Implications Of A British Exit From The Eurozone

The Eurozone has been dealing with more than its fair share of crises from the Greek bailout to the recent immigration crisis but the exit of a major player like the UK will definitely have long lasting consequences for the EU. UK is the second major economy in the EU and the 6th most competitive European economy. It also has a strong financial and legal environment as well as a strong currency.  A Brexit will not only lead to loss of credibility for the Eurozone but a trade restructuring by both parties.

The seed for the Brexit was planted in Jan 2013 as part of David Cameron’s election promise. Cameron promised that should he win, his party would negotiate for more favourable arrangement followed by a referendum by the people on whether to stay in the EU. Even in 2013, public opinion was still split on whether to stay in the EU with the For side citing the additional trade and foreign investment the single market has bought in while the Against side countered with the fact that the EU regulations cost more that they bring in through trade. By being part of the EU, the UK has to adhere to tariffs and customs agreements involving non-EU countries which restrict its ability to enter such markets. With the weak EU economies, UK would be better off expanding into Asian markets.

A Brexit would affect the UK in the following ways.

-Currency- A Brexit would cause currency fluctuations and cause the pound to fall. In February, the pound hit a 7 year low to the dollar on news of the possible exit (the currency has since recovered). UK Treasury pegs the fall at atleast 12%.

-Trade- The EU is the biggest Single Market in the world and Britian’s presence in the EU allows it export goods tariff free and sans red tape. Currently, Britian runs a trade deficit with the EU with UK earning 15% of its GDP through exports to the EU while the rest of the EU earns less than 5% of its GDP through its exports to the UK. Thus, Britian is more dependent on the EU for trade than vice-versa. A UK Treasury analysis of trade data for 195 countries estimates that EU membership has boosted trade in goods and services by 76 per cent and suggests that the volume of trade would fall between 9 and 24 % after Brexit, depending on what kind of relationship London and Brussels agreed to.

 

A Brexit would also affect individual European countries differently depending on their trade exposures to the UK. Countries like Hungary, Czech Repulic and Belgium having a trade surplus of around 1.5% of their GDP would definitely feel a sharper pinch.

 

The effect on trade won’t be uniform across sector and will vary depending on the export intensity and supply chain configuration of the company. Companies exporting to EU will be faced with higher tariffs and more red-tape (A car exporter will have to pay different duties depending on the origin of its parts). The sectors expected to face the Brunt of a Brexit are Auto manufacturing, Manufacturing, Oil and Gas, Food/Beverages and Ports and Shipping.

-Real Estate- No-one is sure what the effect on housing will be. On one hand, housing prices may fall due to low demand (due to a combination of stricter immigration laws and lack of International institutional buyers) but on the other hand the Brexit may reduce investments in the housing market and thus prices may rise on stagnant demand.

-Investments-The UK is used by many companies as a gateway to Europe. Due to its English speaking population, strong legal environment and bank ecosystem, companies prefer to head their Eurocentric operations in UK which may change if the Brexit actually happens

In aftermath of a Brexit, the UK would be free to look to other countries for trade, negotiations will be a long drawn out process which means the UK economy will suffer in the interim (Barack Obama warned that it could take upto a decade to strike a trade deal with the US).Politically, the UK would have more sovereignty but may lose clout among European nations and relationships with the EU as a whole will definitely be sour. Alternatively, the UK can stay connected to the EU in the form of a Customs Union, membership in European Economic Area, Bilateral trade agreements or trade under WTO rules but each has its own pros and cons.

For the EU, the exit of a major economy from the EU could threaten its very existence and hamper efforts towards closer ties and a political union. However, acceding to the demands would make the EU look weak and lead to each country asking for a separate deal.

For India, A Brexit could dampen the FDI many Indian companies have been pouring into the UK. One of the many reasons companies like Tata, Wipro..etc are investing in UK is as a convenient  gateway to EU markets. A Brexit would nullify this advantage leading to a fall in FDI while the UK realigns its trade policies. However, the UK would be free to negotiate new trade agreements with emerging economies which would lead to an increase in UK and Indian trade (This is subject to what relation UK has with the EU, a Customs Union relationship wouldn’t allow such flexibility)

In the end, like the similar Grexit, the Brexit seems to be just a negotiation ploy to garner better terms. Both sides have too much to lose and little to gain and so a Brexit seems unlikely.

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