioned by Paun (2016), the UK's economy is freer

and less corrupted than the majority of the 27 EU member states. The UK could benefit from this

environment by implementing additional measures to liberalize the economy to support

increased business development (Paun, 2016). Furthermore, supporting entrepreneurial

development by establishing a more liberal business atmosphere, combined with reduced and

fiscal business regime would be beneficial (Paun, 2016). According to Paun (2016), the liberal

vision of the UK was frequently blocked by other EU countries, in particular, Italy, France, and

Spain. Additionally, any reforms that were proposed that were not aligned with EU policy areas

have been methodically refuted and debated by other partners (Paun, 2016). For example, EU
BREXIT: CAUSES AND IMPACTS 20

common policy areas tend to environmental policy, agriculture policy, and social policy (Paun,

2016).

Cost Caving with the Net Contribution to EU Budget

Cost savings as it relates to contributing to the European Union is another potential

impact of Brexit on Britain (Paun, 2016). As indicated by Paun (2016), Britain contributed more

to the EU budget than what it received from the EU, with a difference of approximately 4 billion

Euro on an annual basis. The cost saving was not substantial to UK's public expenditures or the

UK economy, as the cost saving is less than 0.1% of the UK's Gross National Income (Paun,

2016). Paun (2016), advises that the majority of EU financial allocations went to regions other

than England. In this regard, Northern Ireland was the greatest benefactor of EU financial

allocations (Paun, 2016). As a matter of fact, the UK's participation in the EU project has

reallocated a significant amount of resources to other UK and EU countries from England (Paun,

2016). According to Paun (2016), the main issue with this financial allocation the EU

(approximately 7 billion Euro) is that there is a disparity between the EU priorities and the UK

needs. Therefore, the UK will be able to better allocate funds and resources more efficiently.

International Position of UK

The global position UK will be affected by Brexit (Paun, 2016). As stated by Paun

(2016), the UK stands to lose the provision of being an EU member, as the EU had commenced

significant trade and investment negotiations with China, Japan, and the United States. Currently,

experts are trying to determine if it will be harder for the UK to negotiate in these type of

agreements, post-Brexit, as such agreements are vital in a more globalized environment (Paun,

2016). Paun (2016), reports that in reality, on its own, the UK is the 5th political and economic
BREXIT: CAUSES AND IMPACTS 21

power in the world, which surpasses any other EU country. This position enables the UK to have

a strong bargaining influence with other countries or institutions (Paun, 2016). Hence, even

without the EU, that UK will most likely be able to negotiate meaningful trade agreements with

other jurisdictions.

According to Paun (2016), the UK has maintained a close relationship with former

Colonial nations, including Australia and Canada, that have now established themselves as

highly advanced economies. The UK's EU membership has sometimes altered its relationship

with such states (Paun, 2016). As indicated by Paun (2016), the European Union is perceived as

a pro-protectionist culture, particularly as it relates to environmental protection, agricultural

protection as well as consumer's protection. Over time, this culture of protectionism has

considerably impacted agreements signed and international relations with other parties (Paun,

2016). As stated by Paun (2016), the UK, on the other hand, has less protectionist views and is

more liberal, and will be able to sign more international agreements on its own more easily and

quickly. As opposed being with a grouping of countries that are extremely fixated on protecting

their suppliers from international competition (Paun, 2016). Additionally, of the EU 28 states,

the UK is the most competitive and the increased exposure to international trade would stimulate

economic development (Paun, 2016). Therefore, Brexit could position the UK with the chance to

become recoupled with the global economic system in higher stranding (Paun, 2017).

Shift in the Economic Development Model

A change in the economic development model is a potential impact of Brexit on the UK

(Paun, 2016). As reported by Paun (2016), the EU became increasingly focused on fake

development enticements such as grants to sensitive industries (R&D activities, SMEs, and
BREXIT: CAUSES AND IMPACTS 22

agriculture), financial incentives for preferred industries, and monetary expansion as the result of

a quantitative easing structure supported by the European Central Bank. In a post, EU economy,

the UK could amend the economic development model which was implemented and used by the

EU for decades which has also constrained the marketplace in support of complex social

objectives, ineffective and expensive redistributive mechanisms (Paun, 2016). According to Paun

(2016), this could enhance the economic system, competition within the markets and could also

stimulate wealth and economic development for the UK. Also, at present, EU Single Market aids

are entirely funded by the significant costs that are paid by all EU citizens and firms in the form

of inflation, taxes and accumulated debt (Paun, 2016). As mentioned by Paun (2016), this futile

EU economic policy is about the concept of the "social market economy," which has obvious

limits for the UK's economy.

