Economic Causes And Economic Consequences Of BREXIT Essay

Question:

Discuss about the Economic Causes and Economic Consequences of BREXIT.

Answer:

Introduction:

BREXIT can be said as an acronym for “British leaving European Union”. The European Union is a political partnership of twenty-eight European countries. It started after World War II with a though that countries which trade with each other are having less likely to war with each other. A single market was created by it which encouraged globalisation and all the products were traded to the people of the countries member of the group. Its currency is Euro and can be said as the biggest economy in the world.

Economic Reasons That Lead Brexit

The prediction of economist regarding the outcome of BREXIT was correct as:

The voters which were in favour of the decision were because according to them preference of economist was not according to them.
The reason of consensus was not described or make understood in clear language.

Economic reasons behind the voting of citizens of British:

An indication that misalignment played a crucial role as the major of the voters of BREXIT were left behind the group which do not have faith in sharing the values and genuinely empathise against the social and cultural diversification.
ns were inherently uncomfortable with the changes in circumstances that have occurred in Britain after being a part of European Union.
According to the economist, much aggressive policies are to be required regarding social liberalism, environmentalism and feminism (Kauko, 2016.).
Immigration was also a reason behind it as it was said it is a manifestation of cultural anxiety which meant inequitable distribution of national economic resources.
To hold back the opportunity in emerging markets because of being a part of European Union.

Impact of brexit on the stock market of uk, us and german:

Description of impact of Brexit on stock market of UK, US and German is enumerated as below:

US stocks decreased to the extent of 3.6 %.

The impact on pound was also at the sharp end of market reaction with a decrease of 11.1 % to 1.3299 which is the lowest since 1992. It is the same situation as was present at the time when the UK left the Exchange Rate Mechanism.

The weakness present in the currency was about 11% decline versus the yen and 5.8% against the euro.

The industrial average calculated as per the theory of Dow Jones dropped to 610.32 or in percentile terms, it can be said3.4%.

A huge loss was suffered by both the indexes.

The value of pound was spectacularly decreased to $1.3638. Even a strike of the 31-year low was observed regarding British currency (Crabb, 2016).

Even the other currencies were also affected as the rate of dollar decreased to 102.24 yen while the value of euro was diluted from $1.1121 to $1.1351.

Figure 1 : Pound- Us dollar spot price ($)

[Source: Bloomberg, Eric Platt/ FT, 2016]

The reason behind the reaction of stock market:

The value of oil was reduced, therefore; the U.S. crude declined the predetermined value of oil barrels which was to close at $47.64 a barrel in New York.
The procedure of voting was started one side and the other side negotiations over Britain trade were also initiated.
The vote of citizens of Britain brought a massive change to the uncertainty of markets which can be said as investors loathe also (R.Kierzenkowski and et.al., 2016).
The decision of traders for investment that was seemed as riskier in that circumstances was appeared to lose from disruptions regarding financials flow and trade.

Reaction of broader UK indices reacted on medium as well as small UK stocks in comparison with large German stocks and UK stocks:

The market came off at worst levels and however the central banks queued up to reassure the level of liquidity required.
The pound pitched to the lowest value since 1985.
The stock relating to British was decreased to 3.2% while the percentile of European share was decreased to 8.6 %.
Investors took the support of secured investments and the American government debt and Japanese currency was strengthened (Baker and Piggott, 2016.).
The impact on the borrowing cost was inverse as after the decision it was increased in heavily indebted nation (Gropp, 2016)

The reason behind the reaction of stock market:

The prices of bonds with their yield were also demolished. Even Treasury note dropped to 1.56 percent from 1.75 percent.
of gold jumped to $59.3 or an increase of 4.7 % was observed during the period.
Britain’s FTSE 100 dropped 31 percent. The value of German DAX index was diluted to 6.8% and the index of 40 was reduced to 8 percent in relation to France’s CAC

Immediate impact of brexit on the british pound vs the euro and pound vs the us dollar exchange rate:

The price of sterling was very low across the board of exchange and a whopping loss was observed aligned with yen, dollar and Swiss Franc.
The loss due to the downfall in the exchange rate of the pound was analysed less severe in comparison with other currencies (Fischer, 2016).
It was also observed after the implementation of Britex that exchange rate of the pound could fall to the parity against Euro and the deficit in UK’s current account deficit was also affected due to it.
Figure 2: Impact on GBP and EURO after BREXIT

[Source: www.poundsterling.com , 2016]

The manner in which exchange rate will affect export of UK and EU: The exports of UK are less than its imports and it basically depends on a pound for foreign investment flows.

The effect on exports of UK is not that severe but the thing to be taken care is that Europe should be treated with respect and the lead should be received from politicians.
The analysis reviewed a major part of UK exports accounted by financial services observed enhanced exposure balance of trade of UK by financial market and other economies.

The impact of exchange rate on the price of import to the UK and it purchasing power:

  • The payment of imports from the US is done in diamonds which means the referendum result will demolish the value of pounds.
  • The focus on US import stock is given so that the pound could be stabilised before reviewing of prices.

The purchasing power has started to wobble after the referendum hence if the exchange rate of pound drops by 10% then the price of the product will increase by 10%.

Conclusion

The above study depicts that after the commencement of referendum Britain will have to take every decision after a thought. This step has affected both trade and commerce. It can be said there is some positivity present after the decision which has been described above. The various exchange currencies, export and import of the country has been affected in positive as well as negative manner.

References:

Books & Journals

Baker, J. and Piggott, R. 2016. Modelling events: the short-term economic impact of leaving the EU. Economic Modelling. 58, Pp.339-350.

Crabb, A. 2016. Wine export: Impact of the'Brexit'on Australian wine exports. Wine & Viticulture Journal. 31(3). Pp.73.

Fischer, T.B. 2016. Lessons for impact assessment from the UK referendum on BREXIT.

Gropp, R.E. 2016. Financial market reaction to poll data suggests strong effects of a Brexit on exchange rates and the banking system both in the UK and in the EU.

Kauko, K. 2016. What would Brexit mean for the financial markets?

Kierzenkowski, R. and et.al. 2016. The Economic Consequences of Brexit.

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