Mixed feelings about Brexit

Discuss about the Case Study for Economics of Brexit and Country Regarding.

1. There is a mixed feeling prevailing in the country regarding the Brexit. Some people are voting for Brexit, as they think exiting from the European Union will boost up the British economy as the freedom from the European Union will provide the British economy a lot of new chances outside Europe. Others are voting against Brexit, as they think this exit will limit their available options in the open market scenario, resulting in a net loss for the economy. The whole article is divided into several categories, namely, “the broad economy, jobs, trade, immigration, status in Europe, and position in the world.” Some of them have argued that Brexit will cause the economy to suffer permanent losses due to weak trade structure and minor investment from the European Union. “National Institute of Economic and Social Research (2004) suggested Brexit will bring in a permanent loss in UK’s GDP by 2.25 percent because of the reduction in Foreign Direct Investment (FDI).”  Jonathan Portes, an economist, raised an argument to that stating, the world economy has changed remarkably in last ten years[1]. The economists from Centre for Economic Performance (CEP) suggested that there would be a fall in income around 6.3 % to 9.5 % of the current GDP. According to CBI, a business group staying in the European Union will provide a benefit of 4-5% of the GDP[2].

Figure 1: Impact on level of GDP.

Source: International monetary Fund report.

The figure above shows the forecast of International Monetary Fund on UK’s economy. It is showing the difference from the base in percent for two possible scenarios.

According to the economists like Roger Bootle, without a fundamental reform, staying in the European Union is not worthy enough. In the year 2012, UK paid a net worth of £9.6bn into the European Union. The CER states that even if UK is a net contributor to the European Union, but the later’s regional and agricultural funding are something the country will miss. According to an optimist, Tim Congdon, UK is losing around 11.5% of its GDP per year due to being a part of the European Union. Although some people are saying Brexit will cost UK three million jobs from the trade industry, others are arguing stating the fact that those jobs are directly related to trade[3]. But economists like Bootle said this is hardly going to change the scenario as the chance of having a bigger world market will follow the Brexit. Even the European Union will try to strike a deal after Brexit, with Britain, as UK has an enormous role in the European Union. The immigration scenario in UK after Brexit is still in a hazy situation. Without a proper replacement of the current rules, the future is unsure. According to some people, Brexit will hurt UK’s influence over Europe. But the people voting for Brexit are hoping that UK will regain its influence over the European Union with time[4].

2. The Brexit realists argued that Brexit will lead to an increase in tariff barriers. The contrast in the patterns of arrangement between the European Union and the United Kingdom will lead to an increasing cost of trade. The pessimists claimed that £150 billion will be the cost of Brexit, which is almost 9.5 percent of the UK’s GDP. The after Brexit scenario can be compared to the 2008-09 financial crises in UK.

Impact on GDP

Britain can have unrestricted practical terms of access to the enclosed market of the European Union, like the countries Switzerland and Norway do. This way UK will lose 2.2 percent per annum of their economic output, which is equal to £35 billion. UK’s trade with the rest of the Europe has risen from 30 percent to 50 percent in a span of forty years approximately. The government of UK is yet to create a sound plan regarding the European Union and the countries within it. Britain’s access to the European market, movement of factors of production and trade barriers are still unattended by Brexit supporters. These may result in a short-run depreciation in the pound’s value against most major economies. Countries, which regarded UK as the gateway to the European market will stop Investing in UK after Brexit.[5] Another cost of Brexit is a fall in the employment rate. According to the pessimists, traders who are involved in trade with other European Union members will lose their jobs because of the deterioration of terms of trade with the European Union. Reduction in foreign domestic investment (FDI) is also another cost to the UK economy according to them, leading to a substantial loss in the country’s GDP. There will be consequences with immigration too. Britain might lose all the benefits it is getting from the European Union currently, due to Brexit.[6]

Figure 2: Exports and Imports of UK in EU era.

Source: The National Archives, UK.

The Figure 1 above shows the total export and import of services to Europe under EU era. According to this graph, both export and import increased over time.

After the Second World War, as an aftermath, The European Union was formed. There was a common belief that countries which are engaged in a trade become economically interdependent. As a result of this, these countries try to avoid any conflicts that might lead to war. 28 nations united under the European Union with the goals of a political and an economic union. These countries have independence, yet they agree to trade under the agreements, which were made among the countries earlier. The countries in the European Union were “Ireland, Italy, Latvia, Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Republic of Estonia, Finland, France, Hungary, Lithuania, Luxembourg, Malta, the Netherlands, Germany, Greece, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.”[7] Recently the United Kingdom left the European Union. The European Union had created a large single market, which permits the member nations to move goods and services, capital, and people freely. There is no existence of barriers in the form of borders and political restrictions. All these make the idea of the “United States of Europe” an intriguing one.

