Hard Brexit? Soft Brexit? Smooth? Cliff-edge? So many terms it’s hard to keep them straight. This article, written in October 2017, will attempt to answer a few of your pressing questions.
“Brexit” is a portmanteau of the words “Britain” and “exit.” It describes Britain’s planned exit from the European Union, triggered by a referendum vote in June of 2016.
The vote was extremely controversial, but in the end, 51.89% of British voters chose to leave the EU, compared to 48.11% voters in favor of staying.
Following the vote, Google searches for “How to stay in the EU?” immediately surged, showing how controversial this vote truly was. There have been many questions about how Brexit will affect citizens of the UK and the EU, the British and EU economies and the value of the British pound sterling. While few of those questions have yet been answered as Britain navigates its still murky path toward exiting the European Union, there are some predictions about what the world can expect as the UK works toward Brexit.
One of the perks of membership in the European Union is the single market, which allows open, tariff-free trade between all member states. A hard or cliff-edge Brexit would immediately remove Britain from the single market, meaning it would lose its privileges for free movement of goods, services, capital and people with the member states of the European Union. British Prime Minister Theresa May, who pushed for the Brexit vote, is a proponent of a hard Brexit.
While economic projections vary widely, it’s generally accepted that leaving the EU will hurt Britain financially in terms of lost labor force, higher cost of goods, and an anticipated exodus of some EU companies headquartered in the UK.
A hard / cliff-edged Brexit probably means the effects will be felt sooner and more harshly.
As of October 2017, following a hard / cliff-edged Brexit, UK citizens may no longer be able to freely live in EU countries without applying for visas and residency. Several nations, including Belgium, have threatened to make it more difficult for UK citizens to move freely throughout the EU as talks between Britain and the European Union have turned increasingly sour. Both sides have stated they want to address the uncertainty faced by people living outside their home countries who will be affected, but a hard Brexit would have no agreement in place prior to Britain leaving the European Union, which could mean that UK citizens living throughout Europe could be forced to leave or face other uncertainties.
UK citizens who want to remain a part of the EU may increasingly turn to e-Residency in countries like Estonia, where online, non-location based residency can be obtained.
Following a hard Brexit, EU citizens living in the UK would face somewhat less uncertainty. UK Prime Minister Theresa May has stated that those who have lived in Britain for five years or more would be eligible to apply for “settled status.” May has also stated that EU citizens living in the UK before Brexit goes fully into effect would most likely be allowed to stay; that “under these plans no EU citizen currently in the UK lawfully will be asked to leave at the point the UK leaves the EU.” This is good news for around 3.6 million EU nationals who currently call Britain home, including as many as 600,000 children.
Projections on what effects Brexit will have on the UK economy vary, but according to initial estimates by the British government, Britain’s GDP stands to fall 5.4% and 9.5% over the first 15 years following a hard Brexit. Currently, about 44% of the UK’s trade exports go to EU member states, and without continued free trade with those states, experts worry that the UK would not be able to replace those lost trade revenues. Additionally, the UK could be asked to pay up on £20 billion in unpaid bills it owes to the EU.
A hard Brexit is lacking in the kind of transparency in negotiations that would attract investors, and is therefore likely to decrease the value of the pound. Those who are looking to mitigate volatility in the value of the pound might look to resources like a TransferWise borderless multi-currency account, which allows users to hold, manage and transfer money in dozens of global currencies all at once.
A soft or smooth Brexit is likely one that happens more gradually, with agreements in place with the EU to outline any changes in the freedom to move goods, services, capital and people between the UK and the EU. It wouldn’t necessarily remove Britain entirely from the EU single market and, if it did, it might have new trade agreements in place to replace Britain’s participation in the single market. It’s seen by many as a best-of-both-worlds agreement, allowing Britain to enjoy many of the trade benefits that come with EU membership, while also pursuing trade agreements outside the EU. A soft Brexit is also seen by many as the more transparent option, because negotiations with the EU would be done in the open. However, talks with EU member states have gotten increasingly sour, and many don’t consider a smooth Brexit a viable possibility anymore.
A soft Brexit might offer more flexibility for UK citizens living in the EU, depending on what kind of deal is reached between the UK and EU member states. It might make workarounds like e-Residency less necessary for UK citizens who still want to enjoy the benefits of EU membership. However, this would be entirely dependent on what kind of arrangement is made between the UK and the EU. It may allow for the continued free movement of people, and it may not.
British Prime Minister Theresa May has already said that she doesn’t plan for Brexit to affect EU citizens living in the UK. Some of them may have to apply for visas, residency or permits in order to stay, but she has stated publicly that even after Brexit goes into effect, EU citizens won’t be forcibly removed from Britain. A soft Brexit might include some kind of agreement with the EU for the continued free movement of citizens between the UK and the EU, or it might not. It all depends on negotiations.
Any Brexit may be bad for the UK economy, at least in the short-term. However, the economic implications of a soft Brexit haven’t been specifically calculated and are a little less clear. There are also many possible scenarios, depending on what kind of deal is struck between the UK and the EU.
However, since Britain voted in favor of Brexit, there have already been economic implications that indicate that even a soft Brexit might not be good for the British economy: the GBP fell to a six-year low against the euro and a 31-year low against the dollar, and the UK also suffered downward credit ratings revisions from ratings agencies Standard & Poor’s, Moody’s and Fitch, losing its top-rated credit status.
A soft Brexit, with more transparency and visibility in negotiations, might not be so unattractive to investors in the pound. Still, it’s difficult to predict what the impact would be on the pound sterling without knowing what the soft Brexit agreement between the UK and the EU would look like. WIth a trade agreement that favors the UK, the pound could soar in value. With an unfavorable agreement for the UK, or no set agreement, the value of the pound could drop.
Economists’ opinions differ on this. While many think that losing free trade with the EU would have a very noticeable impact on the British GDP, there are others who believe that with a clean break from the EU, the UK could negotiate free trade agreements with other countries, allowing it to make up for lost trade with the EU. Already, more than half of Britain’s exports go to regions outside of the EU, and without the tariff barriers that come with EU membership, it might be able to negotiate more advantageous trade deals with other countries. The short answer is that no one is really sure yet which type of Brexit would be better for the UK. There are a lot of complex moving parts, and economists aren’t able to predict the effects of either type of Brexit with absolute certainty.
Britain is the second-largest economy in the EU, contributing €14.1 billion to the region’s GDP. It contributes more than it receives in EU subsidies, which amount to around €7.1 billion yearly. That means that losing free trade with the UK is not necessarily a good thing for the EU. A soft Brexit might keep trade intact between Britain and the EU, which would maintain the status quo and not hurt the EU’s economy. However, again, economists aren’t in agreement about what the exact effects would be of either kind of Brexit, and they aren’t yet able to say with certainty what the future holds for the economies of the UK or the EU. There are simply too many possibilities to make reliable predictions until negotiations move forward.
The best kind of Brexit for the British pound sterling is one that inspires confidence in the stability of the UK and its economy. One of the largest determining factors in the value of a currency is how stable its country is. In the midst of Brexit negotiations and decisions, Britain isn’t particularly attractive to investors, and it shows in the value of the pound sterling, which dropped immediately following the Brexit vote.
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