Why did the U.K. choose Leave?

On Thursday, June 23^rd, 2016, the United Kingdom’s future was unfolded by the EU referendum. With a 52% against 48% vote, the UK has chosen to leave the European Union. The same referendum occurred 40 years ago with a very different set of results. With the Scottish being very keen on leaving the European Union, and the rest of London in harmony to stay within the free market, the Remain votes won with an overwhelming 67.2%.

According to YouGov, with history aside, the statistics from the 2016 referendum seem to be telling a story itself. Those belonging to the AB social class, citizens usually in higher managerial, administrative, and professional occupations, support the EU by 62% to 38%. On the other hand, people in the lower C2 and DE social classes have net dissatisfaction with the institution. However, the split is not only representative of education level. 73% of those between the age of 18 and 29 want to remain in the EU, while 63% of those over the age of 60 want to leave.

In summation, the rich and the young want to stay in the EU, while the less wealthy and older wish to leave. The reasons for this divide are apparent. The rich reaps the benefits such as cheaper employment of the more skilled and larger labour force from the free movement. Companies earn a higher profit margin from exports due to the tariff-free access into EU countries, and they acquire cheaper tariff-free resources which results in lower production costs. The young population worries about potential economic shocks post-Brexit, and the long period of uncertainty that would lead to possible recessions and unemployment. The general working class benefits from the shrunken labour force in the long term, as the decreased supply of workers due to restricted immigrant access will increase their income and decrease the competition to land a job. For the older population, recent terrorist acts that have been linked to immigrants and open borders increased their mistrust towards immigrants. This along with the nostalgia of an independent, and consequently, greater United Kingdom led them to vote ‘Leave’.

 

Will this outcome fill expectations? 

The visions of reality might seem a little different for people on opposite sides of the fence. According to Article 50 in the Treaty of the European Union, members that want to leave the Continental bloc must first negotiate the terms of their exit and develop a framework for their future relationship with Europe within two years. After this negotiation, matters may play out to be very different from what the public initially thought. For the ‘Remain’ side, the nightmare might not become a reality as Britain could follow Switzerland’s example by negotiating a set of bilateral agreements with the European Union that allows access to the common market’s specific sectors. This outcome would be most beneficial to nearly all businesses and MNCs (multinational companies). Under this arrangement, Britain would have to adhere to EU regulations only in the sectors covered by the agreements. This would allow businesses to run the same as before, with tariff-free access to most goods and free labour flow still in place. As for the ‘Leave’ side, it is not all sunshine and rainbows either. Former mayor of London, Boris Johnson, states, “frankly, if people watching think that they have voted and there is now going to be zero immigration from the EU, they are going to be disappointed,’ signifying that the inflow of immigrants would not stop even after the UK exits the EU. As well as many other Vote Leave campaigners have expressed, Gisela Stuart made the claim that “every week we send £350m to Brussels. I’d rather that we control how to spend that money, and if I had that control I would spend it on the NHS.” This has turned out to be an overstatement, as Treasury figures clearly show Britain’s EU budget rebate last year was £4.9bn. Deduct that number from £17.8bn and you get £12.9bn – or £248m a week. This means that the amount of extra funding the general public thinks is going into the NHS is in reality approximately 1/3 less.

 

How long will the aftermath effect us?

Now that democracy has spoken, the UK government has to ensure a fine balance between potential economic downfall and the satisfaction of the Vote Leave party. The Leavers want to take back full control of their borders to reduce the number of immigrants that work and/or live in the UK. However, the EU argues that the abolishment of “free movement” cannot be accomplished if the UK wishes to retain preferential access into the EU market, which the UK’s economic stability crucially depends upon this access. Influential political and economic figures, such as International Monetary Fund chief Christine Lagarde, have warned that a Brexit would lead to recession, as well as the possibility of crashing stock markets and housing prices in the United Kingdom. With the Sterling falling to a three-decade low right after the EU referendum results were revealed and 2 trillion US dollars wiped off the global market during the referendum, their claim seemed to be justified. Thus, striking a good deal with the EU might be much harder than the UK expected, as France is allegedly willing to make Britain’s departure more difficult to send a message to Eurosceptic parties. In addition, Germany is hurrying the UK to finalize the deal to avoid financial instability – which the UK is currently insisting on making decisions only after the new Prime Minister is appointed. This could potentially worsen the relationship between the two nations, leading to a more difficult negotiation.

 

Will things get better or worse in time?

Various professionals and scholars speak differently on the effect of the Brexit on the UK’s business foreground. Nevertheless, one thing is certain and that is not much will and can happen within the next couple of years. From a procurement perspective, any company in the UK that is globally sourcing will have to increase their expenditure due to the weakening sterling. Yet, firms do not have to be too concerned about import tariffs from the EU since the UK government will be holding onto the free market dearly when bargaining with Brussels. Instead, sourcing organizations should focus more on quickly identifying affected suppliers and parties. Seeing the value of the pound fluctuating every day, risk-averse exporters and importers may also consider paying a premium to lock in prices with suppliers over the short-to-medium term.

Now, let us shift our focus to the operational costs of businesses. The free movement will be unchanged until further deals are made between London and Brussels, and will also remain inseparable with the free market. As a result, the UK’s labour force will not shrink in the short run, maintaining employment costs at similar levels. As for the heavy industry, Bloomberg Intelligence anticipates that the UK “will keep attracting investments in energy and water infrastructure despite its vote to leave the EU. The UK is an attractive investment destination amid stable energy-network and water regulation. Thus, renewables and interconnector projects may be delayed, yet will eventually proceed, despite Brexit.” The EU’s stringent environmental legislation had brought huge blows to the basic industry in the UK, making it significantly less expensive to import base materials from heavily polluting suppliers in developing countries rather than producing raw and semi-finished materials under EU requirements. Exiting the EU could help rejuvenate some industrial sectors such as the steel industry, potentially creating greater diversity and capacity among lower-tier suppliers on a localised basis. It could ultimately boost up their exports and improve the UK’s trade balance. Now examining the long-term effects, it is apparent that Europe’s political landscape would also change.

An increased behaviour of Eurosceptism within the EU may lead Eurosceptics to take a stand in order to gain the most from countries with large economies, such as France and Italy. In such countries, citizens are particularly sceptical of the Continental bloc and are optimistic of their countries’ future success independent of the European Union. That being so, it is likely that the European Union would lose a liberal and market-friendly member, giving interventionist countries such as France, Italy, and Spain the upper hand in the bloc. Additionally, Germany has historically seen Britain as a counterweight to France within the European Union. Without the vote of the UK in the European Council, Germany, the Netherlands, and Nordic states would lose a key backer in negotiations with Europe’s Mediterranean states. Germany’s weakened position could even encourage France to attempt to seize the reins of the bloc, creating tension between the two EU leaders and consequently leading to an increasingly volatile EU market and a potential split between the Union.

No one can foresee the future, and with the European Union involving so many bodies of government and individuals, forecasting in the current stage does not seem promising. With the uncertainty of Scotland and Wales leaving the United Kingdom, and Euroscepticism storming the European Union, it will ultimately depend on how well the UK can maintain its reputation in the financial markets to save itself from another major economic shock that would put the UK into another decade-long slump.

 

 

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Written by

Ian Yeung

Business Developer

Steel Available