The 2-year Transition to Brexit

On 23 June, the people of the United Kingdom (UK) voted to leave the European Union (EU).  The UK and the EU will have two years to negotiate the terms of the separation. (The 2-year period will start when the UK officially informs the EU of its intention to leave; this may be sometime in September) During this period, the British will already feel some negative effects of Brexit (British Exit from the EU).
During the 2-year negotiating period, the UK will remain a full member of the EU, with all the privileges and responsibilities this entails.

The coming two years will not be uneventful, however.

Devaluation. In response to the Brexit vote, the British Pound fell from a rate of 1.50 to the dollar, to a low of 1.33 on 24 June. It may still go down a bit farther. Devaluation is supposed to decrease imports (as they become more expensive) and increase exports (as they become cheaper); but this effect takes 9 months to happen. Inflation is sticky upwards (i.e. prices tend to rise fast but fall very slowly if at all), so devaluation would mean that inflation will increase as a result of devaluation.

Immigration. The Brexit vote will probably have the effect of increasing, rather than decreasing immigration – at least during the 2-year period. EU nationals seeking to work and live in the UK may rush in before the UK actually leaves the EU. British pensioners would delay deciding whether to move to Spain and elsewhere in the EU until the rules for this (e.g. for health care insurance, residency permits, etc.) are clear.

Short Term Grants Only.  EU funding for research, study, small business support, urban renewal , and other projects will need to finish before the cut-off date. As a result, fewer and fewer projects will be supported as the deadline comes closer.

Freeze on Foreign Investments. While the new agreement between the UK and EU is being negotiated, foreign companies would be extremely hesitant to invest in the UK. Foreign Direct Investment will dry up.

Transfer of Operations. Businesses will start the process of transferring some of their operations to EU countries as early as during the negotiation period. For those whose EU headquarters are in London, these offices will be downsized into UK offices. For foreign companies which had set up manufacturing plants in the UK to access the EU market, they will simply set up new plants elsewhere in the EU and downsize their UK operations gradually.

Separation. Scotland will most probably hold a referendum on leaving the UK, so that it can remain in the EU. During the Brexit vote, 62% of Scots voted to Remain, and Remain won in all of its counties. The Scots are mad at England for dragging them out of the EU.
Northern Ireland, which also voted for Remain,  is considering the option of leaving the UK and joining the Republic of Ireland. This will be more difficult for them than for Scotland because the Ulster Unionists are vehemently against leaving the UK. However, if Northern Ireland is allowed to hold a referendum on whether it wants to leave the UK, a majority will vote to do so.
If Scotland (and maybe Northern Ireland) leave the UK, this will have negative economic and political effects on the rest of the UK.

Economic Uncertainty. Nobody knows what kind of deal the UK will finally forge with the EU, or what kinds of political changes will take place. This means that the British economy will be saddled by uncertainty for the next two years at least. This is bad  for the economy. Credit rating agencies have lowered the UK’s rating; making it more expensive for the UK government to borrow money.

And finally, there is Regrexit – Regret at the British Exit from the EU. The online petition calling for a second referendum will not get more than a debate in Parliament; it will not delay or overturn the referendum results.
The growing movement against Brexit will  influence the negotiations between the UK and the EU, by pushing to keep the UK inside the Single Market (including immigration of EU nationals). There could be quite heated public debate on this during the negotiations.

All the above are a list of bad things that will happen before the UK leaves the EU. When the UK finally leaves the EU,  things will get even worse.

Why the UK will vote to Leave the EU

On 23 June, the people of the United Kingdom (UK) will vote on whether their country stays in , or leaves, the European Union (EU). While most polls show that the votes for ‘Leave’ and ‘Stay’ are roughly tied; I think that the ‘Leave’ camp will get the majority of the votes.

I am not saying this because I agree with the ‘Leave’ campaign. In fact, I believe that Brexit will be bad for both the United Kingdom and the European Union. I couldn’t do anything about it, since I can’t vote in the referendum.

