After months of heated campaigning, citizens of the United Kingdom surprised the world and arguably themselves by voting to leave the European Union (EU). Although there was never much doubt that results for Leave vs Remain would be close, general expectations seemed to indicate continuity would ultimately prevail. At times it almost felt like the EU and a host of on-looking nations were smiling and nodding as one might regard a child threatening to run away from home. A point was being made, bedtime might need to be tweaked, but the UK would never make it past the end of the driveway. Brexit, or a British Exit, was not really going to happen – until it did.
In the weeks following the tight 52-48 per cent margin, debate about whether leaving was the right decision raged on. Media outlets and professional analysts alike were quick to categorize the two camps, circulating mantras like old vs young, rural vs urban, uninformed vs educated. Ironically, the second most googled term on the European Union in the UK directly following the vote was very simply “What is the EU?” – not exactly reassuring. In London however, the nation’s financial capital and an area that voted to remain, up by 680 per cent was the search phrase “Move to Gibraltar” – a notorious tax haven. All the while publications like The Economist energetically blasted headlines like Anarchy in the UK along with graphics of torn British flags.
Does all of this suggest a portion of polling was based on instinct rather than fact or conversely, on purely mainstream economic thinking rather than well-rounded individual judgement? Probably. Yet regardless of how the United Kingdom arrived at its controversial decision or whether, in hindsight, it might have been a mistake, newly-appointed Prime Minister Theresa May has made it clear that Brexit is moving forward. The UK will begin formal discussions in early 2017 and leave the EU by 2019. Since negotiations have not yet begun, there remains a great deal of uncertainty surrounding the long-term economic impact of the shift. Although details are still hazy, it is safe to say the UK will face both challenges and opportunities on the road ahead.
Perhaps the most immediate and easily observable difficulty following the referendum was its negative impact on the nation’s currency. The value of the pound hit a 31-year low on currency markets following the 23 June vote. Trading at about $1.50 USD just after polling stations closed and falling by more than 10 per cent to $1.33 USD in the subsequent days, concern that a downward slide would continue was palpable. While we haven’t seen any real recovery in the past three months, Sterling has managed to hold fairly steady. This may indicate initial reaction was largely based on the uncertainty of what is to come, which still exists today, not a growing fundamental lack of confidence in the ability of the British economy to function outside of the EU. It is important to note that since the United Kingdom is the first full member state to leave the EU in its present form, there is no historical precedent for how the process will work. The unknown is scary for people and markets alike – fear drives currency down. The recovery of the pound will depend a lot on the outcome of future trade negotiations; specifically, how and if the UK will continue to access the European single market.
The single market allows for the free movement of capital, goods, services, and people between members. Since the UK is one of the EU’s biggest trade partners and almost half of UK exports go to the EU, both parties have a vested interest in arriving at a mutually beneficial arrangement to maintain some level of access. However, as immigration was one of the top concerns for Leave voters it seems highly likely that the UK will push to regain strict control of its borders. The question then remains how a balance will be struck between the free movement of goods and the free movement of people. This will certainly be a point of tension, as the UK has already come under criticism for potentially wanting to ‘cherry-pick’ the benefits of EU membership without participating in all of its responsibilities.
On the bright side, the existing low value of the pound makes British exports cheaper and more attractive internationally, which could help buoy the UK economy during its unclear transition period out of the EU. Even if upcoming negotiations go sour or the EU decides to take a hard stance on the country’s decision to leave, the situation is not necessarily dire. Prior to the referendum Oxford Economics forecasted UK exports to the EU were on track to fall to 30 per cent by 2050, a prediction that has likely now been accelerated by the results.
This could be the perfect time for the United Kingdom to look outwards by building stronger trade relationships with the rest of the Commonwealth and other emerging markets like China. With respect to foreign direct investment, access to the single market is absolutely a major draw but it is not the only reason companies invest in the UK, the world’s 5th largest economy. Interestingly the 1st, 2nd, and 3rd, are not and have never been members of the EU.
Leaving the European Union is not a full-stop rejection of globalisation, in fact it could mean the opposite. Perhaps it is only a call for a modified version with more efficient decision making and sounder, more widely distributed international connections. Europe is a mighty global power, but it is not the only one. Membership does not automatically equate prosperity and exclusion does not mean disaster. It is true that the short-term may be rocky, especially as Scotland contemplates their own referendum, but the long-term outlook is far from bleak.
So maybe the UK didn’t run away from home, maybe it simply grew up, grew restless, and grew ready for the next chapter.