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The effects of Brexit

Iris Veldman
Iris Veldman is a second year Economics and Business Economics student (EBE) who recently joined the Asset|Blog Committee.

Two years ago, the majority in the UK voted for Brexit. The negotiations between the UK and the rest of Europe are still in full swing. These negotiations are about the terms on which the UK will leave Europe. In the time that they have been negotiating, a lot has happened in the economy of both the UK and the rest of Europe. In this article I will line up these consequences that have already taken their effect and will also discuss the consequences that are yet to happen.

One of the biggest effects is the big drop in the exchange rate. where the British pound before the vote for the Brexit stood still at £1 = €1.30539, this has now dropped to £1 = €1.1071. this is a relatively large decrease in value. Due to this depreciation, households will have more problems to make ends meet. The investment market is also affected by the depreciation, because there will be a lot more uncertainty than before the Brexit vote.

Not only did the exchange rate drop, the interest rate on various government bonds from other countries fell as well. This was because people sold their shares. The Deutsche Bank and the Monte Dei Paschi di Siena banking group suffer the most from this. The latter fell by 80% in stocks. A lot of government bonds were also sold. The people who sold their shares and bonds bought sovereign debt.

The UK has two possible ways to leave Europe. The first way is called the ‘soft Brexit’. The ‘soft Brexit’ would mean that the UK stays within the European internal market and other institutes like Euratom. This would make it easier for the UK to trade with Europe, but it would also make it easier for Europe to trade with the UK. In case of a ‘hard Brexit’, where all the ties to Europe would be cut, this would not be the case. There wouldn’t be free trade then. This will then negatively affect both the UK and Europe, as costs will be linked to export to each other. The UK has compensated with these costs because they don’t have to pay Europe to be in the European Union. However, depending on the negotiations going on at the moment, the UK might still be paying Europe in the foreseeable future. The UK is also not the only one who has extra costs to export to Europe. European countries also have higher costs to export to the UK as well. The countries don’t have money to compensate this.

Depending on the negotiations going on right now, the UK will choose for a ‘soft Brexit’ or a ‘hard Brexit’. In the case of a ‘hard Brexit, the Netherlands will need to pay 1.6 billion more in 2019 and 2020 to Europe because the UK left. In 2026 this will be 2.5 to 3 billion more. These are only the costs to be in Europe. The costs that will occur for customs and inspection cost, including more staff to do so, are predicted to be another 700 million. This will not only hold for the Netherlands, but for more European countries. The Brexit therefore has a much bigger effect than just to the UK.

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