Effects of Brexit on the UK Economy - Essay Prowess

Effects of Brexit on the UK Economy


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Brexit is a colloquial name that refers to the act by the UK to end its membership with the European Union (EU). The withdrawal happened after the June 2016 referendum when 52% of the citizen voted to end the country’s membership with the EU. UK formally announced the withdrawal from the EU in March 2017. The withdrawal process was delayed by the UK general election held in June 2017 and three subsequent extensions to Article 50 of the Treaty on European Union which serves as the notice of intention to exit the EU by any of its member states.

After the results of a subsequent general election in 2019, the withdrawal agreement was ratified and UK officially seized to be a member of the EU on 31st January 2020. After the official exit, there is an expected transit period that will end on 31st December 2020. During this period, the UK will be in discussions with the EU in regard to their future relationship as a non-member (Bennett, 2020).  The paper will explore how the UK ending its membership at the EU will affect the economy of the country.

Brief History of the European Union (EU)

The European is a sui generis organization which can be described as a political organization. It has seven principal decision making bodies. The EU throughout its history has had different names and mandates until 1993 when it was finally named the European Union. The organization was initially the European Coal and Steel Community (ECSC) established in 1951. At this point the organization sort to unite European countries to secure peace in the region and uplift the member states economically and political (EU, 2020). The ECSE had six member states; France, Italy, Belgium, Netherlands, Germany and Luxembourg. It later changed to the European Economic Community (EEC) established in 1957. The aim of the EEC was to provide a common market for its six members. The European Union (EU) was established in 1993 by the Maastricht Treaty and now has twenty-seven members (EU, 2020).

Some of the achievements of the EU so far have been to create a single market of the Europe region that is enabled by the free movement of goods, people, services and money. The Schengen agreements by the EU allow citizens of member states to freely move within these countries without their passports being checked at borders. This has allowed citizens to easily study in different universities across member states. Introduction of the euro as the unifying currency across member states is also an achievement of the union even though it is yet to be fully implemented (EU, 2020). The EU also works with organizations like the Organization for Economic Co-operation and Development (OECD) to establish tax policies that eradicate intensive tax planning practices by foreign companies in an attempt to evade taxation.

Challenges Facing the UK as a member of the EU

The UK exited EU due to various challenges it faced as a member of the union.

The first challenge was that the sovereignty of Britain was threatened by the EU. Some EU treaties in the sectors of agriculture, copyright and patent law, data protection as well as competition policy have created more power for EU rules that overrides national laws. At the same time, the European Commission is neither directly answerable to Britain’s leadership nor the British citizens yet the British leaders can use their influence to select the European Commission’s members every five years. The UK’s membership to the EU is seen as having taken away decision making by the UK from the UK citizens through their elected representatives. Instead decision making for the country is seen to be done by regulatory bodies of the EU such as the European Commission (Jennings & Lodge, 2018). In fact prior to the exit vote, 32% of the UK citizens in an Ipsos MORI poll cited the EU as one of the main problems facing the UK (Ipsos MORI, 2016).

The second challenge facing UK as a member of EU was large numbers of immigrants into the country. The EU’s policy on free of movement of people meant that anyone from other EU member states would get into the UK and live in the country as well as take up a job without any restrictions. In 2015 alone, approximately 172,000 people immigrated to the UK from other EU countries compared to the 191,000 that emigrated from non-EU countries (Wadsworth,et.al. 2016). This rule was hard hitting for Britain during the financial crisis of 2008 as citizens from other EU states and especially the poorer states, flocked to the UK for work. Such migratory populations have undercut the native working population and decreased their wages. The immigrants also put pressure on public amenities like schools, hospitals and the security agencies (Goodwin & Milazzo, 2017).

The third reason cited for leaving the EU was the contribution the UK made to the EU annually. Though the EU does not collect taxes from member states, they are required to remit some contribution towards EU’s budget. The UK is estimated to remit about thirteen billion pounds per year to the EU’s budget (Thompson, 2017). While part of this remittance is still spent to proivde services in the UK, many pro-Brexit supporters felt it was better to Parliament decide on how that money is used within the country.

Lastly, Brexit was an opportunity for the UK citizens to revolt against the elite who have been accused of running the country without the consideration of the people. The elite comprise of politicians, banks and other financial institutions that hold power in the country and who were of the opinion to remain in the EU (Arnorsson & Zoega, 2018). The referendum was seen as an avenue to give the power of decision making back to the people.

