Maher Ghorayeb, 25897014

MODULE 3 PAPER

MBA 209F

On June 23rd, the people of the United Kingdom spoke up through the Brexit Referendum:
A majority of 52% decided it was time the UK left the European Union, a decision that
was met with tremendous opposition and distrust by the opposing parties. The riskiness
of the withdrawal has the potential of dangerously affecting the UKs economy and incur
permanent damage to this otherwise functional society. While it is too early to determine
for sure whether Brexit was beneficial for UKs overall economy, it definitely led to major
financial uncertainties that generated multiple noteworthy trends1.

The UKs withdrawal was in fact due to the perception of a majority of Britons that the
EUs intrinsic nature and functions are detrimental to the prosperity of the Kingdom. The
EU is a political and economic union of 28 member states that was founded by the Inner
Six countries by a series of treaties spanning from 1952 to 1993. It initially started as the
European Coal and Steel Community, which aimed at neutralizing competition over
natural resources between member states and establish a material barrier to warfare.
Today, the EU covers a large array of functions: It enacts legally binding legislation for
its member states through the European Commission, which is enforced by the Court of
Justice. The EUs major policies relate to the creation of an internal single market between
the member states that allows the free movement of people through the abolishment of
internal passport control and the free circulation of goods through the removal of custom
duties and the regulation of imports. It also allows free movement of services by allowing
EU citizens to work in the member states and the free movement of capital by allowing
and encouraging investments between countries. The EU also manages a 19-member
monetary union, the Eurozone, where the Euro is employed as the primary currency.

At first glance, all these membership advantages sound beneficial for all the parties
involved, so why would the UK even consider a withdrawal? The pro-Brexit campaigners
argue that the EUs regulations constrain and threaten British sovereignty: Major
decisions about competition policies, agriculture and intellectual property laws are made
through bureaucratic treaties in Brussel. Furthermore, minor rules such as the prohibition
of teabag recycling or regulation of power usage on vacuum cleaners or even the
interdicting of blowing up balloons by children under eight serve as examples of the
everyday ludicrous constraints that the EU imposes. Other rules that require the UK to
contribute annually to the EUs budget are often perceived as not worth the benefits
associated with the membership: In 2014, the UK contributed 14.1 billion to the budget
while only receiving 7.1 billion in regional subsidies, making for a net loss of 7 billion.
Pro-Leave supporters would thus rather have the British Parliament make up rules,

1
This is the position I am adopting. I cannot argue for or against Brexit because both sides have solid arguments
and I will not pretend to know all the intricate future events that Brexit might trigger. What Im arguing for is that
Brexit led to major risk in the financial markets that are justified by the pro-Stay campaign arguments.
 Maher Ghorayeb, 25897014

regulations and trade deals that would be in the best interest of the British people without
being constrained by a central authority or an annual contribution. Another argument in
favor of a withdrawal concerns immigration: In 2015 alone, the UK absorbed a staggering
net influx of 330 000 new people. 49.5% were foreign nationals immigrating to the UK
from the EU, mostly from Poland, Ireland, Italy, Lithuania and Germany. The remaining
50.5% were mainly from the US, Canada, India, Pakistan and Australia. This high net
influx, as well as the refugee crisis affecting Europe, gave Britons the incentive to leave
the EU in order to have more control over their borders.

On the other side of the equation, the people who oppose Brexit are concerned with
Britains access to international trade should the withdrawal take place: the UK actually
exports 44% of its products to the EU, while the latter only exports 7% to the former. It is
often argued that Brexit would isolate the UK from the internal free market, reducing
export incentives and inhibiting local banking, investment and manufacturing. The EU
might also refuse to set up a separate trade deal with the UK in order to deter future
withdrawals from members that are struggling with economic and migratory issues. The
UKs contribution to the EUs budget as well as its compliance to EU regulations pro-
Stay side argues the regulations are exaggerated by the pro-Leave campaign are more
than offset by the economic privilege of being part of a massive single market. The
withdrawal would also hinder the UKs major source of revenue, the service industry, by
halting immigration and the free movement of people. This would render the services
Britons provide less competitive on a continental scale, which would negatively affect the
GDP. Furthermore, setting up barriers with EUs borders will cause millions of Britons
working in the EU and foreign nationals working in the UK to lose their legal status.

Now that the vote is cast and the withdrawal is (almost) set in stone, lets look at the
relevant financial data to have an idea of what to expect in the next few years: In the wake
of Brexit, markets all around the world fell in response to the uncertainty and pessimism
concerning the withdrawal. Many large businesses are unsure about their future access
to the EU market and therefore postponed or froze their investments in the UK. Demand
for the British Pound fell as people started anticipating their currency to have less value
on international markets. The GBP value fell in July from $1.48 to $1.29, its 31 year low
against the dollar and exhibited a 10% drop in value against the euro currency. The UK
stock and bond market also exhibited some major changes: The FTSE 100, after its brief
initial drop, started increasing in value, mainly due to the fact that a majority of indexed
companies report their earnings in USD, which gained in value against the Pound. More
domestic indices, such as the FTSE 250 of midcap companies, fell and remained low for a
month before increasing again. Furthermore, investors started looking for less risky
assets and turned towards UK government bonds (called gilts). The bond price increased
due to increased demand, which dropped the 10-year gilt yield from 1.376% to 0.778%.
However, it is important to mention that although the immediate effects were noticeable,
as of November, the UK market surprisingly did not exhibit dramatic aftermath effects,
as demonstrated by unaffected business investments (which actually increased by 0.9%)
 Maher Ghorayeb, 25897014

and household spending (0.7% increase). This data could be explained by the influx of
visitors that are taking advantage of the weak pound which drove commerce and by the
fact that many investment decisions were made before the referendum took place.

While the majority of Britons were polarized on their Brexit opinions before the vote, the
months following the referendum did not actually confirm either sides position
concerning the withdrawals impact. With still two years before the UK formally
withdraws from the EU by employing Article 50, it is just too early to draw any
conclusion on how the Kingdom will be affected due to the many variables involved. Will
the withdrawal be a hard Brexit, where the UK will be unwilling or unable to negotiate
a free trade agreement with Brussels, or a soft Brexit, were the UK would still have
access to the single market? No one knows how the negotiations will take place and thus
the only thing we can tell for sure is that the next few years are promising to display
major changes and uncertainties in the UK and EU markets, that will mainly be shaped
by politics, the market and the will of the People.