What Is Brexit?
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What Is Brexit?

14 Min.

Brexit is the term used to describe Britain's departure from the European Union. The exit occurred on January 31, 2020, after a referendum was held in June 2016. The Leave side garnered 51.9% of the vote, while the Remain side received 48.1%. From 2017 to 2019, the UK and EU negotiated the terms of their separation. After Brexit, there was a transition period that ended on December 31, 2020.

Basics

Brexit, the UK's decision to leave the EU, was set in motion on January 31, 2020. On December 24, 2020, a provisional free-trade agreement was reached between the UK and the EU, ensuring tariff-free and quota-free trade in goods. However, uncertainties remain, particularly regarding the significant service sector, which accounts for 80% of the UK's economy. This agreement, known as the Trade and Cooperation Agreement (TCA), was ratified by the UK Parliament on January 1, 2021, and by the European Parliament on April 28, 2021. While it promotes smoother trade in goods, customs checks still create some trade friction compared to the UK's EU membership.

Referendum Outcome

In June 2016, the Leave faction emerged triumphant in the referendum, securing 51.9% of the vote, equivalent to 17.4 million ballots, while the Remain camp garnered 48.1%, tallying up to 16.1 million votes. Voter participation stood at 72.2%. Although the results were consolidated at the national level, they concealed profound regional disparities: Brexit found favor with 53.4% of English voters but garnered just 38% of Scottish voters' support.

Given England's significant population share within the UK, its endorsement notably swayed the referendum outcome. Restricting the vote to Wales, where Leave also prevailed, along with Scotland and Northern Ireland, would have reduced Brexit's support to below 45%.

This unexpected result sent shockwaves through global markets, causing the British pound to plummet to its lowest value against the US dollar in three decades. Former Prime Minister David Cameron, the proponent of the referendum and an advocate for the UK's European Union membership, announced his resignation the subsequent day. In July 2016, Theresa May succeeded him as the leader of the Conservative Party and assumed the role of Prime Minister.

The Article 50 Process

Formal EU departure began on March 29, 2017, when Theresa May invoked Article 50 of the Lisbon Treaty, allowing two years for negotiations. After the June 8, 2017, snap election, May allied with the Democratic Unionist Party but faced obstacles to passing her Withdrawal Agreement.

Talks commenced on June 19, 2017, with uncertainty due to the UK's unwritten constitution. Precedents like Algeria and Greenland provided some guidance. A 599-page Withdrawal Agreement was reached on November 25, 2018, but Parliament rejected it on January 15, 2019, leading to May's resignation on June 7, 2019.

Boris Johnson, a staunch Brexit supporter, became Prime Minister. On October 17, 2019, a new Brexit deal was reached, notably replacing the Irish backstop. In August 2019, Johnson's suspension of Parliament was ruled unlawful by the Supreme Court.

Internal strife hit UK parties, with defections and allegations within the Conservative and Labour parties. Johnson called a general election, and on December 12, 2019, the Conservative Party won a significant majority despite receiving 42% of the vote.

Brexit Negotiations Overview 

David Davis led UK-Brexit talks until his July 9, 2018, resignation, succeeded by Dominic Raab, who left on November 15, 2018, opposing May's deal. Stephen Barclay took over. Michel Barnier represented the EU.

UK-EU divisions became evident as the UK initially aimed for concurrent withdrawal and post-Brexit terms negotiations. At the same time, the EU insisted on settling divorce terms first, a path the UK eventually accepted.

A major point of contention was citizens' rights. The Withdrawal Agreement allowed continued free movement during the transition period, with EU and UK citizens achieving permanent residence through application. No-deal Brexit threats led to EU citizens leaving the UK.

The Brexit financial settlement remained contentious, estimated at up to £32.8 billion. Negotiations were protracted, with the EU initially estimating €100 billion.