Other Potential Brexit Implications

According to Paun (2016), additional potential consequences could arise, although these

impacts may not be directly related to the United Kingdom. In particular, internal instability in

the UK could affect states apart from the UK, including Northern Ireland, Wales, and Scotland,

who voted against Brexit in the view that it would be more beneficial for them to remain in the

EU (Paun, 2016). As mentioned by Paun (2016), these UK countries could ask for the vote of

their population to be taken into consideration for different treatment for existing EU members,

for challenges to be represented in international forums, defense and security issues for both

sides. Regrettably, Brexit could result in increased ethnic and national tensions which at the

worst-case scenario, and could eventually weaken the entire European area (Paun, 2016). As

advised by Paun (2016), if Brexit ends with a shift between local and EU politicians without any

meaningful reform, the entire Brexit campaign will be in vain. Furthermore, if the EU
BREXIT: CAUSES AND IMPACTS 23

interventionism policies are merely replaced by local ones, with similar inefficiency or the same

or more intensity, Brexit will not create improved economic growth and wealth for the British

people (Paun, 2016). Additionally, tension still exists in British society as there is a high division

of people for both against and for Brexit (Paun, 2016).

Brexit and the Cayman Islands

According to Chandler (2017), the Cayman Islands along with Bermuda and the British

Virgin Islands (BVI) are Overseas Country and Territories (OCT) of the European Union as per

the Treaty of Rome and respective EU treaties, as the result of being Overseas Territories of the

United Kingdom. However, Overseas Country and Territories (OCT) are not directly impacted

by EU law as these countries/territories are not direct members of the European Union

(Chandler, 2011). As stated by Chandler (2017), OCTs such as the Cayman Islands, Bermuda,

and the British Virgin Islands have diverse economies, and the effect of Brexit will vary for each

OCT. One such privilege of OCT status is that it affords territories with advantageous trading

rights, in practice than less developed OCTs (Chandler, 2017).

As mentioned by Chandler (2011), the Cayman Islands, along with territories such as

Bermuda and the BVI have been ranked amongst the highest GDP per capita on a global scale.

However, these territories have traditionally not looked to benefit significantly from OCT rights,

notwithstanding the fact that any deterioration to these rights may have a more substantial impact

on other Overseas Country and Territories (Chandler, 2017). While the relationship between the

EU and territories such as the Cayman Islands will officially change in the future once the UK

formally withdraws from the EU, as although they will remain to be Overseas territories of the

UK they will no longer be OCT's of the EU (Chandler, 2017). Furthermore, Chandler (2017) also
BREXIT: CAUSES AND IMPACTS 24

advises that Brexit is also likely to affect former OCTs concerning foreign policy such as

financial and economic restrictive measures and sanctions which could be imposed by the EU.

Brexit (once it happens) may also impact foreign policy, including economic and financial

sanctions and restrictive measures (Chandler, 2017).

As indicated by Chandler (2017), while EU regulation is typically not imposed in

Overseas Territories, such as the Cayman Islands as it is outside the EU, at present the UK

directly imposes EU regulations over its Overseas Territories. Due to the significance of the

finance industry to the Cayman Islands, BVI, and Bermuda economies, a particular area of

concern for OCTs is the potential weakening of the UK's influence on EU policy and legislation

as the result of the Brexit vote (Chandler, 2017). Also, while territories such as the Cayman

Islands are not EU member states and EU legislation does not directly affect them, there is a

possibility the Brexit referendum may result in indirect impacts (Chandler, 2017). This may

relate to the European Union implementing a list of EU problematic tax jurisdictions by the end

of 2017 (Chandler, 2017). Moreover, Chandler (2017), reports that the political aspect of Brexit

is fairly high due to the UK having less influence on EU policies and this may intensify the

probability that this could result in a target on low tax rate jurisdictions. This is a major area of

concern for Overseas Territories like the Cayman Islands. Therefore, this obviously raises

concerns for Bermuda, the BVI, and the Cayman Islands, concerning their complete compliance

with the OECD's transparency requirements (Chandler, 2017).

Conclusion

In conclusion, the referendum held by the United Kingdom in which the resulting vote

was in favor of the UK withdrawing from the European Union, referred to as Brexit, will result
BREXIT: CAUSES AND IMPACTS 25

in far-reaching short-term and long-term implications for both the United Kingdom and the

European Union. As negotiations of Brexit are still ongoing, it is unclear of the full extent of

impact to both parties. This will be heavily dependent upon the final agreement as determined by

Article 50. However, what is clear, is that there has been and will continue to be a significant

concern as it relates to political and economic stability across the United Kingdom. Potential

adverse implications for the UK include economic decline due to increased trade barriers and a

decrease in investment activity due to higher uncertainty. However, it is important to note that

Brexit can also bring about substantial advantages and benefits for the UK as it will no longer we

controlled with EU regulation. In particular, the UK could potentially benefit from better border

control and increased economic freedom for the business sector, among other economic

advantages. Nonetheless, such potential benefits are somewhat dependent upon the post-Brexit

relationship with the United Kingdom and the European Union. Furthermore, benefits to the UK

are also contingent on whether or not the UK will move forward with a hard-Brexit approach and

also whether or not the UK will continue to benefit from some EU sanctions as it relates to

investment and trade regimes.

BREXIT: CAUSES AND IMPACTS 26

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