BREXIT is the vote

What it means for the UK and the EU…

Well the verdict has finally been delivered. It is a BREXIT vote; a vote to move away from the European Union. To be fair, Britain was never part of the common currency, especially after the debacle of 1992 when the Pound was ejected from the ECU due to constant short selling by the Soros Fund. But the exit from the EU could be much bigger for two reasons. The EU has a GDP of nearly $18 trillion and it is substantially larger than what it was in 1992. Secondly, global markets are much more interlinked through interest rates, currencies and derivative contracts than at any time in history.

It isn’t over till it’s over… 

Hard core Yogi Berra fans will take comfort from the fact that the BREXIT vote, by itself, is not a time table for the UK to exit the EU. The referendum has to be accepted and ratified by the British Parliament and only after the approval of the Parliament, it could become a reality. But the fact that David Cameron has resigned bears testimony to the fact that you cannot take this referendum lightly. While the BREXIT drive was largely driven by the UKIP, it is clear that neither the Labor party nor the Conservative party in UK can afford to ignore the popular mandate. While the technicalities of the deal may take more than a couple of years to be fully worked out, the direction is quite clear. Britain will have to eventually exit the EU and strike it out on its own.

What it means for UK… 

To begin with, UK loses out its favored nation status while trading with the EU bloc. Remember, EU still accounts for nearly half of UK’s annual trade and Europe is also a key logistics channel for UK trade. Hence the impact cannot be wished away. London, which was seen as the gateway to Europe, will gradually lose its importance for global investors. While the shift may take time, one can immediately see the impact in the form of emergence of alternate financial centers in Europe like Paris, Frankfurt and Amsterdam among others. On the positive side, UK saves £18 billion in annual charges payable to the EU. It also saves on its liability to take on a certain portion of immigrants coming into Europe, more so in the light of the influx of refugees from West Asia.

What it means for the EU…

Ironically, the impact could be much more worrying for the EU. Firstly, UK is the only economy that is growing robustly in the last couple of years. Secondly, UK being a net importer, the major exporters to UK will lose out. Thirdly, smaller EU nations will be worried about losing a strong counterweight to Germany and may also opt for the exit route from the EU. But above all, EU will lose out the good offices of UK in its dealings with the US. This diplomatic loss may be much bigger for EU than the economic losses. ©

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