UK’s Economy after Brexit

The anticipated impact Brexit would have on the economy of the UK was a key feature in the discussion around leaving the EU. Different sides of the argument cited the possibility of positive effects on the economy while others predicted detriment on the UK’s economy once it left the EU.

Positive Impacts

By exiting the EU, Britain can create economic opportunities for itself especially with nations outside the EU. The EU’s freedom of market and other economic restrictions held the UK from trading with other countries. The belief is that the ability to trade with countries of its choosing will enable the UK to position itself as an independent market and benefit the economy. The financial crisis of 2008 and the Eurozone crisis of late 2009 demonstrated the danger of being part of the integrated economy of the EU. The exit from the EU is a chance for Britain to move its economy out of the union as a way of protecting it (Thompson, 2017). An integrated Europe economy would pull down the UK’s economy even where the UK independently was not facing a financial crisis.

Negative Impacts

An immediate negative impact was that the cost of the referendum for the Brexit cost accounted for 2-2.5% of the GDP. This resulted in a reduction of the national incomes of the citizens by 0.6-1.3%. The Brexit debate induced an uncertainty about UK’s future trade policies. The uncertainty created an immediate impact as it reduced international trade with Britain from 2016(Graziano et. al. 2018). European firms reduced their investments in the UK following the debate on leaving the EU.

Before Brexit, companies especially those in Europe would easily move to Britain and provide jobs for the population. Now, companies especially in the finance and banking sectors have relocated their businesses to other countries following the move by Britain to exit the EU. It is estimated that by 2019, about one trillion US dollars had been transferred out of Britain by banks and another 130 million US dollars had been transferred out of Britain by insurance and asset management companies (Wright et. al. 2019). In the same way, British companies will not freely move to other European countries as was allowed under the EU free movement policies.

Exiting from the single market rules that govern EU member states trade would mean that UK’s trade is controlled by the World trade Organization rules. WTO rules would create difficulties for UK exports to other countries in the EU. The first difficulty is that exports from the UK would be subject to customs formalities which are an extra expense on Britain. UK product certification would seize being recognized within the EU and this would call for extra costs for certification in every country the UK exports its products.  If the UK exits the single market, there are chances of imposing non-tariff barriers to trade (Leave Alliance, 2017). Non-tariff barriers would mean lengthy delays of exports at borders of EU countries, import quotas and immigration restrictions that would lead to UK workers losing EU citizenship in EU countries.  The tariffs that will be associated with the new trading rules for Britain have a likelihood of causing inflation in the country.

By leaving the EU, Britain will be forced to face the Divorce Bill which will cost the country significant amounts of money. The Divorce Bill is a financial statement that states that the UK must pay of its liabilities to the EU before leaving the union. The liabilities would include any unpaid remittances to the EU for previous years. The figure estimated in the UK’s divorce bill is at least 39 billion pounds (Menon & Portes, 2019). The money spent to cover this bill is likely to affect the progress of the economy.

Constraints on immigration are likely to hurt the UK’s labour force and affect the economy. The free movement of people enabled the UK to receive immigrants from other EU states who provided the bulk of the country’s labour force. Limiting such people will mean that the UK does not get a constant supply of labour, and especially low skilled labour at minimum wage, which is likely to stall the economy. The young workers from Britain will also find it challenging to move to other EU like Germany which is estimated to be in need of about three million skilled workers by 2030.Remitances from citizens working in foreign countries is therefore likely to lower for Britain.

It is unclear on how the stock exchange of UK companies of the UK currency will be affected by Brexit. On 24th June 2016, the day the UK voted to exit the EU, the Financial Times Stock Exchange 100 (FTSE 100) recorded a 3% fall by the close of trading. The FTSE 100 is an index within the London Stock Exchange that monitors the performance of the top 100 companies in terms of market capitalization. The index is used to estimate prosperity of businesses under the UK company law. The fall recorded at the FTSE 100 continued until 1st July 2016, the rate had risen to a ten month high (BBC, 2016). The same happened to the sterling pound which initially was at its lowest level compared to the dollar on 24th June 2016. The pound remained low for the better part of June and July 2016 but has now stabilized.


The impact Brexit will have on the economy of the UK as well as other sectors of the country is yet to become clear once the UK finalizes its transition period by the end of 2020. Some economists predict that the economy will be negatively affected and that the country would go into an economic depression of about five years before the country recovers from this decision. Others are of the opinion that the economy will not be affected and that having new trade partners is likely to boost the marketability of the UK as a trade partner.  Only time will reveal the true impact of Brexit on UK and especially in regard to its economy.


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