Brexit has rattled the economic, political and social landscape of not only the European Union but also the whole world. Its effects are expected to vibrate throughout the world, including North America. The reasons and consequences of Brexit can be classified as political, social and economic. While discussing the political and social aspects, this article will mainly explore the economic reasons and consequences of Brexit.
The European Union led to harmonized political decisions across the EU countries and, possibly, less independence for individual member countries to enact political decisions contrary to EU policies. This may have fuelled the rise of pro-Brexit voices.
At the social level, free movement of people within the EU led to many EU citizens to move to the U.K. Combined with immigration from non-EU countries, this may have led to U.K. citizens consider immigration less favourably, leading to rise of pro-Brexit voices.
The economic reason behind Brexit is unregulated globalization which led to increased inequality in the U.K. Like other developed countries, automation and outsourcing have led to increased unemployment among low income and middle-class workers in the U.K. Also, migration from EU countries put downward pressure on wages of low-income workers. Increased income inequality, fewer jobs for low income and middle-class workers, and downward pressure on wages of low-income workers were the economic triggers of Brexit.
Various analysis have shown that Brexit will adversely affect Britain's economy. According to the Centre for Economic Performance, LSE, Britain's economy will decrease by 1.3 per cent to 2.6 per cent without considering foreign investment, migration and reduced trade. When the long-run effects of Brexit on productivity are considered, the decline in income is forecast to be between 6.3 per cent and 9.5 per cent. PwC estimates that the decrease will be between 3.0 to 5.5 per cent in 2020. Also, Oxford Economics predicts that it will decrease by 0.1 per cent to 3.9 per cent.
As 44 per cent of Britain's exports go to the EU and only eight per cent of EU exports go to Britain, this shows the importance of EU trade to Britain's economy. All analysis of Brexit have predicted that it will be harmful for the UK economy. While the U.K. can implement trade deals with individual EU countries, it would certainly take some time to negotiate and implement these trade deals.
Brexit is forecast to affect the EU economy and reverberate across the whole world. It is predicted that it will negatively affect both Canada and the U.S. Even though the U.K. consists of only three per cent of Canada's exports, Brexit could adversely affect U.K.'s foreign direct investment to Canada while Canadian companies may be more cautious while investing in the U.K.
The more adverse effect is the uncertainty that Brexit will add to the world economy. The uncertainty and the resultant business pessimism and low confidence could lower everything from investment and consumption, leading to decreased economic performance of countries. The Chief Economist of OECD has predicted that 0.25 per cent of Canada's GDP could be adversely affected by Brexit by 2018.
Again, the U.K. consists of 3.1 per cent of U.S. total trade. Therefore, the direct effect of Brexit on the US economy may not be that significant. However, the uncertainty in the world economy that Brexit may bring can increase the adverse effects on the world's largest economy. TD Bank predicts that Brexit could reduce Canada and U.S. growth rates by 0.5 per cent to 1.0 per cent in the second half of 2016.
It seems that the country forecast to be most adversely affected by Brexit is the U.K. itself. Brexit could lead to lower level of GDP and GDP growth, decline in standard of living and loss of jobs in the U.K. It could have a negative effect on London's position as a financial capital of the world as many financial institutions may move out of the U.K. due to Brexit, which would adversely affect the U.K. economy and employment situation. Foreign direct investment in the U.K. may decrease as many foreign companies invested in the U.K. to access the EU market. Without unlimited access to EU markets, FDI in the U.K. could be adversely affected.
Brexit has indicated the limits of globalization and the effects of unhindered globalization. Globalization and being part of the EU benefited the U.K. significantly in terms of high level of GDP and helping London to position itself as a financial center of the world. However, it also lead to increased income inequality among the British population as globalization mostly benefited high-income groups while the middle-class and low-income people did not benefit from it.
Increase in real estate prices in London made it difficult for middle-class Londoners to purchase real estate in London. The low-income group of the society and people with low education and skills were adversely affected due to increased globalization and free migration of EU citizens to the U.K. While the U.K. economy prospered and London cemented its position as a financial capital, the middle class and the low-income groups, in particular, struggled.
Brexit demonstrated the perils of unhindered globalization. It demonstrates the need for globalization to be inclusive so that it benefits all segments of the population, particularly people in the low-income group, and people with low levels of education and skills. The introduction of guaranteed minimum income, increased opportunities for skills development and incentives for companies to hire locally would improve the economic conditions of the low-income and middle-class population. Only when the fruits of globalization are enjoyed by all segments of the society, especially the low-income and middle-class, would globalization be more acceptable politically and socially by broad segments of the population.
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