The 2016 United Kingdom European Union membership referendum, which took place on June 23, 2016, is one of the most important events for this year and has had a significant impact on the UK’s domestic economy, as well as the economy of many emerging countries, where 51.9% of voters in Britain voted during this referendum.
In favor of its withdrawal from the EU after nearly 42 years, “Brexit” was a big unexpected shock not only to the political and economic union but also for the global markets.
The Maastricht Treaty
On February 7, 1992, the Maastricht Treaty was aimed at establishing a comprehensive European unity, signed by 12 European countries, headed by France and Germany at a historic summit in the city of Maastricht, in the Netherlands. From the border with Germany and Belgium, which sought to transform the European Community into a European Union, the agreement also sought to establish an economic and monetary union, and the development of a common foreign and security policy which under its agreed terms were grouped various institutions of the European Community within one framework is the European Union. It was decided during the terms of the agreement that the union adopts a common currency, immigration policy and joint defense.
All of these were the steps to determine the establishment of the European Union especially after the United Nations joined its membership in the Union in 1973, and then Denmark, and then Spain, Greece and Portugal from 1981 to 1986, followed by countries (Ireland, Finland, Sweden, Austria). From 1993 to 1995, as the new millennium entered into force in 2004, the European Union expanded into Eastern Europe especially after the collapse of the Soviet Union. There were several new EU countries such as Poland, Slovenia, Lithuania, Hungary, Latvia, Cyprus, Malta, Romania and Bulgaria until the union reached 28 members.
It is worth mentioning that one of the main objectives of this treaty, which was established in 1992, opened the door for economic and political integration between the EU-forming countries, the unification of the currency and the improvement of living conditions within the European region. The average inflation rates recorded in the three least inflationary countries should not exceed 1.5 points, the budget deficit shall not exceed 3% of GDP, and the public debt shall not exceed 60% of GDP. The interest rates recorded in the three least-inflationary countries of the union exceeded by more than two points and the exchange rates were fixed for at least two years without resorting to devaluation of the national currency against the currency of another member country.
Britain and the euro area
The United Nations has always been eager to be a part of Europe but it did not want to be a true member of this Union as evidenced by the choices of Britain siding with the Union’s desire throughout history including the Schengen Area. The European Free Trade Association (EFTA) is comprised of four European states: Iceland, Liechtenstein, Norway, and Switzerland. The region aimed to abolish passports and immigration controls at their common internal borders as a single state which was signed in 1985 when members European Union Britain refused to join in addition to the euro. When the EU chose to adopt the euro as their single currency, Britain refused to give up the pound sterling. It refused to comply with ECB rate decisions in the eurozone and to maintain the authority of a bank.
The 2008 financial crisis and the Eastern Partnership
Before the financial crisis of early 2008, several Eastern European countries entered the EU following the collapse of the Soviet Union. In the wake of the financial crisis, British Prime Minister David Cameron pledged to the Conservatives to hold a referendum on Britain’s stay in the European Union. The Conservatives were elected to power in 2015 and in the middle of this year, a poll was conducted in Britain showing that the majority of Britons prefer to leave the European Union.
UK and EU’s legal framework
The debate was over the Brexit agreement, which meant Britain would leave the European Union. This agreement, which included a number of points including Britain’s commitment to pay £39 billion to the European Union to cover what it owes in addition to specifying the transition period that allows both parties. According to the agreement, EU citizens and their families will still have the right to move to Britain freely before the end of the interim period specified in the agreement and there will be no change in activity.
On the other hand, there were several reasons that led Britain to take its decision to leave the European Union, which was because it feared that the eurozone countries would dominate the decision-making process in the European Union especially after Britain refused to enter the monetary union.
On the other hand, Britain has had many repercussions for its exit from the Union and decision-making, as it concerns the British economy which will free Britain from the deficit ceiling imposed by Brussels at 3% of the GDP and the public debt ceiling at 60% of GDP. The exit will contribute significantly to the loss of financial service providers their EU passports which allows them to sell their services to EU countries. Once Brexit finally happens, Paris would then become the financial center of the eurozone.
Financial markets were affected
However, its exports to the EU, which are estimated at 50% of the total exports, will be subject to the customs duties imposed on countries outside the union. Brexit will also raise the cost of investment in the energy sector and will also have an impact on the aviation sector as the space policy between Britain and the EU will stop. According to the World Bank’s latest Global Economic Prospects report, a no-deal Brexit will result in the loss of Britain.
Latest figures revealed that UK’s economy contracted in the second quarter for the first time since 2012 and this decline is signalling that the country could experience its first recession in 10 years. This is also the same sentiment from forex traders as the value of the pound has reached its 2.5 year-low against the dollar.
A study by the National Institute for Economic and Social Research in Britain confirmed that the projected budget deficit would be between £28 to 44 billion and that this would affect the average income of British families by £2,771. Real wages will also have an adjustment of 2.2% to 7% lower by 2030 in addition to the projected increase in income tax of 2 to 5 cents per pound of employees’ salaries to reach 45% of the salary.
On the other hand, following the outcome of the referendum held in 2016 on the decision to leave Britain or remain in the European Union, there were sharp fluctuations in the financial markets where the results of the loss on the day after this referendum reached about $3 trillion and the pound sterling fell by 11% against the US dollar. The euro was also down 4.5% against the greenback with the two currencies recording their biggest one-day declines while stock markets saw similar declines with the DAX down by 6%, the CAC 40 down by 8% and the S&P 500 down by 3%. Economists stressed that the uncertainty about the separation caused Britain’s growth rate to slow down to 1.3% by the end of last year and is expected to slow by the end of this year by 1.9% and fall by 1.6% in 2020. The referendum is also expected to increase import prices.
Looking at the eurozone after the referendum, it lost more than 700 pips against the US dollar but on the other hand, stands well against the pound sterling which was the biggest hit. The EUR/GBP pair rose from 0.76 to 0.85. The EUR/USD fell from 1.14 to below 1.11 while the GBP/USD pair dropped from 1.50 to below 1.30 but the pound was the biggest hit after the referendum as it recorded the biggest drop against other currencies, its lowest level in 31 years. Another factor that have caused this decline is also the sovereign debt of the United Kingdom which is estimated at 1.72 trillion pounds was representing 90% of its GDP.
Gold has seen a record high of 4.5% to breach the resistance level at $1300, the level from which it rebounded twice in 2016 to reach its highest level in two years to reach the level of $1366. After the financial crisis of 2008, and more than 40 years later, Britain took the final decision to exit the European Union, with a majority vote, on its doorstep. Impact of the financial market my world.