What Next for the Pound Sterling?
There is no question that the EU referendum is one of the biggest political events we’ve been faced with in a while. We are so integrated within the EU economically and politically, that it is difficult to appreciate what life would be like outside of it.
Since the UK joined the EEC in 1973, we have thoroughly benefited from many aspects of the EU. The ability to trade openly with other member states and move freely between the Schengen Area has unknowingly been of real benefit for small businesses and expats alike.
Nevertheless, there are aspects of the EU that many disapprove of. Being part of the EU does limit our ability to create new trade blocs with other nations, and although the idea of moving abroad and finding work in Spain seems attractive for some, others are concerned about the level of immigration back home.
The real problem with this debate however is not about a right or wrong choice necessarily. Despite many fear-mongering campaigns about a potential recession, amongst others, no one knows what will happen after a Brexit, and it’s this uncertainty which many are afraid of.
What will happen in the event of a Brexit?
In the event of the UK voting to leave the EU, article 50 of the Lisbon treaty will be invoked, as this is the official withdrawal process from the EU. For a minimum period of two years, all existing agreements will remain in place allowing some breathing space for the UK to renegotiate with the EU.
This period of uncertainty is why Mark Carney, the Governor of the Bank of England warns that the UK may be hit by a year-long recession. Corporate businesses who hold their headquarters in the UK may wish to relocate elsewhere, leading to potential job losses. Trade contracts would freeze with EU countries and small businesses who employ foreign workers would be left in limbo.
The other concern is the impact it may have on Sterling, which could weaken against most of the major currencies. Although this would be good for UK exports, it would make imports noticeably more expensive.
In the case of the UK not renegotiating terms with the EU within the two-year period, other members of the EU bloc will presumably vote to extend this period, whilst a ‘no’ vote would catastrophically eject the UK from the EU. The general consensus is that it is highly likely for the UK to take much longer to renegotiate terms with the EU. According to Gregor Irwin, former UK Foreign Office chief economist, such agreements may take up to 10 years to materialise.
In the short term, it’s difficult to envisage a positive outcome of a Brexit for businesses, or the economy as a whole. But are we likely to be better off long term?
The long term implications of a Brexit
Purely speculative predictions state that the long term implications of a Brexit are contingent on how the UK renegotiate terms with the EU, or look elsewhere for trade agreements.
If the EU allow for it, the UK could become a member of the EEA (European Economic Area), which allows for the free movement of goods, services and people between the other EEA member states. Although non-EU members of the EEA are not bound by the financial burden of the EU, contributions will still be made to the EU from the UK. Given that the UK has special agreements to keep the Pound Sterling and banking policies, leaving the EU to join the EEA would make very little difference.
Another possible option for the UK would be to join the EFTA (European Free Trade Association) – a trade bloc with regulations, set up for the promotion of free trade and economic integration to the benefit of its four member states.
If the UK potentially joins the EFTA, there is a chance for the organisation to negotiate the same terms as EEA members, although this would make little difference to existing arrangements with the EU. It’s been argued that the UK might take the Swiss route and arrange bilateral agreements with the union – a rather complex, difficult to manage and time-consuming process. After over five years of materialising, Canada was recently granted an EFTA membership. The question however is, will the EU be willing to go through with this even in the case of article 50 being extended beyond the two-year period?
It is unlikely that the EU will wish to be involved in business operations with the UK, without a financial contribution. Given that the UK is one of the largest contributors to the EU, analysts predict that the bloc would be damaged by a Brexit, leaving the option for an EEA membership without financial contribution off the table.
The options for the UK to recover are either renegotiating terms with the EU or looking elsewhere for trade blocs. If the country joins the WTO, it would be enabled to trade with the EU, but would most likely be hit with trade tariffs. Barack Obama expressed his opinion that the UK would be at the back of the queue for trade agreements, given their push for the TTIP agreement within the EU. The obvious solution once again would be to remain in the union and renegotiate terms that are a concern to the public.
In any event, remaining in the EU provides stability, certainty and more importantly – familiarity. If you operate an SME – you are fortunate enough to have access to the open market; if you are an expat – you are fortunate enough to live in your dream home in the south of France; and if you are a student – you can study in Madrid with very little barriers. Jeopardising these fantastic opportunities makes little sense and a vote to remain should therefore signal further renegotiations so that a reformed EU works for all.
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