1. What does Brexit mean?
- It is a word that has become used as a shorthand way of saying the UK leaving the EU – merging the words Britain and exit to get Brexit. UK is leaving the EU – so question to ask is what does that mean for them and for us? Hence we need to understand why all this happened in the first place.
2. What is the history of EU?
- EU was formed in 1957 and was originally known as EEC ( European Economic Community). In 1993, EEC was renamed as European union. Britain Joined EEC in 1973.
- The European Union – often known as the EU – is an economic and political partnership involving 28 European countries. The idea of United States of Europe germinated after World War II when most of Europe was devastated. Europe had to be re-built and then to foster economic co-operation, with the idea that countries which trade together are unlikely to go to war with each other. It was a win win situation for all concerned as individually all countries are small and need economies of scale.
- Thus the EU was formed. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country.
- It has its own currency, the euro, which is used by 19 of the member countries and it now sets rules in a wide range of areas – including on the environment, transport, consumer rights and even things such as mobile phone charges.
3. What are the benefits of being a part of EU?
- Low prices of goods – there exists a ‘Single Market’ for all member countries wherein products are low-priced and there are no charges when it comes to custom tax; custom tax is usually charged when goods are transported or sold between states/countries but this is not applied among member countries
- Citizens are free to move from one member country to another – citizens can freely travel, study, work, or live in any European country of their choice
- More jobs are generated – more or less than 3.5 million jobs have been generated over the years
- Development of deprived regions – some member countries of the EU are economically deprived and through the ‘European Structural Funds’, deprived regions are developed
- Louder voice – the EU is able to ensure that all their concerns are taken seriously and heard internationally since it speaks on behalf of millions of people.
- Workers are protected – this is made possible through the European Working Time Directive; the directive includes regulations regarding holidays, working hours, breaks, etc.
4. Why Brexit happened?
- Policies & national sovereignty
- European leaders failed to see that the interests of the various countries were not really in harmony.
- EU ‘imposes’ many standard, one-size-fits-all, laws on Britons. British parliament cannot change them and thus they have to be adhered to.
- Economic matters
- Britain has to shell out about 20 billion pounds to stay in the EU. People of UK do not want to fund underdeveloped countries and want to have the government use this money for their welfare instead of their neighbors. Last year about 9 billion was given which was double of the previous year.
- This is a case of partnership going sour as the rich partner is funding the poor one/s.
- UK has lost complete control on its borders. Worries about excessive migration to the U.K., is cause for grief to a lot of people and rightly so. Britain will no longer have to accept ‘free movement of people’ from Europe. Immigration will be curbed and security factor will increase.
- Brexit campaigners have said Britain will be free to impose an ‘Australian-style points system’ to better manage immigration and fill skill shortages here.
5. Implications on Britain now? 48% chose to stay – why? Pound fell 10% in a day – why?
- Slowdown in investment & growth due to uncertainty in government policy. But this is temporary and can happen everywhere in the world. London is a very important financial center for the world and uncertainty looms over all financial firms in terms of taxation, regulation and related matters. Thus while this uncertainty remains over which new rules emerge and how they will take shape, might provoke firms to avoid further investments in the interim period.
- Half of UK’s exports go to Europe under favorable terms which will now not happen if other European nations feel vengeful. New trade treaties would be re-negotiated and job creation will not suffer as much as is propagated because if British goods are wanted by consumers around the world; they will not stop using it because of Brexit.
- UK will be able to represent itself to the world once again – it is indeed the fifth largest economy of the world today.
- 48% stayed due to personal & business reasons. They would personally benefit – no visa, free movement, easy trade, one company to service all customers.
- Pound fell as foreign investors sell the pound and exit positions in British assets; so they are doing their kind of hedging and risk management. Once there is no immediate threat things will stabilize. This is knee jerk reaction. Did you sell your house in UK?
6. Implications on the world?
- Other EU nations will also come out of EU. This is a failed idea.
- Other better poised nations will grow rapidly while the poorer ones will be desperately looking find white knights.
- The world will rethink treaties on bilateral trade and economic growth.
7. Implication on India?
- Britain’s exit from the EU will not affect the Indian market per se.
- It is hard to make a case of any meaningful impact on Indian economy of Brexit – either direct or indirect. The UK is a small trading partner of India – UK alone accounts for only 3.4% and 1.4% of India’s merchandise exports and imports, respectively, as of FY16. Even that should not be impacted as Brexit will change the terms of trade between UK and EU and not with India. FDI flows from UK to India stood at only US$1bn in FY15 and US$0.8bn in FY16; hence, not that significant.
- The bright side is that a Brexit vote would slow global economic recovery and thus commodity prices are likely to remain low. This would certainly be a plus for India.
- Domestically there are enough triggers to keep markets from declining significantly. Progress of monsoons, passing of the GST bill and improvement in corporate earnings, to name a few. Hence, any significant correction should be a good buying opportunity for domestic investors.
- Should we be worried – somewhat we think…
- If we are holding assets and pound loses value..
- Companies whose shares we buy and who have significant earnings from UK. Eg. TATA group.
- We shall benefit more… so we think
- Trade will continue as profitability is adjusted for – our companies will charge more in billing
- Students will benefit we things will become cheaper, tourism might see some short term boost
- Investments from UK to India may be higher – as opportunities in our markets are higher.