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What is 'Brexit'

Brexit is an abbreviation for "British exit," referring to the UK's decision in a June 23, 2016 referendum to leave the European Union (EU). The vote's result surprised pollsters and roiled global markets, causing the British pound to fall to its lowest level against the dollar in 30 years. Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, resigned the following month. Home Secretary Theresa May replaced Cameron as leader of the Conservative party and as Prime Minister.

"Leave" won the referendum with 51.9% of the ballot, or 17.4 million votes; "Remain" received 48.1%, or 16.1 million. Turnout was 72.2%. The results were tallied across the UK, but the overall result conceals stark regional differences: 53.4% of English voters supported Brexit, compared to just 38.0% of Scottish voters. Because England accounts for the vast majority of the UK's population, support there swayed the result in Brexit's favor. If the vote had only been conducted in Wales (where "Leave" also won), Scotland and Northern Ireland, Brexit would have received just 43.6% of the vote.

The process of leaving the EU formally began on March 29, 2017, when May triggered Article 50 of the Lisbon Treaty. The UK has two years from that date to negotiate a new relationship with the EU. Questions have swirled around the process, in part because Britain's constitution is unwritten and in part because no country has left the EU using Article 50 before (Algeria left the EU's predecessor through its independence from France in 1962, and Greenland – a self-governing Danish territory – left through a special treaty in 1985). (See also, Countdown to Brexit: What Is Article 50?)


"Leave" voters base their support for Brexit on a variety of factors, from the global competitiveness of British businesses to the European debt crisis to concerns about immigration. Britain never opted into the European Union's monetary union, meaning that it uses the pound instead of the euro. The UK also remained outside the Schengen Area, meaning that it does not share open borders with a number of other European nations. "Leave" campaigners argued that Brussels' bureaucracy is a drag on the British economy and that European Union laws and regulations threaten British sovereignty.

Opponents of Brexit also cite a number of rationales for their position. One is the risk involved in pulling out of the EU's decision-making process, given that it is by far the largest destination for British exports. Another is the economic and societal benefits of the EU's "four freedoms": the free movement of goods, services, capital and people across borders. A common thread in both arguments is that leaving the EU would destabilize the British economy in the short term and make the country poorer in the long term.

British exports by destination, 2015 (total = $428 billion)

Source: MIT Observatory of Economic Complexity

Some state institutions backed the Remainers' economic arguments: Bank of England governor Mark Carney called Brexit "the biggest domestic risk to financial stability" in March 2016 and the following month the Treasury projected lasting damage to the economy under any of three possible post-Brexit scenarios: European Economic Area (EEA) membership such as Norway has; a negotiated trade deal such as the one signed between the EU and Canada in October 2016; and World Trade Organization (WTO) membership.

Annual impact of leaving the EU on the UK after 15 years (difference from being in the EU)
  EEA Negotiated bilateral agreement WTO
GDP level – central -3.8% -6.2% -7.5%
GDP level -3.4% to -4.3% -4.6% to -7.8% -5.4% to -9.5%
GDP per capita – central* -£1,100 -£1,800 -£2,100
GDP per capita* -£1,000 to -£1,200 -£1,300 to -£2,200 -£1,500 to -£2,700
GPD per household – central* -£2,600 -£4,300 -£5,200
GDP per household* -£2,400 to -£2,900 -£3,200 to -£5,400 -£3,700 to -£6,600
Net impact on receipts -£20 billion -£36 billion -£45 billion
Adapted from HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April 2016; *expressed in terms of 2015 GDP in 2015 prices, rounded to the nearest £100.

Leave supporters tended to discount such economic projections under the label "Project Fear." A pro-Brexit outfit associated with the UK Independence Party (UKIP), which was founded to oppose EU membership, responded by saying that the Treasury's "worst-case scenario of £4,300 per household is a bargain basement price for the restoration of national independence and safe, secure borders" (the worst-case scenario was in fact £6,600). 

Leavers tended to stress issues of national pride, safety and sovereignty, but they would also muster economic arguments. For example Boris Johnson, who was mayor of London until May 2016 and became Foreign Secretary when May took office, said on the eve of the vote, "EU politicians would be banging down the door for a trade deal" the day after the vote in light of their "commercial interests."

Vote Leave, the official pro-Brexit campaign, topped the "Why Vote Leave" page on its website with the claim that the UK could save £350 million per week: "we can spend our money on our priorities like the NHS [National Health Service], schools, and housing." In May 2016 the UK Statistics Authority, an independent public body, said the figure is gross rather than net, "is misleading and undermines trust in official statistics." A mid-June poll by Ipsos MORI, however, found that 47% of the country believed the claim. The day after the referendum Nigel Farage, who co-founded UKIP and led it until that November, disavowed the figure and said that he was not closely associated with Vote Leave. May has also declined to confirm Vote Leave's NHS promises since taking office.

