Friday, June 24, 2016

Brexit and its impact.

In a close vote the Britons have spoken; they want out of the EU, want to take charge of their own country and its destiny and in the process have created a scenario where the possibilities are endless and the outcomes less than certain. The outcome of leaving the European Union while now inevitable has shown that Britain is a very divided country, surprising many who knew it would be a close vote but the outcome was not entirely expected. So what happens next.

Britain has two years to negotiate an exit deal from the EU, and if there is extension granted to this process then leaving without a deal would spell its own set of problems. This is much like a possible lengthy divorce proceeding, trade agreements to be unwound, new agreements to be made with partners like the US and Japan without the EU umbrella and the key aspects of preparing the financial disengagement costs between Britain and the rest of the EU. Most likely two years is not enough to hammer out the divorce agreement after a 43 year marriage and some EU members might well simply say that you elected to leave the marriage then do so without a favourable exit deal or an extension.

The effect of Brexit is wide ranging, one the one hand there is a strong possibility of a Nexit (Netherlands seeking an exit), and the right wing in France will push for a similar referendum with other members testing the mood for their electorate. In a sense politically the EU will feel stronger as a partner who was not entirely on board with the long term vision of the EU is now out. The flip side is that Germany may remain the only strong EU member wanting a stronger united Europe, while France, Netherlands and Denmark leading the charge for a looser Union arrangement. In essence the main problem for Britain was immigration law and they had wished a more Australia type point system on immigration rather than the current policy. EU leaderships stubborn stance on revising the policy then opened the pandoras box to a plethora of other issues resulting in Brexit.

The key question is will Britain benefit from this decision. There cannot be a serious sensible answer to this because a great deal will depend on the moving parts of the business environment. Yes emotionally the idea of 'winning back the country' has its own charm; but does this put bread on the table and create a strong economy? Personally, I believe till the exit deal is not worked out and new partnership agreements worked out over the next two years the British economy will remain depressed and the economic environment uncertain. A strong British economy will fundamentally rest upon two things:

1. Will the private sector in Britain take advantage of the lesser legislation (from EU) to invest heavily into the economy?

2. How successful will Britain be in negotiating new agreements with the US, Japan and the EU that cover trade, taxes and investments.

The best bet for Britain is that private sector investment will offset the effect of big business moving out of Britain as Brexit takes away the advantage for these manufacturers, like Nissan, to produce cars in Britain. Job losses from these closures will not be the only negative as such measures will effect the secondary and tertiary manufacturing sectors that support the factors supply chain. Can the private sector be strong enough to negate some of this effect is still questionable.

The question of negotiating new trade deals and investment and tax agreements is a more tricky matter. Britain, while the worlds fifth largest economy, now will negotiate from a weaker platform. These agreements are tedious and in some cases require multi level approvals, like in the US, and therefore a three to five year period is not unreasonable before this is sorted out. Britain might want to have a loose partnership agreement with the EU so as to not upset the existing relationship with EU too much, but I suspect that the European leadership may not be that accommodating on accepting such a partnership on terms too favourable to Britain.

If and only if, Britain can over come these two challenges that I have mentioned than perhaps in a period of five years from now Britain may well emerge from the this decision more stable and perhaps stronger. However, one must speculate that stronger does not mean stronger than the EU, but stronger from the position the country has been thrown into now.

In the interim what this means for business and the common man in Britain is that there will be a period of three to five years of uncertainty, higher consumer prices, more unemployment, lower investment into new businesses and the financial markets being in turmoil. While Britain will over haul their own immigration law and perhaps reduce the impact on the large number of EU citizens currently working in UK, there will be shrinking of the financial sector with job losses, manufacturing industry slow down. Yes a weaker pound will mean competitive exports but will this be substantial remains to be seen.

To me at a very personal level it is surprising that the issue of introducing a point system immigration system has been blown up to the extent that Brexit became a reality. In a sense this is a failure of intellect to emotion, a stubborn EU leaderships success over the voice of reason and this lack of flexibility will be the test for the EU in how it handle discontent in its own camp.

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