The UK Decision to Leave the EU
The UK decision to exit as a member of the EU after the majority of its citizen voted in support of the move on 23rd June 2016 raised a lot of questions from political scientists and economists due to the uncertainties that exist on the aftermath of the vote.
Before the UK voted in favor of leaving the EU
Before the UK voted in favor of leaving the EU, its economy had consistently grown in the 2% to 3% range (Jackson et al, 2017). The economy of the country was slowly recovering the performance levels it had gained before the 2008 global economic crises which had paralyzed the activities of most of the developed countries. Thus, despite the fact that the UK is a major player in the EU economy and the performance of the union is dependent on her presence, the decision to leave will come with a lot of negative effects to the overall economy of the country, the union, and other developed states such as the US (Jackson et al, 2017). Hence, the UK should remain as a member state of the European Union rather than leaving.
Basic Structure of the EU
The European Union abbreviated as the EU is a union which is made up of 28 member states that exhibit similar political and economic connection. The union operates as a single market through a standardized system of regulations that control the entire member countries (Europa.eu, 2018). The EU is administered by seven main institutions which include the European Parliament, the council, the court of auditors, the European Council, the European Commission, the European central bank, and the court of justice of the EU. One of the purposes of the EU is to enact legislation in justice and home affairs while at the same time maintain policies that define the nature of trade and regional development in all member states (Europa.eu, 2018). The fundamental purpose of the EU is to advocate and promote greater economic, political, and social harmony among the countries in the Western European region. The EU holds that states whose economies are interdependent are more likely to coexist peacefully and prevent any potential conflict (Europa.eu, 2018).
Economic Consequences of Brexit on the UK Economy
Over the years, the EU single market has played a critical role in facilitating economic growth and development of the complex web of financial relationship between it and the UK (Begg & Fabiann, 2016). The networks have promoted the UK's growth of manufacturing and service activities which largely rely on cross-border supply connections. Hence, the decision by the UK to leave the union brought about immediate and long-term effects on it and the EU economies. For instance, one of the short-term impacts of Brexit on the UK following the referendum is the negative reaction from the financial market as major stock indexes plunged in values on Wall Street, Asia, and Europe.
Although most of the stock markets recoupled the initial impact
Although most of the stock markets recoupled the initial impact, there is still uncertainty about the long-term success for the UK economy as the country continues to feed through economic linkages to emerging economies such as Africa (Begg & Fabiann, 2016). Due to the uncertainty about the kind of long-term economic relationship between the EU, the UK and the rest of the world, the IMF analysis projects that the UK economy will be adversely affected as its GDP will reduce by 1.4% under the most optimistic assumptions by 2019 (Ebell & James, 2016). The analysis of the IMF has been supported by Bank of England (BOE) who argue that Brexit will affect the UK economy since the decision will contribute to a materially lower path for growth and development which in return will lead to higher path for inflation as a result of the combination of influences on exchange rate, supply, and demand (Ebell & James, 2016). In addition, BOE explains that the vote to leave the EU will affect the international financial markets as investors will shift from the pound to other currencies which in return will contribute to the depreciation of the pound and increase the volatility in its foreign exchange value relative to other major currencies such as the US dollar.
In macroeconomic terms
In macroeconomic terms, the decision of the UK to leave the EU will contribute to a high level of unemployment in the UK economy (Begg & Fabiann, 2016). Members states of the EU demand around 12% of the total demand for the UK services and other products which translates into an estimated 3.2 million jobs (Begg & Fabiann, 2016). The economy of the UK has for a long time relied on the service sector as the central means of job creation for its citizens and as a source of export demand. For instance, according to an ONS data on final demand, the UK's total exports increased from 28% to 41% between 1997 and 2013, with drastic growth in service activities such as business services. However, if the UK decides to leave the EU, it will lose an important source of job creation as it seems that the outlook for UK access to the export market in services such as financial services will be essential for future job creation (Begg & Fabiann, 2016).
Economic Consequences of Brexit on the US Economy
The decision by the UK to leave the EU will bring forth a lot of implications to the financial conditions and the US economy. Although trade between the UK and the US constitute only 0.5% of the total US economic activity, the connections extend beyond direct trade between these two established states. The impact of Brexit will come through a number of chain reactions which may hurt the economy of the US (Jackson et al, 2017). The EU is among the largest trading blocs in the world and forms a major trade partner with the US. The UK constitutes about 17% of the EU economy and thus leaving the European Union could trigger a chain reaction which may lead to the destabilization of the union. Hence, if this happens, the US economy will be adversely affected as it could lead to global uncertainty and most of the trade deals that the US has with the EU members will have to be restructured (Jackson et al, 2017). This will likely affect the trade relationship between the UK and the US.
