We said “Hello Britain”, now you say Goodbye
“Leave” or “Remain”? That was the question the UK citizens had to answer on Thursday the 23rd of June. The morning after it was clear, 51, 9% of the voters said goodbye to the European Union and the leave camp celebrated victory. Friday the 24th of June will be remembered as the day that the integration project of Europe ended and the day at which the world looked a bit different. The pound sterling plummeted, financial markets saw turmoil, Britain’s prime minister resigned and the financial services sector was shocked. Nobody, not even the leave camp itself, expected a “leave” victory. But now 5 days later it seems that out is out. The European Union will have to start building a different Europe and the UK needs to start building their new country, maybe even in a different construction as is was known before. Unwillingly the vote divided the United Kingdom but it also pointed out the willingness to separate in other countries of the European Union. What type of Europe that is awaiting is very unknown and will result from future negotiations in which both parties will be acting in their own interest: 27 countries of the EU against the United Kingdom post- Brexit.
A (dis) United Kingdom
51,9% of the 72,2% of the people who decided to vote, voted in favor of an exit out of the European Union while 48,1% of those voters indicated to stay. But aside from the decision made to leave the European Union, the referendum pointed out huge differences in the United Kingdom both demographically as geographically. The 4 main territories of the UK showed a clear difference in voting preferences and made clear that the UK is less united then it hopes it to be. Due to this referendum colors of the Union Jack have faded and triggers the question whether the UK can continue as the UK after the Brexit referendum.
The geographical fragmentation in the UK became very clear after the polling stations closed. In England and Wales the vote was in parallel with the general vote where 52% of the inhabitants voted to leave the European Union. In Scotland, a significant 62% voted to stay in the European Union just as the Northern Irish from which 56% were also sure that their future lies within the European Union.
This referendum made again, after the Scottish referendum not so long ago, clear that England and their co-territories are less united than the central government in London hopes. Furthermore it will heathen the question again for an independent Scotland or an annexation of Northern Ireland with Ireland. This is already communicated by their respective governments after results from the referendum came through. The outcome of the referendum is a very narrow one which will most certainly lead into political turmoil in the short term in the United Kingdom.
Lastly urbanization seemed to have a big effect on the voting preferences. While the countryside of the UK favored the leave camp, big cities across the kingdom clearly pointed out that they saw the UK as a part of the European Union. Big urban areas as Edinburgh 75 %, London 60% or Liverpool 61% were clearly in favor of a “remain” vote while only minor gains were seen in those cities were the leave camp was able to win. Hence, the major economic engines of the country voted in favor of the ”remain” camp.
The voting results also pointed out the demographic fragmentation in the United Kingdom. The outcome clarified the following: The future generation will have to live with a decision which was mainly favored by the old generation who will probably not have to deal anymore with the long term negative outcomes of the new situation.
Generation X, Y and Z favored a Britain as part of the European Union. 72% of the future generation clearly pointed out that they see the UK in the big picture of the European Union. Meanwhile the older, 65+, generation was strongly in favor of an exit of the United Kingdom. The key is that the vote of the older generation has won, which may imply difficulties further in the future when that younger generation will create a stronger voice both politically as economically.
The outcomes of the Brexit vote
Future short and long term volatility?
At the end of 23rd of June, the outcomes about the referendum were very visible. The pound sterling had plummeted to 1, 34$/£, the lowest in 3 decades time and probably reaching even deeper lows by the end of the present week. At the same time, the financial markets experienced a red day when major stock indexes all over the world reacted very negative on the referendum’s results. The uncertainty about the British situation can last a long time and can have a negative influence on the financial markets for months.
Financial markets saw a run from investors towards safer heavens like the American dollar, gold or German sovereign bonds which prices all were affected in the hours following the results. Gold is by investors mostly seen as a safe investment in times of economic and political turmoil. The price is predicted to rise even further in the coming weeks.
Other commodities on the contrary did not see a rise in price and went down together with the pound Sterling. Even at the beginning of this week, days after the referendum, the markets did not seem to have regained faith and are expecting a slowdown in global economy resulting in plummeting stock prices and further decline of both the Euro and Pound exchange rates towards the dollar. Present predictions foresee an exchange rate of 1,20 dollars per pound sterling and a parity with the Euro.
The political and economic situation of the UK will result in long term uncertainty about the position in the world economy. This will not only affect the British but also the European and worldwide economy. The most probable scenario is the UK economy going into a recession because of the increased uncertainty businesses are now facing, while the EU will deal with a stagnation influencing a slow-down of the world-wide economy. This situation will be combined with political instability in both the UK and Europe and an unsure future of global markets which will affect plenty of industries, the financial services industry in the first place.
Because of the outcome of the referendum, the UK and EU will have to deal with uncertainty which will affect the economic performance and credibility of both. It happened the day itself already with the resignation of the British prime minister, David Cameron, who decided to not to lead his country through the negotiations with the EU as he thinks he is not the right man at the right spot. It seems more in place that the leader of the “leave” camp, Boris Johnson, would become the new prime minister of the UK. Although this is, as a lot of other political manners in the UK at the moment, far from certain since Johnson is not fully backed by his conservative party.
Apart from the prime minister’s position, the question rises whether the lower house as it is now in place can stay after the referendum. Many of the conservatives in the parliament were not backing the leave camp which could trigger new elections since the parliament is not representing the vote of the public.
Furthermore, as numbers above already pointed out, the vote did not only divide the “remain” and “leave” voters of the country but also the Scottish, Welshmen, Northern-Irish and English. Political parties favoring an independence of Scotland or Northern Ireland will now ask even louder for a new referendum about the independence of both territories since they want to remain in the European Union.