The Irish backstop was replaced with a protocol, creating a customs border in the Irish Sea and VAT rules for Northern Ireland, subject to assembly vote after four years. The issue was complicated by the Democratic Unionist Party's alliance with the Tories, opposing the Good Friday Agreement and campaigning for Brexit, while the agreement required impartial UK governance in Northern Ireland. This, along with border controls, added complexity to the Irish border dilemma.

Brexit Arguments 

Leave supporters cited concerns about the European debt crisis, immigration, terrorism, and EU bureaucracy impacting the UK economy. They stressed UK sovereignty, maintaining the pound, and border control.

Opponents, however, highlighted the risks of leaving the EU's decision-making process, as the EU was a vital export market. They valued the EU's four freedoms, enabling the free movement of goods, services, capital, and people. Both sides acknowledged potential short-term economic instability.

In July 2018, Boris Johnson and David Davis resigned from Theresa May's Cabinet due to EU relationship disagreements. Jeremy Hunt replaced Johnson, advocating a softer Brexit.

Institutions like the Bank of England and the Treasury supported the Remain camp's economic arguments, projecting lasting damage under various post-Brexit scenarios. Leave supporters criticized these projections as "Project Fear."

Leave campaigners also used economic reasoning, with Boris Johnson suggesting EU politicians would seek a trade deal due to commercial interests. Vote Leave claimed the UK could save £350 million per week, redirecting it to priorities like the NHS, schools, and housing. The UK Statistics Authority disapproved, calling it misleading, but a mid-June poll showed 47% of the public believed the claim. After the referendum, Nigel Farage distanced himself from the figure, and Theresa May didn't confirm NHS promises.

Brexit's Economic Impact 

In 2020, the UK formally exited the EU, ushering in a transition period that aimed to maintain trade and customs arrangements, leading to minimal disruptions in the day-to-day lives of UK residents. However, the decision to depart from the EU had significant economic consequences.

During the lead-up to Brexit, the UK experienced a notable deceleration in GDP growth. From a relatively robust 2.4% in 2017, it slowed to approximately 1.7% in 2018, primarily marked by a significant decline in business investment. While actual growth reached 1.6% in 2019, a staggering drop of -11% occurred in 2020, largely attributed to the complexities of the transition. Subsequently, there was a notable rebound in 2021, with GDP reaching 7.6%, but this momentum eased in 2022, with growth settling at 4.1%.

An interesting employment trend emerged in the period leading up to Brexit. The UK's unemployment rate reached a remarkable low of 3.9% in the three months before January 2019. This was largely attributed to employers choosing to retain their workforce instead of making significant project investments, reflecting a cautious approach amid the uncertainties of Brexit.

June 2017 Snap Election 

In an unexpected move on April 18, Theresa May called for a snap election, deviating from her prior commitment to avoid one until 2020. Initial polls hinted at the potential for May's Conservative Party to strengthen its narrow Parliamentary majority, which stood at 330 out of 650 seats in the Commons. However, as the campaign unfolded, Labor made significant gains, fueled in part by a Tory policy reversal on end-of-life care funding.

The election results delivered a blow to the Conservatives, losing their majority, securing only 318 seats compared to Labor's 262. The Scottish National Party secured 35 seats, with other parties claiming 35. The outcome of this hung Parliament raised questions about May's mandate for Brexit negotiations, leading leaders of Labor and the Liberal Democrats to call for her resignation.

Despite mounting pressure, May refused to step down, asserting, "Only the Conservative and Unionist Party has the legitimacy and ability to provide that certainty by commanding a majority in the House of Commons." Subsequently, the Conservatives formed a coalition with Northern Ireland's Democratic Unionist Party, which won 10 seats. However, May's original intention to use the election to solidify her party's Brexit mandate and negotiation position ultimately backfired, dispersing political power and increasing the complexity of the Brexit process.

Scotland's Push for Independence

After the Brexit vote, Scottish politicians pushed for a second independence referendum. However, the June 8, 2017, election results were a setback for their ambitions as the Scottish National Party (SNP) lost 21 seats in the Westminster Parliament. On June 27, 2017, Scottish First Minister Nicola Sturgeon shifted focus away from independence and toward delivering a "soft Brexit."

