Great Britain has officially begun the process of exiting the European Union after a highly contentious, and incredibly narrow vote to leave.
There were immediate impacts in international markets – a global sell off of the Pound saw the currency hit its lowest point since 1985. Global markets (including the TSX) dropped substantially, and virtually all markets went red as analysts and economists try to wrap their head around the implications of the Brexit.
“Once Britain severs ties with Brussels it’s unknown how trade with Britain will look for many countries.”
We can expect markets to settle in the near future, however Brexit will have long-term and far reaching impacts. In this article I will assess some of the possible next steps for Great Britain and how the Brexit will impact global markets, including the Canadian economy.
Brexit Voting was Just the Beginning of the Process
The Brexit vote was unprecedented and will have significant impacts on the status of the E.U. for generations to come. It represents the first member state who has had a referendum and voted to leave the Union. Historically, states have been pushing for membership into the E.U., so in many ways we are entering into uncharted waters. There are many unknowns at this point, but the one thing that we do know for sure is that this will be a very long process.
The E.U. government in Brussels now needs to start a negotiation process with Great Britain on the terms of exiting. David Cameron, current P.M. of the U.K., has stated he will resign in the fall so we may need to wait until new leadership emerges before the exit negotiations can formally begin. Analysts are currently speculating that the negotiation process could take upwards of two years to complete.
Again, this is all new, both for Britain and the Union. Both parties will be trying to maximize their return on negotiations, however the European Union will need to exercise a tremendous amount of caution as this could potentially set the tone for other states who feel less than satisfied with their relationship with Europe.
How Brexit May Affect Future Sovereignty Movements
Similar to Quebec’s (at times) contentious relationship with the federal government of Canada, there are several sovereignty movements within the E.U., and seeing Britain withdraw from the E.U. may provide momentum to more disruption within states. Discussions of independence from Britain in Scotland and questions of Northern Ireland’s relationship to the U.K. are likely to resurface given the referendum result.
Scotland has already firmly stated their opposition to the result and Scottish First Minister Nicola Sturgeon stated: “[Scotland] proved that we are a modern, outward-looking, and inclusive country, and we said clearly that we do not want to leave the European Union…I am determined to do what it takes to make sure these aspirations are realized.” She further indicated that a referendum on Scottish independence is “highly likely”.
Similarly, Northern Ireland (the only part of the U.K. that shares a land border with the E.U.) has a lot at stake here. Withdrawal from the E.U. may lead to border controls between Northern Ireland and the Republic of Ireland being reimposed, moreover this would see the end of transfer payments, to which Northern Ireland has benefited tremendously.
Further out on the horizon, this may impact other sovereignty movements in the European Union. Belgium, which is coincidentally the home of the European government, has a fairly divided society. In 2010 the government fell, partly based on tensions between decaying relations between the Flemish and Walloons. At the time there were calls for partitions, independence, and the creation of new states. Although the situation is stable, the economic instability as a result of Brexit may lead to calls for independence again.
Catalonian separatists in Spain may also use this as a momentum builder to push harder for independence. Tensions in Spain are worsened by a fairly unstable political situation in Madrid, as well as a fairly bleak economic situation that disproportionately impacts youth (upwards of 40% of youth remain unemployed).
Brexit’s Far Reaching Trade Implications
Most analysts agree that Brexit will significantly alter Britain’s relationship with the continent. Under European law, trade between member states was fairly straightforward. However, once Britain severs ties with Brussels it’s unknown how trade with Britain will look for many countries. There are questions of whether or not the U.K. will need to develop a new trade deal with Europe, will new tariffs develop, if protectionist movements in the E.U. will limit trade to the U.K., etc. Beyond this, however, there are important implications for the global economy to consider as well.
Canada will need to re-evaluate its trade relationship with both the E.U. and the U.K., especially in light of the forthcoming Canada-European Trade Agreement (CETA). Although I expect relations with the U.K. to remain positive, it will be difficult to develop trade agreements with the E.U. and U.K. separately. Given how complex CETA negotiations have been, with both sides making concessions and protecting various interests, negotiating terms with a new party will be difficult.
Canadian Small Businesses will be Impacted by Brexit
Once the dust settles on Brexit it will be interesting to see how Canadian companies deal with Britain. In the short term there should be minimal changes, however once CETA is enacted this may lead to preference to dealing with the continent before Britain, thereby reducing Canadian trade to Britain.
Nonetheless, given the importance of Britain to Canada (both historically and economically) I expect that a new agreement will be developed. Small businesses in Canada who rely on easy access to international markets may end up focusing efforts on developing exports on the continent as opposed to the U.K. If a small business is able to access the European market with limited (if any) tariffs or red tape, it’s easy to see why they would focus efforts here.
Ultimately, Canadian businesses can leverage export-focused government funding programs to help subsidize export development activities, so this will still provide Canadian businesses with lots of opportunity to develop in the U.K., Europe, and beyond.