The unexpected pro-Brexit vote is the biggest failure of polling forecasts in the history of journalism. This came as a surprise as all surveys predicted a majority vote preferring to stay in the European Union. Till the end, the betting markets gave ‘remain’ a guess of around 96 per cent and the opposite side a guess of approximately four per cent of the vote, whereas actual turnout was around 51 per cent pro-Brexit versus 49 per cent against. It wasn’t just the betting markets that were shaken by the outcome, as the result couldn’t be priced in equity and trading of currencies in the market, therefore, upon the country’s exit from the EU, the pound was shaken down to the lowest it had been in over 30 years.
In an interesting analysis of the voting trend, votes for pro-Brexit were much more widespread among the older generations (above 50) than any other part of Britain’s populace, whereas younger generations (college age to around 40), preferred to stay in the EU. The debate remains on how a small number of people in a single issue referendum can change the course of the country for years to come, especially when those people may not live to see the impact of their voting decision.
The history of British inclusion in the European Union goes back to 1993 after the Single European Act and Maastricht Treaty was signed. This treaty was to facilitate the single currency of Europe as the euro. Although Britain wanted to join and gain access to EU markets it was not ready to join the euro club. Hence then Prime Minister John Major got an ‘opt out’ clause for Britain as this would mean that they would become a part of the European Union without joining the currency.
As one of the members of the European Union, Britain couldn’t control the ability of any citizen of the EU to enter and live in the country, and similarly British nationals enjoyed the freedom to live and work in any of the other EU countries. Due to a stable economy and a strong pound, Britain saw a large influx of foreign workers from Eastern and Western Europe. According to an estimate, there are currently 1.7 million Eastern and Western Europeans living in the UK. Pro-Brexit campaigners wanted to curb the foreign work force and families on benefits. Incumbent Prime Minister David Cameron tried to cement Britain’s position in the EU and addressed pro-Brexit concerns before the polls by renegotiating terms and conditions of immigrants so that immigrants would receive less benefits, however, that was not enough to sway a majority of the British population.
The biggest impact of leaving the EU would be trade and inward investments. For years, US banks saw the UK as a gateway to Europe. That status will no longer be valid. Morgan Stanley has already announced moving from London to Dublin and the relocation of a 5,000-strong workforce. Investment banks and Hedge funds are likely to move out to Dublin or Frankfort. There is an estimate of 20,000-30,000 job losses with businesses moving out of the UK. This will also result in reduction of tax revenues and a great impact on the status of London as the financial hub of Europe.
Car manufacturers will no longer be able to export tax and tariff free to Europe and may move their manufacturing plants to other European countries where they would be able to enjoy free trade. The next prime minister, Boris Johnson, likely hopes to reach a deal such as Canada’s or Switzerland’s where free trade agreements will stay valid for Britain. However, sceptics warn that it would likely take years of negotiations and, even if an agreement is reached, it would never be as flexible an arrangement as being part of the EU. Britain enjoys £200 billion of trade with Europe, and that may decline as the EU and Britain would no longer be bound by trade agreements. This means that they would be left fishing in the world market for their trade share.
According to an estimate, Britain may lose over three million jobs as much of the European work force will be relocated; a smaller skilled workforce for employers, resulting in wage rise for the ones who remain i.e. the British. This might push the soaring housing market to more a realistic position. Post-Brexit United Kingdom is likely to save £8 billion as net cost of being a part of the EU would no longer be applicable and it might no longer feel bound by the policies of the EU. As an independent nation they would have the freedom to form fiscal policies suited to their economic situation.
In the short run, the pound is being hammered along with stocks and securities as the news was unexpected and markets were not prepared for an exit. Interest rate is unlikely to change as the government may not want to create a jolt in an already uncertain market. In another scenario, the post-Brexit pound would mean more inflation as imports will become more expensive with goods and clothing to be the obvious commodities. The Bank of England (BOE) would be forced to keep it at two per cent a year and that may push them to raise interest rates. However, with a staggering economy BOE may not raise the rates much or goes opposite and cut rates in case uncertainty pushes the economy to a recession.
On the other hand, Euro sceptics believe this exit vote may encourage other countries to consider leaving the EU, as the downside of being in the EU remains the frustration of a restricted fiscal policy with more bureaucracy and pressure to maintain the Euro currency.
Regardless of the short term jolts and turmoil to the economy and the general sentiment, Britain embarks in the process of notifying the European Union under Article 50 of its decision to exit the EU, and begins mapping the post-exit strategy. Today Britain is a sovereign state with an independent financial and fiscal policy. The Brits voted for sovereignty and sentiment not politics and economy.