Let us look at some of the dynamics that will affect the Brexit (‘Bristish Exit from the EU’) vote.

Old versus Young
The overwhelming majority of the UK’s older citizens are inclined to vote to leave the EU. These people perceive the EU as gradually stripping their country of its sovereignty. At the same time, they do not feel or experience the advantages of increased travel possibilities, friendships throughout Europe, EU subsidies and grants, etc that EU membership brings.

On the other hand, the young generation has grown up with the UK in the EU. They travel, have many personal links in Europe, benefit from study grants or other EU programs, etc. They know that the EU could provide them with future jobs and opportunities.

The votes of these two groups should balance out. However, the older people are much more likely to vote, and are quite motivated to do so. The youth, in contrast, are less likely to vote. This is made worse by the referendum day falling in a time of college exams and the beginning of the summer vacation.

Feeling the Effects
Whichever way the UK votes, most of the effects will not be felt for some time. At least two years, in fact. This is because the UK will have at least two years to negotiate its exit from the European Union. Things will remain generally the same in this period.
One possible immediate effect would be the weakening of the British Pound if ‘Leave’ wins. This may lead to an increase in exports; as well as to more expensive imports.

When the UK finally leaves the EU (perhaps in 2019), the government will most likely restrict immigration. Fewer EU nationals will be allowed to move in and work in the UK; while fewer UK nationals will move in and work in other EU countries. What will be felt by more people is the lower level of immigration. For them, this will mean less congestion when availing of government services, and maybe lead to more jobs for UK nationals.
The decreased chance to live and  work in the EU will be felt by far less people..

On the longer term, Brexit will lead to a gradual transfer of companies to countries within the EU. Foreign companies which had built manufacturing plants or service hubs in the UK in order to serve the EU market will gradually shift operations to countries inside the EU. Big British companies will need to set up their Europe headquarters elsewhere; they may also shift some of their operations to within the EU. London’s role as a global financial center will diminish.

Scotland may decide to leave the UK because of the Brexit vote. There would be less trade, and increased cost of trade. There could be many other, mostly negative, effects.

UK citizens will anticipate the more immediate positive effects of Brexit; while discounting the possibility or the extent of the negative effects.  People are more likely to choose immediate gain over (bigger) future problems.

Managing Images
A big problem of the ‘Stay’ camp is that it does not promise anything – only a continuation of the present. The ‘Leave’ camp, on the other hand, promises a return of their country’s independence, less strain on the job market and social services due to immigration, and even a vision of a more powerful and prosperous country.

Efforts by the ‘Stay’ camp to show that a Brexit will cause an economic disaster have been met with accusations that they do not have confidence in the strength and vitality of their country and people. They then shifted tack to saying that Britain will still prosper outside the EU, but that it will prosper more within it. The result is that many people have gotten the idea that Brexit will not have long-term negative economic consequences.

The issue of sovereignty is a favorite of the ‘Leave’ campaign. They argue that the country has surrendered a big part of its sovereignty to the EU.  This is because the British parliament has had to pass a lot of laws to align with decisions made by the EU. The fact that the UK participates in making those decisions is discounted by saying that it has only one voice out of 28.  They create an image of the UK fighting against 27 others and losing; where in fact it is quite often in agreement with the majority.Also, when decisions are made in the European Parliament or even the European Council, the UK has a very big voice..
The ‘Leave’ campaign’s claim that Brexit will reduce immigration is brilliant. Most people have some (mostly minor) irritation due to recent immigrants (both from the EU, and elsewhere) – be it  longer queues for health services, scarcity of cheap housing, miscommunication with foreigners, etc.  And since cutting immigration is one promise a Brexit vote would most likely deliver; a lot of people will be more inclined to choose ‘Leave’.

The only way the ‘Stay’ campaign can win is if it manages to convince people that Brexit will lead to big economic problems and uncertainty. If enough uncertainty is generated, people will have a natural tendency to choose the status quo. Scare tactics worked to keep Scotland in the UK; it might be the only way to keep the UK in the EU.