Both Britain and the US enjoy the same level of investment
Both Britain and the US enjoy the same level of investment in each other's regions. In this regard, Brexit could lead to a loss of more than two million jobs in both countries. Although the US will have to restructure most of the deals made between her and the EU member states in case the union breaks, the UK will be in a dire situation since Brexit is a vote against economic integration and it may take her off the main stage of the financial world (Jackson et al, 2017).
Although a strong dollar may sound good
Although a strong dollar may sound good, particularly to the US travelers, it may negatively affect international organizations located in the US as most of their products are shipped to other countries (Busch & Jürgen, 2016). As a result of the Brexit, the US dollar will relatively grow stronger which in return will contribute to lower US exports since most of the products will be more expensive and less attractive to the foreign buyers. Although a stronger US dollar could contribute to cheaper importations of goods and services for the consumers, that strength is not favorable to U.S stock markets due to the fact that the American shares will become more expensive for foreign investors (Busch & Jürgen, 2016).
Economic Consequences of Brexit on the EU Economy
When the UK decides to leave the EU, the labor mobility, barriers to trade and capital flow will be disrupted and the job output will not only affect the UK, but also the remaining 27 member states (Felbermayr & Clemens, 2017). The economic relationship between the UK and the EU has been beneficial to both sides with the UK being the largest trading partner accounting for about 13% of its trade services (Felbermayr & Clemens, 2017). Furthermore, the UK has a substantial and established supply chain trade connection with the EU member states and involves almost all the countries. In addition to bilateral trade links, the UK's financial linkages in the market are very strong, with gross bilateral capital amounting to 52% of the EU GDP (Felbermayr & Clemens, 2017). In this regard, the withdrawal of the UK from the EU will adversely affect both the UK and the EU in equal measures.
Britain's decision to leave the EU will result in weakening of the forces within the EU-27
Britain's decision to leave the EU will result in weakening of the forces within the EU-27 which favor greater integration. The single market and customs union offer the strongest possible economic integration of the region (Felbermayr & Clemens, 2017). Thus, by the UK deciding to leave the union, it implies that both the UK and the EU-27 will incur economic losses and any further deviation from this integration will lead to higher macroeconomic costs (Busch & Jürgen, 2016). In this regard, reversing the integration will adversely affect jobs and the long-term output in the EU-27.
The existing uncertainties on the potential impact of Brexit will likely contribute to higher trade costs
The existing uncertainties on the potential impact of Brexit will likely contribute to higher trade costs such as tariffs upsurge on the price of UK exports to EU-27 members and vice versa (Felbermayr & Clemens, 2017). Hence, such a scenario will lead to trade destruction and diversion in such a way that either the trade between the EU-27 and third states increases or the trade between the UK and the third countries upsurges. Although the impacts of trade diversions will possibly be small as a result of Brexit due to the fact that value added chains are interconnected, the decision to leave the union will drastically reduce trade of goods and services between the UK and the EU-27 states (Felbermayr & Clemens, 2017).
Conclusion
Britain's decision to withdraw its membership from the European Union will have many implications for both parties than anticipated. The move has been a watershed moment for the European integration efforts which have been a source of job creation for the UK, the US, and the EU member states. Although both the UK and the EU-27 member countries will be adversely affected economically, the impact on real GDP per capita indicates that Brexit will be more devastating to Britain than on the average EU-27 state. Thus, despite the fact that the UK is a major player in the EU economy and the performance of the union is dependent on her presence, the decision to leave will come with a lot of negative effects to the overall economy of the country, the union, and other developed states such as the US. Hence, the UK should remain as a member state of the European Union rather than leaving.
References
Begg, I., " Mushövel, F. (2016). The economic impact of brexit: jobs, growth and the public finances.
Busch, B., " Matthes, J. (2016). Brexit-the economic impact: A meta-analysis (No. 10/2016). IW-Report.
Ebell, M., " Warren, J. (2016). The long-term economic impact of leaving the EU. National Institute Economic Review, 236(1), 121-138.
Europa.eu. (22 May 2018). "Institutions and bodies - European Union - European Commission." europa.eu/european-union/about-eu/institutions-bodiesen.
Felbermayr, G., " Fuest, C. (2017). Economic Effects of Brexit on the European Economy (No. 4). ifo Institute-Leibniz Institute for Economic Research at the University of Munich.
Jackson, James K., Shayerah Ilias Akhtar, " Derek E (2017). Mix. Economic Implications of a United Kingdom Exit from the European Union. Congressional Research Service.
