On June 23rd, Britain will vote to decide if it wants to stay within the European Union or leave it and chart its own course. The British decision will have wide ramifications for not just the British economy but also the euro-zone as well as the global markets. That’s because an exit is likely to impact the equation between different currencies. Moreover, an exit will also impact the business plans of all businesses operating out of Britain, especially those which use it as a base for the rest of Europe.
Historically, Britain has been a reluctant member of the European Union — joining it much later than others — and, in fact, never joined the common currency agreement. And yet, even though Britain has lesser integration with the European Union — thanks to retaining its own currency and independent monetary policy — it is the independence to decide its own policies that is at the heart of the present discontent that has led to the vote.
Of course, having a special agreement with the European Union provided all countries within the Union to get assured market for its exports as well as cheaper imports. However, the free flow of labour is a key area that has created much heartburn. There is growing sense among Britishers that exiting the European Union would mean more jobs for the locals and lesser government payouts (on social security etc) on immigrants.
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So at the heart of the vote is not just politics but also economic concerns. As such, it stands to reason that if Brexit does happen, the new set of policies in Britain would be in line with the larger protectionist sentiment in Britain.
To begin with, irrespective of the result of the referendum, the level of economic uncertainty is likely to fall after the outcome. That’s because businesses would know clearly where to focus their energies.
In the immediate aftermath of a potential Brexit, it would be relative, and possibly volatile, movements in currencies that will hog the limelight. It is not clear whether Britain will gain or lose or lose substantially out of this decision. Depending on what they believe is likely to happen, market players will buy or sell the British currency. Rupee will be impacted even though it is primarily anchored in the US dollar due to the relative movements.
Another immediate or short-term impact would be in the share prices of companies with huge exposure to the British market, either for supply or demand. Again, much of this movement will be due to the obvious uncertainty.
But as things settle down and it becomes clear how governments of Britain and the countries still within the European Union view the Brexit, policies will become clearer. At that stage, companies would be in a position to figure out, given the new equation between Britain and EU, how far are they impacted. At present, the different estimates have too huge a variation to be usable.
There are two issues on which a possible Brexit decision will have the biggest impact and these may be the more lasting ones. First, the issue of immigration and the free flow of labour in Europe and even on other parts of the world. Second, the rationale for EU-type regional agreements. Both these will be impacted by how Britain responds in a post-Brexit phase. If the British economy resolutely weathers the storm of uncertainty and grows faster than it has done while being part of the EU, one could expect some other countries within the EU asking for a similar vote. Similarly, both within Britain and outside, depending on how the Britain’s domestic services and economy, especially with respect to jobs, pans out, the view on immigration will firm up. It is noteworthy that the opinion on immigration is something on which opinions are sharply divided all across Europe, even though it is only Britain that is going to vote for the moment.