Britain’s vote to quit the European Union (EU) after four decades as its member has been hailed as a historic decision in a few quarters. However, the decision has multiple implications on the world economy as well. The impact on Britain’s economy, the EU, and on the rest of the world is manifold and is cumbersome to determine. In accordance to this, the term “Brexit” has emerged, which is an amalgam of two words “Britain” and “Exit”.
What is European Union?
The European Union, or “EU” as it is commonly referred, is a group of 28 member nations (including Britain) in Europe. The area covered under the EU is characterized as Common Market or Single Market in economic terms. The common market is a multilateral integration of several nations to remove the trade barriers among the members such as tariffs and duties. Within the EU area, the goods and services as well as people and money are allowed to move freely without any restriction, exactly as within a single nation.
Impact of BREXIT on the World Economy
The referendum vote in Britain to stay or leave the EU turned out to be 52% in favor of leaving against 48% in favor of staying. Even after the decision was made, it is likely to take at least two years for Britain to actually withdraw its membership from the EU. It will only take place once the government of Britain invokes Article 50 of the Lisbon Treaty. This implies a huge period of uncertainty for the economies of the UK, the EU, and rest of the world.
Once the UK leaves the EU, the impact on the UK economy would depend massively on what kind of trade agreement the economy will be able to establish with the EU. Moreover, with regulatory divergence between the UK and the EU region evident over time, this will lead to lower trade and investment in the UK. Furthermore, this means early signs of recession in the UK economy, and slower growth for other economies in the European region, as the British economy contributes massively to the growth of overall European region.
Meanwhile, the IMF (International Monetary Fund) has already predicted that following Brexit the worldwide growth for 2016 and 2017 will be at least 0.1% lower during each year. Also, this period of uncertainty implies increasing financial volatility across the world economies at least in the short run.
In terms of foreign exchange, this development is expected to put downward pressure on currencies in the European region, which in turn will lead to strengthening the US dollar to result in lower trade. Moreover, demand for Chinese exports is also expected be lower from a weaker European economy which will put extra pressure on the already-troubled Chinese economy, and in turn on the overall world economy, given China’s status as the second-largest economy in the world.
Furthermore, Brexit is also expected to negatively impact the Indian economy, because in the G-20 Group of countries, UK is the biggest investor for the Indian economy. Most of the Indian-Owned businesses in the UK choose British economy due to the easy access it provides to the rest of the European markets.
Therefore, future investment and trade expansion around the world will massively depend upon what kind of deal the UK economy will be able to strike with rest of the European economies before its complete exit from the European Union.