Britain’s Earthquake

The political and economic implications of Brexit

01 July 2016


The referendum held by Britain on June 23, 2016, to decide whether the UK should leave the European Union has shaken the country with uninterrupted tremors after the UK voted to leave the EU by 52 per cent.

The first repercussion of Brexit arose when UK Prime Minister, David Cameron, announced that he would step down in October, confirming that the new prime minister will be the one carrying out negotiations with the EU about the UK’s withdrawal. UK's European Commissioner, Jonathan Hill, has also announced his resignation in the wake of Brexit vote.

As a response to the vote to leave, 4 million people in Britain signed a petition calling for a second EU referendum, and as the numbers of signatories passed 100 thousand, the Parliament will have to consider discussing an appeal. In another petition, more than 100 thousand people have called on the Mayor of London to declare the English capital independent from the UK and apply to join the EU. Meanwhile, many questions are raised concerning whether Scotland would remain in the UK.

In addition to Brexit’s repercussions on the UK, it is evident that the vote to leave has had several impacts on the EU. The need to quantify the actual impact of Brexit might have pushed the European Commission President, Jean-Claude Juncker, to urge Britain to implement Brexit immediately without waiting until October.

Organizational and Institutional Repercussions

The EU relies on legal frameworks that regulate the withdrawal of one of its members. Article 50 of the Lisbon Treaty stipulates the right of any member state to withdraw from the EU. In case a member state decides to leave, the State in question shall be suspended from participating in the EU treaties, after two years from the date of Article 50’s entry into force

The provisions of Article 50 did not prevent confusion for Brussels, the EU capital, where calls have emerged to hold a legal workshop to discuss the treaties concluded between the EU and Britain during the past 43 years. Many expect that the actual implementation of Brexit would not take place before two years due to the complex legal provisions included in said treaties and as some fall under international regulations while others abide by EU laws.

On the other hand, after losing Britain’s budget contribution, the EU needs to fill in a gap of 7 billion Euros in its 145 billion Euro budget set for 2020.

The turmoil further intensified after Malta refused to take over the EU rotating presidency for a whole year instead of six months to cover for the UK’s six-month presidency. Malta was expected to head the EU ministerial meeting in January 2017, and the UK was scheduled to carry out that responsibility until July of next year.

Economic Repercussions

The results of the EU referendum in Britain had immediate consequences on the European and global economic scene with the fall of European and global indexes after the announcement of the results. The Nikkei Index in Tokyo went down by more than six per cent and the Japanese Yen exchange rate surged by five per cent, as investors sought safe-haven assets.

European stock markets tumbled at the open on June 24, 2016 (the day after the referendum), the London stock market fell sharply by more than seven per cent and the British pound suffered its biggest one-day selloff in 30 years, suffering a jaw-dropping plunge to just USD 1.3229, falling close to 12 per cent against the Dollar and eight per cent  against the Euro. On the other hand, the credit-rating agency, Moody’s, warned that Brexit would adversely affect UK's sovereign credit rating and the rating of other credit instruments issuers in the country. To face such fluctuations, central banks in Europe, the US and Japan would have to pump billions of dollars into the financial system to stabilize global markets.

In the long run, the European economic map will witness several changes as global companies are concerned about the financial repercussions that would affect their business in Europe. For example, South Korea’s Samsung is considering to move its EU headquarters from London.

Moreover, Brexit would pave the way for Luxembourg to become the potential leading financial hub in Europe. Both London and Luxembourg have been competing to become the financial capital of Europe and host the European headquarters of several global banks. The banking sector in Luxemburg, which already features 143 institutions, is getting ready to host new non-EU banks, mainly American, Australian, Canadian, Swiss and Turkish banks, that are relocating from London.

There are various scenarios for the future long-term EU-UK relations. The first scenario speculates Britain exiting the EU while remaining part of the EU single market, that includes states that refused EU and Euro membership but do not want its citizens and companies to be treated as foreigners. As for the second scenario, it features Swiss-style bilateral deals between London and Brussels. In the third scenario, the EU would impose sanctions on banks and companies operating in Britain to make an example of Britain for other countries who are considering an EU withdrawal.

Far-right and Calls to Leave the EU

EU states are witnessing an apparent rise of right-wing movements calling for the withdrawal from the European Union. Brexit would empower the stance of such movements and their calls for leave. The most striking example is that of Marine Le Pen, the French right-wing leader, who called for an immediate referendum in France after Brexit vote results.

Popular calls for EU referendums also spread in Austria, Holland and Denmark leading to warnings over a Brexit domino-effect. The founder and leader of the Dutch Party for Freedom, Geert Wilders, praised Britain’s vote to leave and said, “the Netherlands will be next.” In a similar stance, the far-right Northern League in Italy, which is hostile to immigrants, hailed the Brexit result and congratulated the British people for their bravery in the face of extortion, threats, and lies, noting that Italians will follow their lead. In the Czech Republic, right-wing populist supporters have also demanded a “Czexit.”

The EU Role as an International Actor

The Brexit decision banishes all theories about the multi-polar international political system or at least eliminates the possibility of having a unified Europe amongst international poles. British withdrawal from the EU will deprive both entities of any important status on the global scene. They would thus have a limited influence on regional conflicts and would fail to achieve a balance between the influential international powers.

Concerning London, the capital’s status would downgrade as it is expected to adopt a US-style approach, transforming Britain into an actual extension of the US. Although the UK has always been close to the US Administration, the UK aimed to maintain certain balance between EU joint foreign policies and US policies when said EU policies would diverge. However, after the Brexit vote, the UK will no longer be able to make such justifications.

Many medium powers in the world are expected to reconsider their ties with the UK as they prefer to deal with Britain as part of a strong, unified Europe to create a balance with the US on one hand and Russia on the other.

However, some factors are expected to remain the same, including Britain’s role in the NATO. NATO Secretary-General Jens Stoltenberg affirmed that “the UK will remain a strong and committed NATO ally and will continue to play its leading role in our alliance.” Stoltenberg pledged to keep on carefully coordinating with the EU, as 22 out of 28 EU member-states are part of NATO.

Concerning the European project, as the EU managed to remain as a Union; Brexit would probably lead to the withdrawal of other states. The size of the union would thus be reduced, but the remaining member-states would be harmonious enough to save their unity, especially in light of the interior and exterior challenges faced by the EU (migrants, economic and security problems, etc.). If Brussels does not amend the way it is dealing with crises, member-states will resort to implementing actual independent decisions, leading to the end of the EU as a unifying forum for European policies. EU member-states are always divided over many issues, mainly the refugees’ crisis that allegedly imposes a potential demographic and cultural transformation of European societies.

The European political model will change with Brexit, and the EU international status will undoubtedly be negatively affected. The European diplomatic decision will lose power and the EU’s influence in many global thorny files will shrink, mainly its influence on the Palestinian Cause as it is a member of the Quartet on the Middle East. The EU was strongly involved in many international files, including the nuclear negotiations that lead to a historic deal with Iran over its nuclear program, and the Kosovo and Serbia affair.

Although the General Secretariat of the Council affirms that the Brexit vote will not affect its decision regarding sanctions against Russia, the current European stumble leaves the door open to intensified Russian and Chinese roles on the international scene. Furthermore, Iran has not hidden its joy towards the Brexit as Hamid Aboutalebi from the office of the Iranian president for political affairs considered that Brexit is a move that would serve Iran’s advantage and a historic opportunity for Iran.