Question

Elaborate the possible economic consequences of Brexit for the European Union countries.

Answer 1

Although UK has started leaving EU but Brexit referendum has not made things clear that what type of relationship will be between UK and EU in future. Many banks and financial organizations are in problem to move from one to another place because of ambiguity of Brexit at its given time. United Kingdom’s EU referendum affected on pound and it fell, as “Brexit” was the result of referendum. Political crisis also affected stock markets and peoples’ trust had been shaken in this phase of uncertainty. The impact of Brexit is very hard and most of the critics think that this decision of UK will damage the economy by creating political chaos in UK and will also be damaging to EU.

            Organization for Economic co-operation and development projects the degrading effects of Brexit on British economy. The mere uncertainty of the future of UK’s economy is already impeding its economic growth. Once the third poorest country of EU, UK was contributing 17% to the nominal GDP of EU, which made it, second highest contributor after Germany (20%). EU extracts budget contribution from countries according to the size of their economy; larger the economy larger will be the contribution to the budget. UK will face tax on its GDP once it’s out of EU and will lose the luxury of free and non- border controlled trading with other EU countries, which it previously enjoyed and gained benefit from. According to Kierzenkowski et al. (2016), in case of exit, the GDP loss will be 3% by 2020 and by 2030 it will further decrease to 5%. Decreased immigration, mentioned by most of the voters as the cause for which they were voting against EU membership, will result in decreased influx of skills and investments, which will certainly have a direct and/or indirect degrading effect on economy.

            In addition to these localized impacts on UK’s economy, continued Brexit will leave impact on other EU countries. Brexit, if continued, is most likely to cause polarization in EU; pro-Brexit and anti-Brexit countries. Countries like Germany, highest contributor to EU GDP, will gain power and will come to forefront, whereas Eurosceptic countries can face the need for referendums. A survey conducted in all of the EU countries revealed that 60% of the population was in favor of UK’s continued membership and 10% was in support of Brexit; countries like Ireland, Portugal and Malta are one of the countries in support of the former. Ireland and UK share extended socio-economic ties with economic benefits flowing both ways which makes Ireland in direct line of impact of Brexit. Similarly, Poland (number one beneficiary of EU budget to which UK is the second largest contributor) will face direct and massive consequences and will have to take a stance that will not affect its economic relations with UK, which accounts for most of its export revenue. Irrespective of the support or opposition of Brexit amongst economists, the one at which a consensus has developed is that a wave of short-term negative impacts will hit the economy for an undeterminable period of time and with incalculable force (Patel & Renwick, 2016). The Bank of England (2015) has already issued a warning for economic instability, which could have long-term effects.

            Political impacts of Brexit are astonishing for those who have been working for globalization. The material produced in last couple of decades focused the idea of free market and globalization, but Brexit has proven the Backlash to liberalism and Globalization. After the fall of Soviet Union, cold war ended between US and USSR and writers started writing on liberal democracy and free market economy. Some theorists and writers argued that human rights, liberal democracy and the capitalist free market economy had become the only remaining ideological alternative for nations in the post-Cold War world. (Russett, 1994). Brexit once again has challenged all these theories and created conflict of thought among intelligentsia; the class of the people who are characterized with the mental efforts; that what would be the ultimate result of Brexit at its completion.

            The pro-Brexit economists argue that the exit will result in elimination of membership-fee which UK has to pay and will use that huge monetary sum elsewhere but it is possible that UK will have to suffer border controlled trade based charges that will leave the problem unsolved and will possibly reduce the GDP as much as 2.75%. It is yet to be seen that whether UK will be allowed to enjoy the benefits of free trade in single market or not. Even if it is allowed to do so, it will have to pay some fraction of membership fee and will have to agree upon some rules and regulations which will also involve free movement of people across its borders with other EU countries (Booth et al., 2015). Leaving the EU may also means losing access to future economic reforms and trade liberalization amongst EU members which will further result in loss of 2 % GDP per annum