Brexit Explained Simply

Over the past few days, we have been reading reports about certain breakthroughs in the Brexit deal. After more than four years of negotiations, the United Kingdom had finally exited or removed its membership from the European Union (EU) in January 2020. Now, the 11-month transition period will come to an end on December 31. The two sides have also approved a historic trade and co-operation deal. This new deal will provide the framework for the relationship between Britain and the EU in the years to come. Let us understand why the UK decided to exit the EU. Let us also learn about specific details regarding the new trade agreement.

Brief History

To understand why Britain decided to remove its membership from the EU, we need to look at a bit of history. 

It was in 1967 that a group of European countries decided to collectively form one common market. It was initially referred to as 'The European Communities’. The EU was established as a single European political entity to end the centuries of warfare among European countries (that closed with World War II). The geo-political entity would ensure the freedom of movement of goods, services, people, and money. After 6 years of its formation, Britain decided to join the European Communities. In 1975, a referendum was held in the country, wherein 67% of the population agreed that Britain could be a part of the new common European market. 

In 1999, the EU decided that all countries that fall under it should have a common currency- the Euro. However, Britain stated that they would not agree to this change, and would retain their Pound. The country never fully accepted the legitimacy of European control over British institutions in a way that other EU members did. Since 2008, Britain felt that all major European economies were performing very poorly. This was primarily due to the fall of the Euro after the 2008 recession period. 

Many political leaders and a major size of the population felt that "principle decisions about the UK should be taken in the UK". They also believed that the country had to regain control over immigration, as well as its borders. This had been the major reason why Britain decided to exit the EU.

The Brexit Referendum

In June 2016, the Brexit referendum was held to ask the British electorate (all people who are entitled to vote) whether the country should remain as a member of the EU, or leave it. "Leave" won the referendum with 51.9% of the ballot with 17.4 million votes, and "Remain" received 48.1% or 16.1 million. The result defied expectations and caused disruptions in the global markets. After almost 30 years, the British Pound fell to its lowest level against the dollar.

Former Prime Minister David Cameron, who called the referendum and campaigned for the UK to remain in the EU, announced his resignation the following day. He was replaced as leader of the Conservative Party and Prime Minister by Theresa May in July 2016.

Thus, the process of Britain leaving the European Union formally began on March 29, 2017. Britain initially had two years from that date to negotiate a new relationship with the EU. In November 2018, Britain and the EU agreed on a 599-page Withdrawal Agreement. This included important issues such as citizen's rights, the divorce bill, and the Irish border. However, members of the British parliament voted 432-202 to reject the agreement. Theresa May stepped down as party leader in June 2019, after failing three times to get the withdrawal deal approved by the Parliament. 

She was succeeded by Boris Johnson, the former Mayor of London. After 3 months of his rise to power, the UK Parliament passed the EU (Withdrawal Agreement) Bill. Due to the complex nature of the withdrawal process and political unrest in the UK, there was another significant delay. Finally, after months of negotiations, the UK and European Union agreed on the new withdrawal deal in January 2020.

The Transition Period

The UK left the EU on January 31, 2020. However, they mutually agreed to retain all policies until 31 December. An 11-month transition period was initiated, during which the UK followed EU rules. The leaders from both sides were given time to come up with a new trade deal. This deal would set the framework for trade once the UK leaves the EU market. This transition period will end at 11 pm on December 31, 2020. This means that the free movement of goods, people, services, and capital will stop from January 1 onwards. The EU and Britain will become two separate market spaces with distinct regulations. 

The New Trade Deal

According to the deal agreed upon by the UK & EU, there would be no taxes on each other's goods when they cross borders (known as tariffs). Also, there would be no limits on the number/quantity of items that can be traded, which are known as quotas. While the UK was a part of the EU, companies could buy and sell goods across EU borders without paying tariffs. Without this new deal, businesses would have had to start paying these taxes- which would have added to their costs. No deal would have also meant more checks at borders, which could have caused delays for lorries transporting products.

People travelling from the UK will still be able to enter countries under the European Union without a visa. However, they may be subject to screening and will no longer be able to use the biometric passports. Also, European boats will continue to get more access to the UK’s fishing waters and the two parties will jointly manage the fish stocks in EU and UK waters.

For this new deal to be made into a law, both the European and UK Parliaments have to formally approve and sign it. On December 28, Ambassadors from 27 European Union (EU) Member States unanimously approved the EU-UK post-Brexit trade deal. On December 30 (Wednesday), the members of the UK Parliament also voted in favour of the deal. Thus, Brexit will end years of uncertainty weighing over the UK’s economic future.

Will Brexit Affect India?

Now that the new trade agreement has been made into law, India will have to adjust to the change in ‘world order’. Over the past 4 years, the value of British Pounds has been declining alarmingly. It has been reported that its value will keep falling even after the Brexit deal. This could impact India’s exports to the UK. The depreciation of the Indian Rupee will also lead to Indian import companies operating in the UK to report losses. There are also reports which state that Brexit will have a negative short-term impact on the Indian IT sector.

However, the British pound is among the most expensive currencies in the world. After Brexit, the UK currency could become cheaper and would likely boost exports from India as an alternative to the overpriced Eurozone. The cost of travelling to the UK could become much more affordable.

As per EU rules, member countries should not invite immigrants from non-EU countries unless there was a significant shortfall of talent within the EU. Now, Brexit would provide a new opportunity for Indian professionals to look for work options in the UK. There are also reports which state that business ties between the UK and India are most likely to strengthen. After losing access to the EU single market, the UK would want to develop trade relations with emerging markets such as India. 

Market Reaction

Due to relief from the Brexit deal and positive news from Covid-19 vaccines, the FTSE 100 hit a nine-month high on December 29. [The FTSE 100 is an index that tracks the 100 largest public companies by market capitalization that trade on the London Stock Exchange] Interestingly, we also saw that shares of Tata Motors (which has a very strong presence in the UK due to Jaguar Land Rover) rose nearly 6% due to the positive news regarding the new trade deal. Various financial analysts have stated that listed companies that have a significant presence in the UK & EU will continue to enjoy the benefits of free trade. This includes large firms such as Motherson Sumi, Tata Steel, TCS, Wipro, Infosys, and Tech Mahindra.  

The end of the transition period and approval of the new trade deal could have a positive impact on the European stock markets. It would also mark the end of high-political tensions amongst major countries in Europe. Let us look forward to seeing how these significant changes are going to be implemented in the months to come.