By Aashay Tripathi

The British have shocked the financial, political and business establishments of the world by voting to leave the European Union (EU) in the referendum of 23 June, 2016. Briefly analyzing the votes in the referendum, we see that while England and Wales opted to leave the EU, Scotland, Northern Ireland, and the city of London were strongly in favour of Great Britain remaining a part of the EU. Looking at the vote split, 52% to 48%, it cannot be said that either side won decisively. However, the Britons have spoken, and this democratic decision will have a huge impact on Britain, the EU and the world as a whole.

Looking at the vote split, 52% to 48%, it cannot be said that either side won decisively.

The immediate effects can be seen in the drastic fall of the pound. It was at its lowest in 30 years, post the decision of the voting. Nearly £120 billion of value was lost from the Financial Time Stock Exchange (FTSE) 100 index in the space of ten minutes the next morning. The FTSE 250 showed a drastic drop as well. However, the recovery was not much when compared to the FTSE 100. Japan’s Nikkei 255 tumbled by 7.9% while Mumbai’s Sensex dropped by 3.6%.

With one of the most important nations deciding to divorce the 28 nation bloc, the looming uncertainty is prompting investors to take their money out of the UK and put them into safer assets like gold. This has pushed gold prices by about 8.1%.

The uncertainty surrounding the EU referendum led to market jitters and a slump in the value of pound. | Photo Courtesy: Flickr

The uncertainty surrounding the EU referendum led to market jitters and a slump in the value of pound. | Photo Courtesy: Flickr

In addition to the aforementioned immediate effects, some other issues might warrant our attention as well:

  • Depending on trade negotiations between the UK and the EU, firms will have to rethink their strategies. A third of the Indian investment in the UK is in the IT and telecom sectors. With Britain’s exit, the requirement for separate headquarters in Europe and Britain might crop up. However, with Britain free of strict EU regulations, one can only hope that it will be easier for India to engage in business in the world’s fifth largest economy.
  • With the reactionary fall in the pound, Indian investors stand to gain in the short run as they can acquire property in the UK at cheaper rates.
  • India is a great investment destination from the emerging markets’ perspective. With trade norms being dictated according to its own needs, the UK is likely to invest more in India.
  • Since one of the major reasons behind Brexit was to control immigration and have tighter border control, migration to Britain will take a hit. This will affect every aspect of Britain’s functioning – from academia to industry. Additionally, free movement is going to become a major issue in Europe after the UK’s exit.
  • Brexit proves that the forces of nationalism and sub-nationalism do not die out just because free trading unions and common markets are created. Economic gains do not always trump social and cultural concerns. Trade does not erase xenophobia and bigotry, which are barely concealed.
  • Britain will probably spend another year or more trying to negotiate the exit. Like the immediate effects show, the resultant uncertainty is likely to damage growth, dent the pound, and slow down investment decisions in Britain. Taking an example of The Tata Group, which owns Jaguar Land Rover (JLR) and Tata Steel (formerly Corus Steel); it is possible that they will be affected by the higher tariffs imposed by the EU against British imports.
  • The unraveling of the EU market means uncertainty, having an impact on exports from all over the world. Studies extrapolate that Brexit will reduce British imports by 25% in the next two years. The volatility of the currency, both pound and euro, will have a negative impact on the exporters by making their products more competitive in the world market. However, it has also been said that this effect would be short-lived for India’s trade with the UK and EU.
  • The most worrying issue is that this exit might prompt other nations to go ahead with shifting power back to the national governments in areas like immigration, while maintaining the trading union.
  • With 62% of Scotland voting to stay in the EU, the possibility of a second independence referendum becomes a reality.

For the moment, it looks unlikely that the EU will disintegrate with Britain’s exit — but it will certainly not be the same anymore.

The EU is changing; it will rest on Brussels, the headquarters of the European Union, to see whether the change is favourable.

Aashay has completed his Masters in Economics from the University of Warwick, U.K. He has worked on the Economics of Happiness and Subjective Well-being under the supervision of Dr. Robert Akerlof. He is a Research Analyst at Outline India and works on quantitative research.

Featured Image Credits: World for Travel

Posted by The Indian Economist