Notably, not a single Scottish local area voted in favor of Brexit, with the closest margin in Moray at 49.9%. Scotland strongly rejected Brexit, with 62.0% voting to remain and 38.0% leaving. However, Scotland's influence in the overall decision was limited, representing only 8.4% of the UK's population, highlighting the challenge of pursuing independence.

The historical context is vital in understanding Scotland's quest for independence. While Scotland and England formed Great Britain in 1707, their relationship has seen fluctuations. The SNP, established in the 1930s, initially had limited representation in Westminster but gained momentum and secured a majority government in the devolved Scottish Parliament. In 2014, Scotland held an independence referendum, which the pro-independence side lost. However, it reignited nationalist support, and Brexit further fueled calls for Scottish independence. Scotland's economic outlook, especially concerning oil prices, raised concerns about its independence prospects, as did questions about its choice of currency.

Upsides Amid Challenges 

Conversely, a weaker currency subject to global market fluctuations can prove advantageous for British exporters. Certain export-dependent industries could potentially benefit from this situation.

In 2023, the UK's top 10 exports, measured in USD, included:

  • Precious gems and metals: $62 billion
  • Aircraft, engines, and parts manufacturing: $23.4 billion
  • Vehicles: $18.8 billion
  • Pharmaceuticals: $16.5 billion
  • Oil refining: $12.2 billion
  • Petroleum and gas: $9.8 billion
  • Off-road vehicle manufacturing: $7.2 billion
  • Jewelry manufacturing: $6.9 billion
  • Organic chemicals: $5.9 billion
  • Clothing: $5.7 billion 53

Certain sectors were well-positioned to capitalize on the Brexit aftermath. Multinational companies listed on the FTSE 100 experienced increased earnings due to the pound's depreciation. The weakened currency also benefited the tourism, energy, and service industries.

In May 2016, the State Bank of India, the nation's largest commercial bank, proposed that Brexit could be economically advantageous for India. While exiting the Eurozone restricted the UK's access to the European single market, it potentially allowed for a more concentrated focus on trade with India. Additionally, India could navigate trade rules and regulations more flexibly if the UK was no longer bound by European standards.

Diverse Brexit Trade Scenarios 

Theresa May initially advocated for a "hard" Brexit, entailing the UK's departure from the EU's single market and customs union, followed by trade negotiations in the transition period after ratifying the divorce agreement.

However, the Conservatives' poor performance in the June 2017 snap election raised doubts about popular support for a hard Brexit. Consequently, the government proposed a softer Brexit approach in a July 2018 White Paper. This softer version involved leaving the EU single market and customs union while establishing a free trade area for goods. This arrangement would minimize border checks and regulatory hurdles for businesses. Essentially, the UK would align with EU single market rules for goods. 

Notably, the proposed customs relationship would be broader than any other between the EU and a third country. Several precedents existed, including the relationships between the EU and Norway, Switzerland, Canada, and WTO members.

  • The Norway Model: Joining the EEA The UK could have joined the European Economic Area (EEA) alongside Norway, Iceland, and Liechtenstein, providing access to the EU's single market for most goods and services, except agriculture and fisheries. However, this option meant accepting certain EU laws without direct influence; a notion May deemed an "unacceptable loss of democratic control." 
  • The Switzerland Model Switzerland's complex relationship with the EU involves around 20 major bilateral agreements. It is a European Free Trade Association member and enjoys access to the single market for goods (excluding agriculture) but not for services (except insurance). Switzerland contributes modestly to the EU budget. However, its compromises on immigration, budget payments, and single market rules might not have aligned with the goals of "taking back control" or the EU's preferences. 
  • The Canada Model: A Free Trade Agreement Negotiating a free trade agreement akin to the Comprehensive Economic and Trade Agreement (CETA) with Canada was another option. The tight two-year timeline for Brexit negotiations posed a significant challenge, given that CETA negotiations spanned five years. Furthermore, securing approval from all EU member states, even subnational legislatures, could be time-consuming and uncertain. 
  • WTO: Trading Alone The default option was reverting to WTO terms if an agreement with the EU couldn't be reached. While the UK started work on splitting tariff schedules and trade dispute liabilities with the EU, this was considered a negotiating tactic. Trading under WTO terms would have posed challenges for industries like automotive, where EU tariffs on exported cars could have a substantial impact. 

