Brexit Presents Potential Economic Downfalls

By John Gallagher,
International Business Assistant Editor

Great Britain will hold a referendum on June 23 of this year to discuss the country’s membership in the European Union. The EU has been plagued in the past few years due to financial crises in countries like Greece, Spain, and Italy and by the ongoing migrant crisis that is dividing the nations. Great Britain is not content with some of the overarching policies that the EU has put in place and feels that by being a part of the EU, they are losing their sovereignty and even their democracy. If they remain, they get to continue reaping the benefits of European Union membership which boasts access to a single market of 500 million people allowing the free flow of capital, goods, services, and people between member countries. Membership in the EU does come at a cost, which to Great Britain is currently about £12 billion, but many people pushing for Brexit are willing to pay that price in order to regain their sovereignty.

London based magazine, The Economist, lays out the arguments for and against Brexit. Supporters for remaining in the European Union argue that there is a higher monetary benefit to free trade than cost, 45 percent of Britain’s exports go to the EU thus remaining in will same them immense amounts of money from reduced tariffs. In terms of political influence, they can be represented twice at international summits, once from the EU, and once independently, versus only one time if they leave.

Supporters of Brexit argue that they can regain their desired level of sovereignty and negotiate new trade deals with the EU other economic powerhouses, i.e. India, U.S., and China. They suggest that the EU membership fee will be put to better use by spending the money to conduct scientific research and create new industries. Additionally, Europe is currently experiencing the largest refugee crisis since World War II, and they would like to have control over their borders rather than being subject to EU policy.

One surefire economic impact from Brexit is the weakening of the pound. The ETF that tracks the strength of the pound (FXB) is down almost 2 percent this year, and was down almost 6 percent at its lowest point. A weak pound makes imported goods (manufactured goods, machinery, fuels, and foodstuffs) more expensive and it makes British goods cheaper to foreigners. Great Britain currently has a negative current account balance (imports more than exports) of 5 percent of GDP, meaning their economy will be hurt by the weakening of the pound more than they will benefit from it. This will weigh on the markets, deter investment, and slow growth in the economy. To add to the weight of a weaker currency, new trade deals that will need to be struck with the EU and the 60 other countries that the EU trades with, and it is a near certainty that they will face increased tariffs.

Earlier this month, the Wall Street Journal published an article warning of adverse economic effects of Brexit. Some proponents of Brexit argue that Britain would be able to negotiate favorable trade deals with the EU after Brexit, similar to the way that Canada, Norway, and Switzerland have arranged favorable trade deals without having to accept membership. The article argues that if they were to arrange these types of deals, it would not only take a significant amount of time, but it would require other concessions such as contributions to EU spending and allowing free movement of people. The article argues that consumers would be hurt the most by a Brexit as the price level would surely rise. The increased costs of doing business brought about by a weaker pound and tariffs could force businesses to cut costs by laying workers off.

If Britain does decide to leave the European Union, it will not be easy. Although they will save on the price of an EU membership and regain their sovereignty, they will lose access to a single market of 500 million people, they will be forced to spend massive amounts of time renegotiating trade deals, and the increased tariffs coupled with a likely sharper decrease in the pound will hurt the national economy.

Britain will have to ask itself the question; are all of these negative consequences worth our sovereignty?

A version of this article appeared in the Tuesday, March 22nd print edition.

Contact John at
john.gallagher1@student.shu.edu

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s