Market Reactions

The referendum's result severely impacted markets worldwide, though in some cases the effects were short-lived. The British pound crashed by 11.1% against the dollar – its biggest-ever one-day fall – before paring its losses to 8.1%. It has since fallen farther, and at the end of February it was down 16.8% from its June 23 close to $1.2381.

The euro also fell against the dollar on the referendum's result, dropping 4.2%. It recovered before close, but continued to slide in response to Brexit as well as other challenges: Italy's rejection by referendum of constitutional reforms, fears that the euroskeptic Marine Le Pen could win the French election and continuing anxiety over the Greek bailouts.

Equities also fell as a result of the vote, but in contrast to the pound and euro, the damage reversed itself fairly quickly. London's FTSE 100 fell 8.7% and closed down 3.1% on June 24. Germany's DAX fell 10.1% and closed down 6.8%. The S&P 500 fell 3.8% and closed down 3.6%. Shares in British, German, Irish, Italian and Greek banks took double-digit hits. American banks also swooned, though less intensely. As of March 9, however, the FTSE, DAX and S&P are all up by more than 10%. American banks have more than recovered due to optimism about a Trump-era cull of financial regulation.

The End of Britain? Scotland's Independence Referendum

Not one Scottish local area voted to leave the EU, according to the UK's Electoral Commission, though Moray came close at 49.9%. The country as a whole rejected the referendum by 62.0% to 38.0%. Because Scotland only contains 8.4% of the UK's population, however, its vote to Remain – along with that of Northern Ireland, which accounts for just 2.9% of the UK's population – was vastly outweighed by support for Brexit in England and Wales.

Scotland joined England and Wales to form Great Britain in 1707, and the relationship has been tumultuous at times. Founded in the 1930s, the Scottish National Party (SNP) did not win a seat in Westminster until 1970. By 2010 it had just 6 seats, but the following year it formed a majority government in the devolved Scottish Parliament at Holyrood, partly owing to its the promise to hold a referendum on Scottish independence. 

That referendum, held in 2014, saw the pro-independence side lose with 44.7% of the vote; turnout was 84.6%. Far from putting the independence issue to rest, though, the vote fired up support for the nationalists. The SNP won 56 of 59 Scottish seats at Westminster the following year. Once-dominant Scottish Labour's seat count plummeted from 41 to one (the Liberal Democrats and Scottish Conservatives also took one seat each). The SNP overtook the Lib Dems to become the third-largest party in the UK overall, and Britain's electoral map suddenly showed a glaring divide between England and Wales, dominated by Tory blue with the occasional patch of Labour red, and all-yellow Scotland.

2015 UK General Election Results

Source: Wikimedia. Blue = Conservatives, red = Labour, yellow = Scottish National Party, orange = Liberal Democrats. For other parties see original page.

When Britain voted to leave the EU, Scotland fulminated. A combination of rising nationalism and strong support for Europe led almost immediately to calls for a new independence referendum. When the Supreme Court ruled on November 3 that devolved national assemblies such as Scotland's parliament cannot veto Brexit, the demands grew louder. On March 13 SNP leader Nicola Sturgeon called for a second referendum, to be held in the autumn of 2018 or spring of 2019. Holyrood backed her by a vote of 69 to 59 on March 28, the day before May's government triggered Article 50.

Sturgeon's preferred timing is significant, since the two-year countdown initiated by Article 50 will end in the spring of 2019, when the politics surrounding Brexit could be particularly volatile. May's government is likely to try to push the vote to a later date, if it allows it to be held at all.

Even independence, however, might not allow Scotland to avoid "being dragged out of the EU against its will," as the SNP's website describes Brexit. According to the Press Association's Arj Singh, EU Commission spokesman Margaritis Schinas responded to Sturgeon's mid-March announcement by saying that Scotland would have to apply to join the EU, rather than remaining a member. Scotland's bid would face the threat of a veto from Spain, which wants to avoid sending pro-independence messages to the restive autonomous region of Catalonia.

Scotland's economic situation also raises questions about its hypothetical future as an independent country. The crash in the oil price has dealt a blow to government finances. In May 2014 it forecast 2015-2016 tax receipts from North Sea drilling of £3.4 billion to £9 billion, but collected £60 million, less than 1.0% of the forecasts' midpoint. In reality these figures are hypothetical, since Scotland's finances are not fully devolved, but the estimates are based on the country's geographical share of North Sea drilling, so they illustrate what it might expect as an independent nation.

