Brexit: A view from afar.

Brexit (or British Exit) has been the focal point of any discussion not only in the UK and Europe but elsewhere. In a sense, other than the seriously politically minded within us, most people are fed up with the whole discussion about Brexit. This is precisely what is wrong with the way our British friends are dealing with the Brexit issue. Boris Johnson, the British PM, seems to have stepped a few strides closer to the exit from the European Union, and even though there is no certainty that Parliament will go with the deal he has brokered, there is considerable merit in the thought that being tired of this issue the MP's who could sway this vote might just cave in.

Boris Johnson the other day commented that he is determined to get the deal done as that is what the majority of the voters wanted. He could not ignore, he said, the wishes of this majority and called it the will of the people. Most people focus on the 'will of the people' which was 17.4 million who voted to leave the EU, however, 16.2 million voted to remain in the European Union, and in all this 'will of the people' argument we forget the large segment who wanted to stay. It therefore makes sense that whatever deal is finally done should go to the people of the UK for final say in a referendum.

One understands the entire emotional appeal of leaving the EU and British people having their say in their own affairs. Yes in a sense no one likes to be told what to do within their own country. However there always was an alternative to leaving the EU and could have been moving the EU to roll back some of the powers that Brussels (the EU head quarters are there) have over domestic policies of member states. While a longer path to achieve this it would have been a less painful path for the British people.

Beyond the emotional hype of regained independence from Britain, the economic cost of leaving the EU has never really been put to the average British person. Just during the leaving process, (mind you the divorce has not been done) the inflationary pressures of Brexit have caused an average increase of expenses to each household in the UK of approximately £ 404 per annum.

In the long terms UK's GDP will slow down from between 1.2% to 2.9% (depending on the final divorce terms), unemployment is expected to rise by 1.9% and net foreign investments into British Industry will shrink. Already British export industries have moved some of their manufacturing jobs to Europe to avoid the new tariffs that would affect them post Brexit. In the same sequence European industries have cut back investments and job which were within the UK causing considerable strains to British industrial production and jobs.

The argument that the UK will benefit from new deals with USA and the Commonwealth countries is not based on any economic reasoning. The US remains, under President Trump, a highly mercurial and temperamental trading partner and the most of the Commonwealth nations have very favorable trading terms from China and Japan, which Britain, in its current state cannot match. some have suggested that since UK was a net contributor to the EU, that money saved will augment the effects of leaving the EU. Yes indeed the UK was a net contributor to the EU by about £ 9 billion a year. However when accounting for over all effect of jobs and investments in UK created by being in the EU  one can be sure that this £9 billion would have been more than offset by the job creation and investments and exports into the EU.

Brexit was sold to the UK people as an emotional deal, and the economic realities of its effects were glossed over to the point of suggesting that the average British citizen will be better off. NO free borders, hence less foreigners taking the jobs, not subsidizing the EU meaning more funds to the British people etc etc. The realities are that, as an example, many of the jobs that lower paid Polish workers were taking up in Britain are usually not taken by British people. The pros and cons of such policies will never be crystal clear but after decades of integration into system disengagement is not going to  be painless. The British economy will shrink and with it jobs and the common man will feel the pinch. EU workers came to Britain because the economy was doing well and expanding, much of this from being in the EU. Take the financial sector, where perhaps British employees will be hit the hardest as major financial institutions will find being in London is no more beneficial in a post Brexit environment.

The skeptics would argue that losing 10,000 jobs in the banking sector cannot do much harm but this is just one important segment. We must consider this is a high salaried sector so the knock on effect into the consumer spending side is larger than just 10,000 jobs. These higher salaried people spend more, buy houses, send kids to school, and of course pay taxes. So the trickle effect into the economy would be far greater than just losing 10,000 jobs to Europe. This story repeats itself into other sectors of the British economy and gradually the pinch of Brexit will be felt across a wider cross section of British society than we care to admit today.

In all honesty rather than just focusing in the people who wanted to leave the EU one should consider that a great deal has changed since the 2016 referendum and more realities have come to show that while the emotional euphoria of leaving EU is all fine, the economic pinch is going to be much worse. It would be appropriate therefore to have a new referendum on the issue of leaving the EU.

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.