Lastly, the European leaders asked immediately from the UK to create certainty towards the European citizens and take fast steps leading to the British exit. In order to leave the EU, the leaving member state needs to activate article nr. 50 of the Lisbon Treaty which applies to member states who want to leave the European Union. The EU is not able to activate this article itself as it needs to be done by the leaving member state. Since the UK declared that it prefers to first settle the internal political situation, prime- minister Cameron indicated that it would last until October for that event to occur. European leaders stressed that this situation will create political and economic uncertainty which will affect the global economic atmosphere.
In general there are a lot of factors influencing political instability that need to be solved as soon as possible in order to give clarity to citizens of both the UK as the EU. As mentioned, uncertainty needs to be avoided as it will impact other nations to reconsider non-EU citizenship. Eurosceptic parties in France, the Netherlands or Italy already requested a referendum in their respective countries immediately after the results came through. Fast political stability will give political leaders at both sides the opportunity again to focus on other important matters within their respective countries and start to negotiate deals leading to a future relationship between the European Union and the UK.
Economic implications of the Brexit
The results of the Brexit will be clearly reflected to the economic sector as it will heavily impact certain sectors operating in the single market. In the short term, the British products will become more attractive on the international markets due to the low exchange rate of the pound Sterling. But at the same time it will become more expensive for the UK to import goods from the European Union. As the UK is heavily dependent on imports from the EU market, this can impose problems. This situation is mainly what is forecasted in the short term as it is difficult to predict the long term situation. This results from the fact that the long term situation will be very dependent on the trade deals that will be negotiated between the European Union and the United Kingdom. As the United Kingdom will have to look at their inner economy to produce certain goods, the possibility exists that the UK will turn towards protectionist economic measures.
A certainty on economic part is that a lot of major companies in the UK will consider other countries for their corporate headquarters as the UK will have no or limited access to the European market. Major Asian as American companies like Toyota or Hyundai are profiting from the European market. The fact that the UK will not give them the desired access anymore might result in job cuts and relocation of different services over the long term.
Only hours after the “leave” camp announced a victory, a petition was started with the request to organize a second referendum. Whether it was due to immediate negative reaction from the financial markets, the announcement of Nigel Farage saying that “he could not guarantee that 350 Million pounds weekly would float back to national healthcare system” or because of the lack of information prior to the referendum, is not certain. But 3 million citizens of the UK already signed the petition. Because of the huge amount of signatures the House of Commons will have to discuss it and decide whether it will give further reaction to the request.
A new global financial center?
As mentioned in previous articles (Brexit or Bremain: A major difference for the powerhorse called European Union?), a Brexit can have an effect on the financial services industry in Europe. The consequences of the Brexit decisions were already coming through on the 24th of June when Dublin and Paris expressed that they are open to receive specific financial services that are heavily relying on the passport rights which allow presence in the European single market. At the same time, large American banks JP Morgan Chase and Morgan Stanley announced to cut 1000 to 4000 jobs in the UK reallocating them to mainly Frankfurt. Although specific plans are not yet in place because the situation needs to settle over time, major banks are already preparing themselves and looking out to other financial centers.
The Brexit definitely means the end of the city of London as we know it today because of the fact that it will never provide the same attraction to financial services providers as it did under the European Union. The industry, heavily relying on the passport rights provided by the EU, will no longer be functioning anymore as before even not if the UK can negotiate a good deal with the EU, because a future deal will never be based on better terms as the present EU membership situation.
As long as the UK stays part of the single market, the city can remain a global financial center but the deal negotiated for passport rights will decide on the long term sustainability. Otherwise the job market in the UK, the global outlook of London but also both the UK as European customers will feel the consequences. Some specific services will stay in the EU articles (Brexit or Bremain: A major difference for the powerhorse called European Union?) as they will be possibly provided in other countries that developed the niche expertise. But if services can be relocated at the same price to a more global center as it is possible to execute the same services from there, big financial institutions will not hesitate to relocate globally.
Since the 24th of June 2016, the world has woken up in another place as it was before. The UK’s citizens decision on leaving the European Union can be the beginning of the end for the European project started more than 60 years ago. But at the same time it could be a trigger for the present union to enhance communication, stronger clarification and more decision making on a larger scale. All will depend on how the European leaders will be communicating on a political, economic and even cultural aspect about the future developments of the EU. Ultimately, if the European thought survives the crises it has been dealing with by involving its citizens, it may lead to more integration and a stronger political and economic European Union with a stronger feeling of “being a European”. For the UK, the future generation will have to live with a decision mainly backed by the older generation. Whether this decision is the right decision will all depend on the economic reaction of the UK and the political stability within the country as well as the future negotiations with the European Union.
At the present situation it is questionable whether the UK will keep its preferred seat within the UN Security council or other important institutions as their position will be questioned by other countries (such as for example India who are due to their presence through inhabitants and strength of their economy requesting a permanent seat). But it is out of hands of the voters and the long term will clarify the UK’s global situation and London’s position as financial center.
Who will take the responsibility to trigger the notice under article 50 of the Lisbon Treaty, knowing all the consequences that this may have on the UK economy? From the frontier at Calais to the issuance of regulations for a free market with the EU, the list of legislations to be torn up and rewritten is growing every day since the Brexit announcement. Since the referendum result is not binding, the UK parliament is not bound to commit itself in that same direction… Should it lead to a denial of democracy for the sake of reasonability? Or will they vote again if Nigel Farage stands with his argument of a couple of months ago that a 52%-48% in favor of the “remain” camp is too close and would trigger a 2nd referendum, which is now the case but then the other way around…
For the many UK citizens who had voted for “remain”, this long-lasting uncertainty will not be their cup of tea.
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