What Does Brexit Mean For The UK And Europe?

Citizens of the U.K. have historically been skeptical of the European Union (EU), an economic and political partnership containing 28 nations, but this distrust had not grown strong enough to prompt the country to break free from the consortium.^[1]

Both U.K. voters and lawmakers expressed frustration with the situation, and many looked to former Prime Minister David Cameron to negotiate a new agreement with the 28-nation consortium. However, given that he failed to do so, sentiment became worse and gave voters the clout they need so that Britain can exit, or "Brexit," the EU. The following is a look into how this all came to pass.

Immigration

One matter that has been cited as having an impact on the Brexit debate is immigration. Over the years, polls have repeatedly shown immigration being a top concern of the nation's people.^[2] In light of the ongoing refugee crisis, this issue has grown far more salient, helping fuel the growth of so-called euroskepticism, the belief the EU's power should not increase. This point of view has always been prominent in the U.K., but it has been gathering clout because of the immigration challenges.

As this particular movement gathers steam, many British voters have changed their allegiance, and millions have flocked to support the U.K. Independence Party, a populist party that campaigns against immigration and supports leaving the EU.^[1]

Growing Unrest

In the past, several polls showed only a fraction of British voters wanted the U.K. to leave the 28-nation partnership. However, a September survey provided a different consensus. In the assessment, conducted 3-4 September by market research firm Survation, 43% of participants indicated the U.K. should depart, while 40% specified that it should stay.^[3]

Finally, 17% were undecided. Excluding these on-the-fence voters, 51% of respondents stated the U.K. should cease to be a part of the EU. This was the first time since November 2014 a Survation poll showed more participants leaning toward leaving the 28-nation partnership than staying. This September poll used a new EU Referendum Question, "Should the United Kingdom remain a member of the European Union or leave the European Union?"

Survation asked this new question after it was proposed by the Electoral Commission and approved by Cameron. During a previous poll conducted between June 29 and July 6, the market research firm had used a different inquiry, "Should the United Kingdom remain a member of the European Union?"^[4]

This question yielded a different result, as 45% said yes, the nation should remain in the EU. Another 37% said no, the country should leave, and the remaining 18% were undecided. Without counting those who refused to take a side, 54.4% thought the U.K. should stay, and 45.6% believed it should go.

Sentiment In Parliament

While the Survation polls show that a growing number of British voters want to leave the EU, research conducted by London-based think tank Open Europe shows that 22 conservative members of parliament are "Firmly Out" and 47 are "Out Leaning," based on an evaluation of their public statements on the matter.^[5]

As a result, 20% of Cameron's party is either partially or strongly inclined to vote against the nation continuing to be a part of the EU. In contrast, the research concluded only 14 MPs are "Firmly In," while another 44 are "In Leaning." Finally, 203 lawmakers could vote either way. Pawel Swidlicki, Open Europe policy analyst, shed some light on the situation.

"The number of proponents and opponents of EU membership within the Tory party is relatively balanced," he stated. "However, the number of undecided MPs easily outnumbers both of these groups, underlining how important it will be for Cameron to secure a comprehensive and ambitious reform package."

Cameron's Demands

Cameron has promised to negotiate with EU officials before the referendum vote takes place.^[6]

In doing so, he aims to obtain several key reforms, including changes involving the government benefits immigrants can receive. However, if Cameron's negotiations do not succeed, he has indicated he will consider all other methods of obtaining the desired changes.^[7]

Failure to secure the desired reforms could cause a larger number of conservative members of parliament to want to leave the EU, said Steve Baker, MP for Wycombe. He serves as co-chairman of Conservatives for Britain, an organisation that wants the U.K. to have a different relationship with the EU and is willing to support the nation's exit if a new relationship cannot be obtained.

"If we go down the current path where the government is asking for very little and therefore will come back with very little ... I would be amazed if a majority of Conservative MPs don't campaign to leave," he stated.^[7]

Baker continued: "The prime minister has said he wants fundamental change ... we need to carry through things we say to the public, so I would hope if the renegotiation position is as thin as it currently looks like is going to be, the government recommend we leave."

Impact of Brexit

The potential implications of a Brexit are complex, as they hinge largely on what economic actions the U.K. takes after splitting off from the rest of the EU and how the rest of the world reacts to such a move.

Those wishing to stay in the 28-nation group contend that if the U.K. should decide to go off on its own, the move could create widespread job losses and economic uncertainty.^[9] However, those advocating the Brexit assert that by breaking free, the nation can reduce taxes for its citizens and reduce the burden of immigration.

Trading Implications

One matter that is central to the future of the U.K. is its trading relationship with nations around the world. Currently, the EU is Great Britain's largest trading partner.^[10]

If the U.K. leaves the 28-nation partnership, its businesses may find they have far greater freedom to trade with companies across the world. However, if enterprises in the new EU are reluctant to do business with British firms, such organisations could face substantial headwinds.

FDI Concerns

Aside from being concerned about trade, many are worried about how a Brexit would affect foreign investment in the nation's businesses. The London School of Economics' Centre for Economic Performance has done some analysis in this area, estimating that if Great Britain manages to establish a free trade agreement with the EU after leaving the partnership, it will lose foreign direct investment equal to 2.2% of gross domestic product.^[9]

However, if the U.K. cannot secure desirable trade terms, its FDI will suffer a decline equal to between 6.3% and 9.5% of GDP. The authors of the CEP report gave their two cents on Great Britain's potential break from the EU, casting it as a risk more than anything else.

"Our current assessment is that leaving the EU would be likely to impose substantial costs on the UK economy and would be a very risky gamble," they said.

