If BREXIT Happens…

An event which will dominate the headlines till the 23rd June 2016, and probably even later, is the idea of BREXIT. Britain is to hold a referendum whereby the citizens will decide whether or not the country should be a part of the European Union (EU). It may be highlighted here that as per the treaty of EU, the member states have the right to withdraw from the Union in accordance with its own constitutional requirements.This referendum was arranged by (British) Parliament when it passed the European Union Referendum Act 2015. EU is a group of 28 countries which have come together to have common rules in the areas of:

– Trade
– Investment
– Migration
– Joint standpoint when dealing with the rest of world
– Finance

The purpose after the Second World War was to have better economic cooperation between these countries by the creation of a single economic market.

 An analysis by CARE Ratings on the possible BREXIT and its impact.

Why leave the Union?

The argument for leaving the Union is that it provides independence and flexibility to Britain to formulate its own policies, which it has been argued has been lost since the 1975 referendum held two years after it joined the group then called as European Economic Community (EEC) or economic common market. It must be remembered that Britain is not part of the euro-currency zone, which includes 19 nations, and to that extent has remained a frontier country which has control over its own monetary policy unlike the euro nations. Therefore, to this extent, UK was less affected by the euro contagion which erupted in 2010. Also, the issue of migration has become serious for Britain with increased pressure on public services, housing and jobs as well as the cost of being a member with annual fees being paid to the Union.

Incidentally, Britain has already put forward its case to the EU for special status earlier this year assuming that it would continue to be a part of the Union even after the referendum. This has however already been rejected internally by other member countries which deem such conditions as being unfair to the others. It has been stated that the concept of ‘à la carte’ membership should not be provided.

Leaving the Union will give political strength to the country in terms of policy formulation though business will not be too pleased.

– Presently substantial trade takes place between these nations and will be impacted. Further the financial players too have strong ties across these territories which allow free flows of funds. Thesecompanies will have to rework their own plans in case there is an exit.

– Some of the smaller units may feel empowered with this exit as they can function under more favorable domestic regulation unlike those in effect presently which are governed by the EU.

– Supporters of Brexit however, argue that EU countries have every incentive keep trading with the UK even after the exit as it is a large importer of goods and services.

– IMF has contended recently that growth prospects of Britain will be adversely affected and has stated that there will be ‘negative and substantial’ hit to the economy which will ‘permanently lower incomes’ and harm other European states.

– The markets are guessing that the sterling will weaken and come closer to parity level in course of time with the euro.

– Another view from economists is that Britain will not thrive outside the EU and the biggest negative impact will be felt over the next five years and persist through the slowdown in investment and the weaker bargaining position that Britain will have in future negotiations.

On the other hand:

– It must be recognized that even after the exit there could still be a trade deal between the EU and Britain which could keep out services and labour.

– It must be pointed out that while the process of exiting could start immediately, the exit will formally be in 2019. This process would require resolving several complex legal and financial issues. Further they have to
address citizen-based-concerns in all countries such as pensions, health coverage, immigration status of European citizens working and living in Britain and vice versa etc.

Impact on India

The overall impact in real terms will be muted as the flows of trade and investment that take place with these nations would continue in the regular course and would not be seriously impacted. The impact would, however,
be distinct in four areas:

– Currency movements. A BREXIT will definitely affect the euro and pound and it remains to be seen as to which one will gain. The indirect impact will be felt on other currencies and while the rupee has thedollar as the primary anchor, there will be some element of volatility in these markets.

– Stock markets would be jittery to begin with, which will be a universal phenomenon but would be expected to be mean-reverting subsequently.

– Indian companies in Britain will be impacted and hence have to be watched. Several companies have
set up shop in Britain for leveraging not just the local market but also the European markets for which Britain was a base camp. This will mean reworking business plans.

– Impact on migration will be a matter of conjecture presently as while there will be attempts to controlthe same from the rest of the EU, the same from emerging markets could go either way. One school feels that this could be a plus for India as labour does come at a lower cost unlike that from the EU.
But, one cannot be too certain

Odds of a BREXIT

The market is apprehensive of the move and what started off as a 30-70 in favour of an exit, it looks more like 40-45% vote for BREXIT days before the referendum.