Oct 22, 2019
What You Need to Know About Brexit
What happens in the UK can affect markets.
- Following European Union (EU) parliamentary approval, the UK officially left the EU on Friday, January 31, 2020. There will be an 11-month transition period, during which the UK will adhere to previous EU trading rules and regulations as the new relationship gets ironed out, according to reports.
- On Thursday, December 12, Boris Johnshon’s conservative party won the majority of votes in a general election. Johnson’s victory is likely to pave the way for the U.K.’s departure from the European Union.
Brexit has hit the rocks again.
Over the weekend, British members of parliament rejected Prime Minister Boris Johnson’s plan to remove the United Kingdom (UK) from the European Union by the end of October, and they have asked for an extension to attempt a solution.
Brexit has consumed the UK for nearly three years, as the country and its governing representatives have been unable to agree on exact terms for its departure from the single European market, which could mean a big shakeup for one of the world’s largest economies, and possibly markets around the world.
If you’re confused about what Brexit is, or why it matters, read on.
What’s the European Union?
The European Union (EU) is a group of 28 countries that function as a single trading bloc. Ratified in 1993, the union has its roots following the calamity of World War II.
Its purpose is to foster economic and political partnership. The hope? Countries that trade together will be less likely to declare war on each other.
The EU functions as a single market, which means goods (like refrigerators and eggs) can be shipped without paying tariffs and duties. Citizens of the individual countries and visitors to the region are allowed to move around all the countries as though it was one gigantic country.
Think about the border between Oklahoma and Texas—the highway patrol may change, but there are no customs or border security and people can move from Norman to Austin whenever they want.
The EU has its own parliament in Brussels and puts its stamp on rules that affect the nations under its umbrella. These rules can affect prices on trade, environmental policy, and how people can travel from country to country.
Many countries in the EU have abandoned their currency and adopted the euro. Great Britain chose not to and continues to use the pound sterling.
The movement to leave the EU is known as Brexit, short for “British Exit.”
On June 23, 2016, the people of the United Kingdom voted on a referendum. The question? To stay in or leave the EU. The decision? The results surprised the world (and many people in the UK). Experts predicted that the UK would overwhelmingly vote to stay in the EU. But the experts were wrong.
The UK voted to leave the EU by a tiny margin.
The reasons why are complicated. What many people saw in Great Britain as a positive, such as ease of travel and citizenship from country to country, others saw as a negative, including increased immigration, globalization, and loss of native culture.
And not everyone in Great Britain likes taking orders from Brussels. Many who voted to leave the EU have said they think that U.K. decisions should be left to the U.K. and that it should have control over its own borders, and its own economy.
Brexiteers also point to costs: Britain pays 13 billion pounds annually to belong to the bloc, for which it also gets about 4 billion pounds in spending.
Politicians have struggled for years to make the Brexit deal a reality. Theresa May, the prime minister prior to Johnson, was unable to convince parliament to vote for a deal she had painstakingly worked out with the EU. She stepped down as prime minister in May 2019.
Johnson has also struggled, going as far as shutting down parliament so he could complete Brexit without further legislative debate by the October 31 deadline.
One of the most complicated sticking points relates to the border with the Republic of Ireland, which will remain in the EU, while Northern Ireland will depart in Brexit. Questions linger over whether Northern Ireland will continue to be subject to EU trading rules, and where to put a customs border.
As an FYI: The UK includes England, Wales, and Scotland, as well as Northern Ireland. The Republic of Ireland, on the same land mass as Northern Ireland, is an independent country. Tensions between the UK and Ireland have run high for centuries.
Brexit, the UK economy, and world markets
With a GDP of nearly $3 trillion, as of 2018, the U.K.’s economy is currently the fifth-largest in the world. It’s also connected to many others in the region and around the globe.
London, for example, is one of the biggest financial centers in the world, and it is often seen as an entryway to markets in the rest of Europe. That status may change after Brexit, according to some experts.
Britain’s trading border with the EU is currently wide open, and approximately 50% of its exports go to the EU. Following Brexit, its trading businesses would suddenly be subject to tariffs and other trade impediments.
Similarly, its trading partners in the EU would also be subject to new tariffs and other potential financial burdens with a separated UK.
You may have heard the term no-deal Brexit. That’s the possibility that the UK could leave without any deal with the EU in place. Some economists and other market watchers say this could cause huge financial problems, including a recession in the UK, and problems for markets around the world.
Follow the Stash Way
Markets can be volatile, and sometimes what happens in other parts of the globe can affect what goes on in our own economy. That’s why Stash recommends following the Stash Way, which includes investing for the long term, regular investing, and diversification.
You can learn more about the Stash Way here.