The UK also risked losing the EU's trade agreements with 63 third countries and faced uncertainties in renegotiating or replacing these deals. Trade Secretary Liam Fox expressed challenges in managing the negotiations, as some countries hesitated to offer the UK the same terms as the EU. 

US Business Impact 

Over the years, American companies spanning various sectors have made significant investments in the United Kingdom, contributing 9% of global foreign affiliate profits since 2000. The US is one of the largest employment markets for UK citizens, with US affiliates generating $129.3 billion in output in 2021. 

The United Kingdom plays a pivotal role in the global operations of American corporations, encompassing assets under management, international sales, and research and development initiatives. Historically, American firms have regarded the UK as a strategic entry point to the broader European Union market. However, Brexit poses potential risks to affiliate earnings and stock prices for companies closely tied to the UK, prompting reevaluations of their operations across the UK and EU.

US businesses and investors exposed to European banks and credit markets may confront credit risk challenges. European banks could face the need to replace $123 billion in securities, contingent on the Brexit outcome. Moreover, excluding UK debt from European banks' emergency cash reserves may lead to liquidity issues. The decline in European asset-backed securities since 2007 is poised to escalate due to the UK's departure.

EU Exit Sentiments in Other Member States 

While the focus has been on the UK's departure from the EU, Euroskeptic movements have also left their mark in several other member states, influencing national politics in the post-Brexit era. Although these movements have struggled to secure power at the federal level, the possibility of future referendums on EU membership remains.

Italy 

Italy's delicate banking sector created tensions between the government and the EU. Italy provided bailout funds to protect small bondholders in defiance of EU rules. In response to EU threats of sanctions, the government revised its 2019 budget, reducing the planned budget deficit from 2.5% to 2.04% of GDP.

Matteo Salvini, leader of Italy's far-right Northern League and deputy prime minister, called for an EU membership referendum immediately after the Brexit vote. He expressed that the Brexit outcome challenged the notion that Europe's affairs were beyond Italian intervention.

Salvini's ally, the populist Five Star Movement led by former comedian Beppe Grillo, proposed a referendum on Italy's euro membership (not EU) but later formed a coalition government with the Northern League in 2018, with Giuseppe Conte as prime minister. Conte ruled out the possibility of an "Italexit" during the 2018 budget dispute.

France 

Marine Le Pen, the leader of France's Euroskeptic National Front, celebrated Brexit as a victory for nationalism and sovereignty in Europe. Despite her enthusiasm, she faced defeat in the French presidential elections of 2017 and 2022, losing to Emmanuel Macron on both occasions.

Macron has cautioned that the demand for "Frexit" (France's exit from the EU) could grow unless the EU initiates reforms. Survey data from 2020 to 2022 indicates that 16% of French citizens support leaving the EU, a decline from 24.3% between 2016 and 2017.

Conclusion

The European Union (EU) came into existence in November 1993 through the Maastricht Treaty. The initial founding members included Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Subsequently, fifteen additional countries joined the union.

The UK's Departure from the EU The United Kingdom's decision to exit the EU, commonly referred to as Brexit, was driven by rising nationalist sentiment, economic concerns, and sovereignty issues. The majority of UK voters opted to leave the EU. Brexit was officially completed at the end of January 2020 following two years of negotiations and a one-year transition period.

Brexit
European Union (EU)
United Kingdom (UK)
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