WellTax Blog

Brexit: The Facts

January 24, 2017

The “leave” victory in the Brexit referendum has initiated a socio-political-economic breakthrough with the past. Undoubtedly, this event will affect the global scenario and trade policy in the years to come.

It is the first victory by a populist party. Farage, the leader of British Eurosceptics, led the “leave” campaign to an unexpected win. The first consequence was the resignation of the former prime minister Cameroon, head of the group in favour of the “remain”. His replacement, Theresa May, has already started the exit process from the European Union, which, since the triggering of Article 50, will last about two years, in order to give time for negotiations with European officials. If May delivers her promises, the Brexit will actualise at the beginning of 2019.

The winners of the British referendum want to maintain healthy relationships with EU countries and the access to the European market as they fear that foreign investors may transfer their interests outside the UK, but will not receive special treatment during negotiations. On the other hand, the European Union will try to prevent future fracture, show the potential “leavers” that being outside “will be very uncomfortable”. Instead of a full-access, as required by the UK, it is possible that they will reach an agreement of intermediate position (individual agreement with each country) between the total market access and status of Most Favoured Nation.

The short-term effects of this event have been erratic. From the first days after the vote, the British economy suffered a heavy blow: the pound has fallen to a minimum after thirty years, in a single day the world’s stock markets have burned 2 trillion of dollars, the rating level in Britain was lowered from “AAA” to “AA”, and the Bank of England has cut interest rates and took other emergency measures helping to stop the British economy running toward recession.

In spite of the first bad consequences, the UK economy started to recover again on August, after the PMI publication, which in July fell sharply to 48.3 (a result below 50 indicates economic contraction). This situation brought eminent economists and academics to forecast that a severe economic downturn for the UK will be very likely to happen. They also said that this event will then be followed by a recession. However, the indicator results of August did not continue to report an economic deterioration but showed exactly the opposite, which contradicted those who threw panic in the markets. It reported an increase of 5 points to 53.3, the fastest rise in the history of the Stock Market Movers recognition, which began 25 years ago. The pound rocketed upward, the service sector rebounded strongly in August; the PMI index rose from 47.4 in July to 52.9, well above analysts’ forecasts. In response, once again, the pound reached new highs from the post-Brexit. Even the most recent data on employment (+ 21.8%), wages (+ 4.7%) and retail sales (+ 1.4% in July alone) proved wrong the catastrophic previsions of the Remain front, in favour of Brexit supporters.

Sabelli, Italian historian and economist, sums up the Brexit: “It is a good thing in my opinion …” and about the changes: “Very simple: the devaluation of the pound, the British asset volatility, speculation on these assets. The British central bank announces a rate hike already this morning (26/12/2016). It can do nothing differently to avoid inflation. Nothing shocking or catastrophic. Nothing that it does not rebalance with time”.

In the Theresa May last speech (17/01/17), she has said the UK “cannot possibly” remain within the European single market, as staying in it would mean “not leaving the EU at all”.

The PM promised to push for the “freest possible trade” with European countries trying to establish a fair trade agreement with each EU countries. Mrs May used her speech to announce her priorities for Brexit negotiations, including maintaining the common travel area between the UK and the Irish Republic and “control” of free movement between the UK and the EU. Thus, her intentions are clear: to trigger Article 50 by the end of March.

However, this morning the Supreme Court ruled that the Parliament have to vote on whether the government can start the Brexit process. This judgement means Theresa May cannot begin talks with the EU until MPs and peers give their support – although this is expected to happen in time for the government’s 31 March deadline.

Therefore, we must wait until the end of March this year, when all the changes occurred in 2016 will start to materialise, whereby we will be ready and exploit such events in our favour: “Change is the process by which the future invades our lives”. (Alvin Toffler)

 

 

Silvano Ghigliani

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