BREXIT: Game Changer for the UK and the EU? What to Expect Next

EU leaders have already met to ponder over the way forward after Britons surprised the world by voting to leave the EU. Ex-PM David Cameroon urged the EU to give Britain more control over immigration. Cameroon had promised the EU leaders in the run-up to the referendum that he would deliver the win. EU leaders may blame him for allowing the Brexit referendum in the first place, but as he explained, the pressure was too huge to avoid.

At the EU summit in Brussels, French President Francois Hollande, made it clear that UK must be ready to bear the consequences of leaving the biggest single market union. It is not business as usual, U.K. won’t enjoy the advantages of the EU single market after rescinding its membership without applying the rules governing trade in the monetary union, reported Bloomberg.

Ben Bernanke weighed in his thoughts on Brexit. The former chairman of Federal Open Market Committee and leading US economist says that the biggest loser is Britons themselves.  The votes open doors to numerous political and economic uncertainties in the UK. Uncertainty about how the UK will manage the trade rules with its neighbors in continental Europe. The fate of workers in the UK of foreign origin as well as UK workers in EU countries. Bernanke also makes a case on the uncertainty over the political direction the deeply divided country will take going forward.

Moody’s downgraded 12 banks and Building Societies from the UK. The rating of UK banking system has been changed from stable to negative following Brexit vote.  Laurie Mayers, an Associate Managing Director at Moody's expects slower growth in UK’s economy. She further expects a rise in unpredictability over Britain’s future bilateral trade engagement with the EU to result in shrinking appetite for credit, heightened credit defaults and increased volatile wholesale funding environment for the UK’s financial systems.

Post-Brexit UK will see diminishing investors confidence coupled with slow real GDP growth of about 0.5% for the year 2016 or lower and approximately 1% in 2017. The battered pound, on the other hand, will ironically make export cheap and attract tourist to London.

Word on the streets of London is financial multinationals are already planning their relocation to other cities in Europe, top of the list being Frankfurt, Dublin and Paris. New Financial, a London-based think-tank claims banks such as JPMorgan, HSBC, City Group, Goldmann are already planning an exodus of hundreds of their London-based staff as reported by Matt Turner.

The position of UK in Europe and the world at large is under threat. Outside the EU, UK will adhere to trade regulations whose direction it can’t influence. Many suggestions have been put forward on the kind of relations Britain should pursue in renegotiating trade deals with the EU which is the UK’s biggest export market. The Norway-model in which UK would form part of the EU economic block without being subjected to Brussels’ political bureaucracy is gaining momentum among the political class.

Goods and services from the UK will be subjected to taxation and examination before entering the EU under this arrangement. Free movement of people from EU countries is a trade-off the UK will have to compromise under this new proposed arrangement.

The road ahead for EU and secessionist UK is certainly a bumpy ride. The markets are already pricing in fully fledged recession in the UK and a rising risk of the same in the rest of Europe. This recessionary pressure may have a spill-over effect to rest of world. 

It is worth noting that post-Brexit UK’s main challenge is political. Today we expect candidates to announce their bid for the PM position which will only be filled in September. Leaders from Scotland are contemplating how to eat their cake and have it. The economic dilemma facing the Scottish people is how to maintain the £46bn annual trade and 1 million jobs with England while keeping the £12bn in trade and 250,000 jobs linked to the mainland Europe.

The EU has to work hard to regulate illegal immigration, foster economic conditions that favor job creation for its citizen and enhance security. These issues are a huge concern as they are driving the rise of secessionist populist political movements in its member state. This populist movement has the power to completely break up the now 27 members Union as demonstrated by the historic Brexit vote.

Articles based on: