What’s happened so far?
On June 23rd 2016, despite most polling, expectations and predictions, Britain voted to leave the European Union. The political significance of this decision cannot be overstated, and the potential fallout in international relations is something that no one really yet knows the consequences of, however outside of direct politics there is no doubt Brexit has had an effect on the UK economy. In the early hours of the 24th of June, it was initially thought that Britain had voted to remain. The apparent continuity and stability led to the pound looking strong in currency markets, however this changed quite quickly. As it became clear that the Leave campaign had won the referendum, the value of the pound, and the value of the FTSE 100 index all fell dramatically, due to the enormous uncertainty about what was going to happen next, catalysed by the dramatic resignation of the Prime Minister just hours after the result was declared.
Whilst this all looks very bleak, I would argue that currency falling is not in and of itself a serious problem. Currencies fall and recover, and everybody expected a boost of dip in the value of the pound dependent on whether we voted to remain or to leave the EU. In the height of the financial crisis of 2008 the value of the pound fell, for example, but since stabilised and recovered. It is the immediate uncertainty over Britain’s future which caused so many traders to sell pounds, increasing supply and pushing the price down. As the terms of Britain’s exit become clearer, it is likely that the supply will fall and the price will increase once more. The fall in value is noticeable for holidaymakers. Last winter I visited Amsterdam, at which time one euro cost around 73 pence. This summer I visited Germany, by which time one euro cost closer to 85 pence. But as I say, the consequences of this fluctuation shouldn’t be too far reaching besides being inconvenient for travellers.
Are there any long term problems that could arise?
Arguably, what will be most difficult to retain, and what has the most capacity to cause serious, long lasting damage to the economy, is Britain’s financial services industry, the heart of the City of London. London has often been viewed as the financial capital of Europe, a multicultural, open for all city that hosts international, pan European businesses working in conjunction with the rest of the world. A huge part of London’s appeal has been the fact that the UK has been a member of the European Union, meaning we are part of the single market. This has historically meant that trade between London and other European cities has been quite straightforward and relatively free of red tape, enabling productivity to prosper. Because of the uncertainty regarding the terms of Britain’s exit from the EU, the way in which businesses based in London can operate is now under question. It is plausible that companies could relocate to other European financial cities, such as Frankfurt in Germany, leading to Britain losing its reputation as the financial hub of the EU. The implications of this have the potential to be incredibly deep rooted. In the immediate sense, people working in Financial Services will find it harder to reach the pinnacles of the profession in London as the amount of high profile, top jobs decreases. However the implications could run into central government, as tax returns from the city could drastically decrease. This would have effects on the government’s public spending, leading to country wide effects which cannot be accurately predicted.
Currency trading, stockbroking, investment banking firms and so forth will not disappear overnight. There are so many highly creditable firms and institutions in London, such as CMC markets, that it is unlikely anything too dramatic will happen in that short a time. However as Britain completes the process of invoking article 50 and actually leaving the European Union, many firms looking to invest and spread out into other countries may not consider Britain to be in their interests. Global, international companies may consider leaving London and moving somewhere such as Frankfurt. All of this is extremely hard to predict as no one really knows the exit terms Britain and the EU will agree on, but there is serious concern that Britain’s reputation as the financial capital of Europe is under serious threat.