3. The European Union has its migrants in the United Kingdom, as well as, there is a significant amount of British people working in the member nations of the European Union. The Brexit situation needs both the authorities to cooperate and come up with new solutions, which will make the migration process easier for the people. In reality, Britain has created its list of the member nations of the European Union, whose citizens will need a visa to enter the UK. This will make coming into Britain hard for the people of the emerging countries like Bulgaria and Romania (Butler, Dagnis and Snaith 2016). Citizens of these countries will face a long list of forms and regulations to get in to the United Kingdom. But people from wealthy nations like France and Germany, which has a better tie with the British government will get the visa for entering into Britain much more swiftly. This theory promotes discrimination, against which the European Union stands. According to Steven Peers, a “professor of EU law at the University of Essex”, the European Union has a joint visa list. Britain presenting a list of its own will hamper the fluency of the process, disrupting the United Kingdom and the European Union’s clear immigration pattern.

Impact on jobs

Figure 3: Percentage of change in growth.

Source: OECD quarterly national count.

The above figure shows that the fluctuations in percentage change in real GDP growth for UK was much more high than the member countries of the European Union.

The whole scenario can be explained through “game theory: prisoner’s dilemma.” The agents here are UK and EU (the European Union) have two options namely agree and disagree. If both of them choose ‘agree’ they will be better of simultaneously. If both of them choose ‘disagree’ they will be worse off. Both of them have incentives to deviate from their choice if the other does not switch. All EU has to do is to check whether the threat given by the UK is credible. As UK was one of the leading countries in Europe, UK had an upper hand in bargaining. Trading with the member nations of the European Union will be complicated due to this immigration process, for the United Kingdom. The trading giants will lose interest in investing their resources in Britain’s market because of this complexity. Moreover, this might increase the shipping charges and cost of production for the British companies, as the free flow of goods and services, people, and resources will be hampered. If the European Union retaliates with some other strict policies for British people, the later will be worse off.[8] This way not cooperating with each other will cut off the payoffs of both EU and UK. This makes the United Kingdom take an interest in keeping a good relationship with the European Union. This leaves the United Kingdom only the choice of being a non-member of the European Union and have good terms with the European Union as it will bring the most of the pay offs in this game.[9]

4. The Brexit decision will give some shocks to the world economy in short-run. Australia will also face the shocks with other major economies. But the Asia-Pacific region has its economic attributes which will make the Australian economy shock proof. Slow growth along with a massive debt piling up in China, most of the developed nations are struggling to increase the growth rate with the low rate of interest. This scenario makes the global economy fragile. The trade situation of UK and the European Union (EU) is currently halted.[10] This puts the export of Australia in a standby mode. In the long run, if the terms of trade between Britain and the European Union deteriorate, Australia will not see the Europe as a whole compact market, as it used to do. The European market will be divided into two. One is the UK economy another is the 27 nations’ joint economy, EU. Both will try to keep a strong bond over the trading relationship with rest of the world. This will, in turn, help the Australian export market. The volume of export will increase. On the other hand, the import of Australia from Europe will cost less as both EU and UK will try hard to capture most of the market share by reducing its prices or lowering its interest rate.

This can be depicted in an aggregate demand and supply model. The model defined as:

Y=C+I+G+(X-M); Y – aggregate income, C – private consumption, I – private investment, G – government expenditure, X – exports, and M – import. Due to Brexit, the Australian export will face a downfall in the short run. The value of the pound will depreciate in the mean time. There will be unrest in the European market. When the unrest will start fading, Australian importers will use the situation in their favor. This will decrease the value of net export i.e. (X-M). The GDP of Australia will go down as a result.

Figure 4. Demand and supply of the Australian economy.

Source: As created by the author.

The above figure shows the previous equilibrium E1 of the demand faced by the Australian economy and its supply. In the short run, the export will decrease as the demand faced by the economy due to the demand in the export market falls. This shifts the demand curve to the left resulting in less output.[11]

Slowly the effects of Brexit will lose their importance with time. This will restore the balance in the global market. The money market will come to its original place. Equilibrium in one market will lead the other markets to equilibrium. According to several economists, although a short run shock in the Australian economy will be felt but it will fade away quickly.[12]

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