Can Brexit Bring Back Growth? - Outside View by Nitin Gregory

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Can Brexit Bring Back Growth?
Jul 8, 2016

It is now more than a week since the shocking Brexit referendum. A lot is still unclear. Who will lead the country? What is the long-term economic impact? What is the future of the EU?

In the era of global prosperity, it was easy to sell the idea of open markets and globalisation. There was enough cake to go around. The last few decades have seen increased integration and trade between countries. Developing economies have benefitted from this trend.

Today, however, we are seeing the rise nationalism in many parts of the world. The outlook for growth is poor. And the middle class is wary of a technological shift. It is natural to view open borders and trade deals with skepticism.

The history of the EU dates back to 1993. The idea of a united Europe was very relevant in a post-war world. It was thought to reduce the risk of political tensions and create a large trading area where goods and services could move freely. It would also provide a single currency - insulating consumers from exchange risk in this region. The tradeoff was the free movement of labour, loss of monetary control, and adherence to a common framework of trade regulations.

The union today consists of 28 countries. Countries such as Norway and Switzerland do not use the euro but have a special status in the union.

The key drivers of the Brexit debate were (and still are) trade and immigration. The 'Remain' camp believes that leaving the EU will cut access to a large market and hurt trade. The 'Leave' camp is disgruntled by open borders and the perceived loss of jobs to immigrants.

The Norwegian model

The 'Leave' campaign has highlighted the Norwegian and Swiss models as the next step. This choice is hard to understand. This model retains access to the free market, but it has to adhere to a smaller subset of EU laws.

However, it still allows the migration of people within the Schengen area. In other words the access to the EU market comes with the price of free movement of people. Not ideal for the 'Leave' camp. More importantly, Norway has no vote in the framing of trade laws, which the UK does (or at least currently does).

Setting a precedent

The indications are that UK will lose access to the single market. It would be harmful for the EU to go easy on Britain. Any concessions regarding the free movement of people will result in similar requests from other members.

The very idea of the EU - free movement of goods, services, people, and money - would be in jeopardy.

What next?

The UK will go through a protracted period of uncertainty - to negotiate the divorce. But Brexit is hardly the panacea that people are expecting. The stemming of immigration will not create jobs, and the loss of the single market is temporary. The UK can still negotiate terms (albeit worse) with the EU and other countries to ensure that they can still participate.

And ultimately, Brexit alone will not determine long-term growth. Productivity drives growth. The productivity of capital and labour will decide the economic future. Technological innovation, a young and educated work force, and policies that spur entrepreneurship will decide long-term growth.

Access to markets and control over borders will have an impact - but nowhere near the impact of the fundamental drivers...

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Can Brexit Bring Back Growth?". Click here!

  

More Views on News

A Unique Sector for Short-Term Profits (Fast Profits Daily)

Apr 12, 2021

This ignored sector could deliver big short-term profits.

My Recent Recommendation Will Profit from the Global Supply Chain Crisis (Profit Hunter)

Apr 12, 2021

A tiny chemical company, started in the Licence Raj era, is a great example of a new wealth creating opportunity.

Mirae Asset Tax Saver Fund: Seizing Superior Growth Opportunities (Outside View)

Apr 9, 2021

PersonalFN's analysis on the features and performance of Mirae Asset Tax Saver Fund.

Time to Change Our Trading Blueprint? (Fast Profits Daily)

Apr 9, 2021

The Indian government recently announced cut backs on crude oil imports from Saudi Arabia. Does this change our crude oil trading blueprint. Find out...

An India Revival Stock I'm Bullish On... (Profit Hunter)

Apr 9, 2021

This could take India to the position of 3rd largest economy.

More Views on News

Most Popular

A Critical Update on the Market (Fast Profits Daily)

Mar 30, 2021

In this video, I'll tell you why I am recommending caution in the market at this time.

My Recent Recommendation Will Profit from the Global Supply Chain Crisis (Profit Hunter)

Mar 31, 2021

A tiny chemical company, started in the Licence Raj era, is a great example of a new wealth creating opportunity.

My Stock Trading Strategy (Fast Profits Daily)

Mar 31, 2021

In this video I'll show you exactly how I go about picking stocks for trading.

What You Need to Find Hundred Baggers (Profit Hunter)

Mar 30, 2021

100 baggers of the last decade share this common trait. Here's how to use it to nail future multibaggers.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Apr 12, 2021 10:23 AM

MARKET STATS