The debate over what currency an independent Scotland would use has been revived. Former SNP leader Alex Salmond, who was Scotland's first minister until November 2014, told the Financial Times on March 17 that the country could abandon the pound and introduce its own currency, allowing it to float freely or pegging it to sterling. He ruled out joining the euro, but others contend that it would be required for Scotland to join the EU. Another possibility would be to use the pound, which would mean forfeiting control over monetary policy.

June 2017 General Election

On April 18 May called for a snap election to be held on June 8, despite previous promises not to hold one until 2020. The move, through which the Conservatives hope to win a mandate to pursue Brexit negotiations, was approved by a 522-13 vote in the House of Commons. Jeremy Corbyn, the leader of the opposition Labour Party, said he welcomed an election, despite his party's poor performance in the polls. Labour has since closed part of the gap with the Tories, however: May's party is expected to win a majority of around 40 seats, according to polls released on May 20, down from the majority of around 150 seats suggested by earlier polls.


The Tories' manifesto puts concerns over Brexit at its center, saying it will "define us: our place in the world, our economic security and our future prosperity." It repeatedly stresses May's leadership abilities, suggesting a contrast with Corbyn. It promises to "reduce and control immigration" and start a "United Kingdom Prosperity Fund" with money saved through EU exit "to reduce inequalities between communities across our four nations." It expresses opposition to a "divisive" Scottish independence referendum and promises to "maintain as frictionless a border as possible for people, goods and services between Northern Ireland and the Republic of Ireland." 

The manifesto reiterates a promise to pass a "Great Repeal Bill" that would, rather than repealing EU laws, convert them as a block into British law while ending the EU's ability to effect British law through the European Communities Act. The manifesto stresses May's preference for a "hard" Brexit, meaning Britain would leave the EU's single market and customs union. These would be replaced by a "comprehensive free trade and customs agreement," which the manifesto says will be complete within the extremely tight two-year deadline – expiring in the spring of 2019 – set by Article 50 of the EU's Lisbon Treaty. It also says that both houses of Parliament will have a vote on the final agreement, even though Tories repeatedly blocked a provision requiring such a vote from being included in the Article 50 legislation.

May promised in January to "bring an end to the jurisdiction of the European Court of Justice in Britain," but the Conservative manifesto does not mention the court.


Labour's manifesto calls May's approach to Brexit "reckless" and lays out a different set of priorities: "We will prioritise jobs and living standards, build a close new relationship with the EU, protect workers' rights and environmental standards, provide certainty to EU nationals and give a meaningful role to Parliament throughout negotiations." The manifesto rejects Conservatives' repeated assertions that Britain must be willing to "walk away" from negotiations with the EU, saying that "no deal" is not a viable option. It criticizes anti-immigrant rhetoric among pro-Brexit wings of the Conservative party: "we will not cut public services and pretend the cuts are a consequence of immigration."

The manifesto promises "no return to a hard border between Northern Ireland and the Republic of Ireland" – slightly stronger language than what appears in the Tory document – and legislation to guarantee Parliament's role in a approving a final deal. Bizarrely, the manifesto appears to treat the Conservatives' Great Repeal Bill as though it would actually repeal EU law, promising instead "an EU Rights and Protections Bill that will ensure there is no detrimental change to workers' rights, equality law, consumer rights or environmental protections as a result of Brexit."

Longer-Term Effects

Because the exit process could stretch for two years, predictions about Brexit's future impact on British citizens are mostly speculation; however, experts suggest that Brexit is likely to mean slower economic growth for the country. A slowdown in investments may also lead to fewer jobs, lower pay and higher unemployment rates. Britain relies on the EU as an export market far more than the EU relies on Britain. The absence of seamless access to European markets may also mean fewer exports and foreign investments. Additionally, consumers and employers reacting to "doom and gloom" news about Brexit's potential fallout alone may contribute to an economic slowdown as companies hire fewer people and consumers spend less money.

In particular, slowed growth in Britain would translate to contraction in Ireland, since exports of goods to the United Kingdom account for nearly one-third of Ireland’s total output. The flow of Irish labor to the United Kingdom might be curbed, which would in turn exert pressure on Irish wages as more people compete for fewer jobs.

Michael Bloomberg, former mayor of New York City and founder of Bloomberg News, pointed out the EU could penalize Britain, imposing harsh limitations, to deter other member states from following its example.

