By -Uday Mitra
“To remain or to leave” the European Union (EU) was the question people of Great Britain were required to answer on the Referendum held on Thursday 23 June 2016.
The question has been brewing for some time, especially among the conservatives. In 2011, shortly after the election of the Tory Government led by David Cameron 81 conservative Parliamentary members demanded that a referendum on Britain’s membership of the EU. The PM then resisted their demand; however, in order to placate the conservative members of his party, during the course of the 2015 re-election campaign, he promised to hold a referendum on the question. This referendum took place on 23 June 2016.
Britain joined the EU about 41 years ago. The EU has 27 other members. Countries forming part of the EU are required to accept certain rules. Laws on many aspects of the EU operation are made by the European Parliament based in Brussels, and apply universally throughout the member countries. Principal among these laws are rights of free trade and freedom of movement of people among the member countries.
This means that member countries are able to supply to, and import from, goods and services, the other members free of any customs or import duties. This also means that people from any of the member countries can freely travel to, live and work in the other member countries, without having to comply with any visa requirements.
Many Britons believe that this free movement of people has resulted in significant increases in immigration from the other countries, especially the Eastern European countries, to Britain. In turn, this influx of people has put pressure on employment opportunities, and health and education services provided by the UK Government. Further, the recent influx of refugees into Europe and the EU’s suggestion that all of the EU members should share a reasonable burden of these new refugees put further pressure on Britain. Thus, these Britons believe that they have lost control of their borders due to the EU membership. Thus, these Britons want to exit Britain from EU. Boris Johnson, a former mayor of London and Nigel Farage, founder of the United Kingdom Independence Party, are champions of this Brexit group.
On the other hand, many Britons note with satisfaction that the operation of the EU single market has enabled Britain to supply her goods and services to a larger market with no barriers. Also, due to London’s historical importance as an international finance centre, many European and other non-European banks have established large presence in London in order to service the European market. Thus, Britain has access to duty-free European goods and services, immigrant labour and investor cash. Most members of the Government and Parliamentary members of the Labour Party led by Jeremy Corbyn are in this camp.
Before the actual vote, Britons supporting to remain in the EU, including the PM, were feeling optimistic that the people would vote to remain in the EU. The world markets were also optimistic of this outcome. Just before the actual vote, world share markets started rising.
Over 46 million residents eligible to vote; approx 33.6 million actually voted. The result was a surprise to the Optimists. 51.9% of the voters voted to leave the EU and 48.1% of the voters opted to remain in the EU. The Brexit camp had won.
The political fall-out was immediate. the British PM David Cameron has been replaced and there is to be a new leadership ballot for the leadership of the Labour Party.
The response of the world market was immediate. Global share markets lost about $2.7 trillion; Dow Jones Industrial Average Index lost 3.4%, Standard & Poor 550 Stock Index lost 3.6%, the Nikkei Index in Japan lost 8%, and Major indices in France and Germany lost 8% and 7% respectively, although the loss in the UK FTSE 100 was not so severe.
The Australian ASX lost 3.2% – over $50 billion of the index value in one day. Stocks with exposure to the British and EU markets, and banks suffered the most.
On the currency market, Pound Sterling lost over 10% reaching its lowest value against the USD in 30 years. Investors piled into bonds, gold and safe haven currencies such as the USD and JPY.
From the Australian viewpoint, this was an over-reaction. The effect of Brexit on Britain might result in weakening of the British economy, but Australia’s trading with Britain has reduced considerably in recent times. Indeed, the EU is our second largest trading partner. So, it is likely that the Australian economy would not suffer much. Some Australians currently working in the UK might return home, as some European banks and other large companies doing business with the EU re-locate to European financial centres in Germany and France.
It is true though that a level of uncertainty will prevail for some time for some time on the levels of global economic activities.
Uday Mitra is a practising chartered accountant and tax adviser.