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Consequences of Brexit: UK’s Future Fraught With Uncertainty

So, that happened. What are the consequences of Britain voting to leave the 28-nation bloc? 

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The referendum on the question of Brexit – or Britain’s exit from the European Union – has come to a close, with the UK voting to leave the EU. With this historic move, one domino has set the rest in motion, with inevitable consequences looming ahead for the UK, the EU, and the rest of the world.

The next steps: David Cameron, who recently announced he will be resigning in October 2016 as the Prime Minister of the UK, will spend his next three months in office to make the transition process easier. As early as 28 June, leaders will meet at an EU summit. There, the UK is likely to begin the process of disengagement by invoking Article 50 of the Lisbon Treaty, beginning the legal process for leaving the 28-nation bloc. After that, they have two years to renegotiate agreements, and access scopes and norms in every industry possible: from beer, to cars, reciprocal visas, drugs and agriculture.

If they go the Canada way and try to create a fresh free trade agreement with the EU (something pro-Leave leader Boris Johnson may call for), it can take up to seven years or more to negotiate.

The UK has to choose between:

– The Norway Model: Norway is a part of the European Economic Area and has access to the EU’s market and free movement of people. It does not have a say in the evolution of the market, and still has to contribute to the EU’s budget.

– WTO Trade Norms: It can go with the norms set by the WTO to trade with the EU, just like any other country would, and set about creating bilateral ties with EU countries separately.

– Fresh Trade Agreement: Re-negotiating a fresh set of regulations for trade and movement of people is the most thorough, and also the most time-consuming of the options. The EU is likely to be rightfully miffed, and be harsh with the UK to set a precedent for any other countries looking to leave.

But what are the main concerns of exponential change and downfall of the UK government – irrespective of the model they choose?

Economy

Snapshot

Three major talking points that need to be discussed in the days following the vote for Brexit:

  • The nature of the new agreement, which regulates $575 billion dollars’ worth of annual trade between the UK and the EU.
  • What happens to banks domiciled in the UK? Will they be allowed to continue operations in the rest of the EU?
  • The scope of access the UK will have to EU’s $13.6 trillion market.

Britain will no longer be subject to EU budget rules, which limit a government’s budget deficit to 3 percent of gross domestic product (GDP) and public debt to 60 percent of GDP. It could therefore run whatever budget shortfall it wants without admonishment from the European Commission and other EU ministers.

It would also be free from the Commission’s monitoring and advice on future actions.

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Finance

Financial services firms based in Britain, from banks to clearing houses and funds, could lose their money-spinning EU “passports”, which allow them to sell services across the 28-nation bloc with low costs and a single set of rules.

The passporting system has contributed to making London one of the world’s most important financial centres. Some American, Japanese and other non-European banks that have European headquarters in London have said they would consider moving parts of their business inside the European Union, in the event of Brexit.

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Trade

The rest of the EU has a trade surplus in goods of about 100 billion euros ($110 billion) with Britain, while Britain exports some 20 billion euros in services than it imports, principally due to financial services.

Brexit campaigners say it would be in the EU’s interest to agree a free trade deal with Britain, even if it leaves the bloc. However, there tends to be more of a focus on goods than services in free trade deals.

Switzerland, where financial services are a larger share of GDP than in Britain, has no general access to EU financial service markets and runs a financial services trade deficit with the bloc.
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Competition

British companies acquiring EU peers would still need approval from the UK competition watchdog and the European Commission, resulting in more legal costs and the risk that each delivers a different ruling.

Britain will have a free hand to aid ailing companies or industries without fear of EU action, but it will also not be able to oppose subsidies granted by EU governments to their own national champions.

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Energy

Leaving the EU could make UK energy infrastructure investment costlier and delay new projects at a time when the country needs to plug a looming electricity supply gap.

The uncertainty after Brexit could make energy investors demand higher returns to compensate for the risk of less favourable conditions. Oil and gas majors BP and Shell are among energy companies who warned about the potential downside.

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Climate

Britain is the second-largest emitter of greenhouse gases in Europe and its utilities are among the largest buyers of carbon permits in the EU Emission Trading System (ETS). Although most analysts believe Britain will remain in the cap-and-trade scheme, the vote is viewed as bearish for the market as Britain would no longer be able to drive tough reforms to drive up the price.

Brexit would also disrupt the bloc’s plans to share out the burden of its Paris climate change pledge. The environmentally-minded also worry that EU climate targets would be less ambitious without British leadership to balance against more reluctant member states, such as coal-dependent Poland.

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Aviation

A Brexit might call into question EU agreements on open airspace that have granted the region’s airlines unlimited access to the skies of fellow member states, benefiting both UK and EU airlines. It would also affect transatlantic routes because of the EU-US Open Skies agreement, which gives British airlines unlimited flying rights to the US.

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Foreign Policy

Along with France, Britain is the leading foreign policy power in the European Union, boasting a large military and close ties with the United States. After a Brexit, Washington has made clear it will be less interested in London as an ally because of a perceived loss of influence.

Britain would no longer be bound by joint EU positions, for instance on economic sanctions against Russia. Britain would remain a member of NATO.

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Justice and Home Affairs

Britain has multiple exemptions from justice and home affairs policies, notably not being part of bloc’s Schengen zone of free travel. It is not clear what restrictions Britain might place on foreign arrivals. The EU has vowed to respond in kind.

Britain currently recognises other EU members’ arrest warrants, exchanges police information, including personal data, and is a member of the bloc’s police agency, Europol. Its future involvement, including access to EU databases, could diminish, meaning less cooperation on policing and fighting crime.

(With inputs from Reuters)

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Topics:  Economy   free trade   Brexit Referendum 

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