Impact On EU

As for how a Brexit would affect the EU, the impact would be widespread and drawn-out. The actual process of the U.K. leaving the partnership and establishing new agreements with remaining EU countries would take roughly 10 years, economist Gregor Irwin wrote. As Great Britain forged new contracts with the nations left in the consortium, many businesses would face substantial uncertainty.

Under an "exit clause" that exists in Article 50 of the EU Treaty, the U.K. would have two years to figure out the exact terms of the nation's departure. After Great Britain formally leaves the EU, it will take several more years for the nation to determine its new relationship with the rest of the consortium, Irwin said.

While the new relationship between the U.K. and the EU could follow several models, Irwin predicted it will likely involve a detailed FTA or a Swiss-style model containing several bilateral agreements. Either of these outcomes would require ongoing negotiations. While Cameron has stated several objectives he has should the U.K. leave the partnership—they include greater autonomy for individual states, less bureaucracy and constraints for the benefits immigrants can collect—he has provided little clarity on how he wishes to achieve this.

In order to reduce this uncertainty, Brexit advocates are weighing potential options. They're considering either supporting a second referendum on which model to pursue or making an effort to create a consensus behind what the U.K.'s trade deals would look like after the nation's exit.^[12]

The nation's future looked quite murky at the time, and several market observers emphasized that if the U.K. left the EU, this would likely persist for some time.

Cameron spoke to this uncertainty in a speech he gave to the U.K. House of Commons on 22 February 2016, stating that voting for a Brexit would be a "final decision" that would set off a "process for leaving," which would include a two-year window during which the nation would negotiate new contracts. ^[13] Many market observers reported that nobody knew for sure what the nation's new agreements would look like.

Outcome Of Brexit Vote

Over the next several months, Brexit polls showed varying results. Going into the referendum on June 23, the Remain and Leave campaigns commanded equal support from participants, with 44% of voters signaling their intent to back the former and the same number indicating their plan to vote for the latter, according to figures compiled by The Economist.^[14]

When the referendum's final results were tallied, 52% of votes went to Leave and 48% went to Remain.^[15] The votes varied by demographic region, with the vast majority of those in London and Scotland voting to stay and regions outside these areas opting to leave.

The vote's outcome seemed to create a stir in British politics: Cameron promptly announced his resignation and Jeremy Corbyn, leader of the Labour Party, received a motion of no confidence from two of his party's members.^[16] While Corbyn took the hit tied to the Remain campaign's failure, government officials who supported the Leave campaign started distancing themselves from previous promises.^[17] One major selling point of the Brexit was the assertion that by leaving the EU, the U.K. could take the £350 million it was sending to Brussels every week and use it to fund its own National Health Service.

Critics have singled out this particular claim as being the most dishonest of any used by the Leave campaign.^[17] After the referendum results were announced, Nigel Farage, leader of the U.K. Independence Party, admitted that it was a mistake to cite the £350 million figure. Former London mayor Boris Johnson had campaigned in a bus advertisement that stated "we send the EU £350 million a week, let's fund our N.H.S. instead."

Second Brexit Referendum Attempted

A petition for a second Brexit referendum collected more than 4.1 million signatures.^[18] While the British parliament must consider any petition with more than 100,000 signatures for debate, the Foreign Office rejected the request for a second referendum, stating in an official reply that "the decision must be respected" because 33 million Britons voted.

"The EU Referendum Act received Royal Assent in December 2015," the reply stated.^[18] This act, which was "scrutinised and debated in Parliament," did not set any minimum threshold "for the result or for minimum turnout." Now, "we must now prepare for the process to exit the EU," the reply added.

The Path Forward

For the U.K. to exit the EU, the nation would have to trigger Article 50 of the Lisbon treaty, something which had not yet been done at the time of report (July 11, 2016). For the article to be triggered, the U.K. government will need to enact primary legislation, according to a letter signed by more than 1,000 lawyers. The document, which was addressed to the prime minister and members of parliament, suggested they were writing to "propose a way forward which reconciles the legal, constitutional and political issues which arise following the Brexit referendum."^[19]

However, the British government might have a different path forward, as it was announced 11 July 2016, that Home Secretary Theresa May would become the next prime minister of the U.K. on 13 July 2016.^[20] While Cameron already announced he was stepping down from his position, May became the only candidate left running for his position after rival Energy Minister Andrea Leadsom left the race. Following this outcome, May repeated her commitment to honoring the outcome of the referendum.

"Brexit means Brexit, and we're going to make a success of it," she said.^[20] "There will be no attempts to remain inside the EU. No attempts to rejoin it by the back door. No second referendum. The country voted to leave the European Union, and as prime minister, I will make sure we leave the European Union."

While this decisive language might help alleviate the concerns of some, German officials quickly jumped on the situation, stating on July 12 how important it was to become clearer on the U.K.'s status in the EU.^[21] Both German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, weighed in on this situation.

At a news conference, Merkel stated that "the task of the new prime minister ... will be to get clarity on the question of what kind of relationship Britain wants to build with the European Union," while Schaeuble asserted that after the surprising results of the Brexit referendum, getting a better handle on the situation was needed to keep uncertainty under control.^[21]

May was installed as the new British Prime Minister the afternoon of 13 July 2016.^[22] As a result, she became the second woman in history to hold this key political post. After ascending to her new role, her first task was to steer the U.K. through its separation from the EU, even though she had advocated the nation's continued inclusion in the 28-member consortium.

Additional Reading

• What Is The Economic Impact Of Hard Brexit vs. Soft Brexit?
• Comprehensive Guide To Brexit
• What Is The 2017 U.K. General Election's Impact On The GBP?