Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

The 2-year Transition to Brexit

Posted by butalidnl on 29 June 2016

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.

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