Capital Economics, a research consultancy, stated that Britain’s exit could result in "looser monetary conditions" around the world. According to the firm, Britain's exit could prolong the European Central Bank's (ECB) bond-buying program and even increase its size. Similar easing could occur in Britain: "The Bank of England is likely to keep interest rates low for longer and, if necessary, may even announce further policy easing," an analyst at the firm wrote in a note.

Sterling could continue to take a pounding. If Britain can no longer rely on continental Europe for barrier-free trade and mobility, there is a strong chance that capital will leave the country to avoid getting stuck there. In other words, investors may sell pounds (or pound-denominated assets) to purchase those denominated in dollars, euros, or francs. A sharp fall could last for longer than anticipated as politicians and deal makers try to establish new trade agreements and economic pacts that can take many months or even years to ratify.

Furthermore, if the domestic economy of the UK does slip into recession, it will keep the Bank of England from raising interest rates to protect the currency, further compounding the problem.

Upsides for Some

On the other hand, a weak currency that floats on global markets can be a boon to UK producers who export goods. Industries that rely heavily on exports could actually see some benefit. In 2015, the top 10 exports from the UK were (in USD):

  1. Machines, engines, pumps: US$63.9 billion (13.9% of total exports)
  2. Gems, precious metals: $53 billion (11.5%)
  3. Vehicles: $50.7 billion (11%)
  4. Pharmaceuticals: $36 billion (7.8%)
  5. Oil: $33.2 billion (7.2%)
  6. Electronic equipment: $29 billion (6.3%)
  7. Aircraft, spacecraft: $18.9 billion (4.1%)
  8. Medical, technical equipment: $18.4 billion (4%)
  9. Organic chemicals: $14 billion (3%)
  10. Plastics: $11.8 billion (2.6%)

Some sectors are prepared to benefit from an exit. Multinationals listed on the FTSE 100 are likely to see earnings rise as a result of a soft pound. A weak currency may also benefit tourism, energy and the service industry.

In May 2016, the State Bank of India (SBIN.NS), India's largest commercial bank, suggested that the Brexit will benefit India economically. While leaving the Eurozone will mean that the UK will no longer have unfettered access to Europe's single market, it will allow for more focus on trade with India. India will also have more room for maneuvering if the UK is no longer abiding by European trade rules and regulations.

Britain's Next Moves

The June referendum itself was touted as a way to give the British people a say in the matter and the House of Commons voted to conduct it. Once Article 50 is invoked, it sets a two-year process starting in March 2017 for the UK to negotiate the conditions of leaving with the remaining 27 countries in the EU, each of which then needs to obtain approval from its parliament. Trade agreements will also be negotiated. 

The latest data has the EU accounting for 48% of UK exports and 51% of its imports. What are the options the UK will have when finalizing its potential divorce with the EU?

The Norway Model: Join the EEA

The first option would be for the UK to join the European Economic Area (EEA). The EEA promotes free trade and the movement of goods via the EU "Single Market." On the face of it the cost to the UK to join the EEA may be small; however, there are problems. Joining the EEA would require the UK to pay into the EU, but it would relinquish any say in the laws and regulations set because it would be giving up voting rights in the European Council and the European Parliament. The British Treasury sees a Norway-style agreement as causing the least economic harm, but this also conflicts with the Brexiters' demand of "dealing on our own terms."

Pro-Brexit politician Nigel Farage of the UK Independent Party believes the Norway model would be a step back for Britain. "We are a country of 65 million people. If Norway, Iceland and Switzerland can get deals that suit them, we can do something far, far better than that," Farage said in an interview with BBC.

Lastly, and maybe most importantly, joining the EEA would mean the UK would have to accept the free movement of people, which would conflict with Brexiters stance on immigration.

The Swiss Model: Bilateral Trade Agreements

Switzerland's model is similar to the Norway model in that Britain would retain certain economic ties with the EU but with little say in negotiations and laws. The difference is that under the Swiss model, the UK would have to sign bilateral trade agreements with every other country individually, which becomes clunky as each trade agreement usually requires renegotiating every few years.

The size of the Switzerland economy makes this model a little easier for the Swiss. Switzerland's GDP is around $700 billion compared to the UK's, which is just shy of $3 trillion.

The Canada Model: Bilateral Trade Agreements with Strict Rules

A third option is to copy the Canadian model. Together, Canada and the EU are in the midst of negotiating the Comprehensive Economic and Trade Agreement (CETA), but it is yet to be signed into law. If the UK leaves itself just two years to sign trade agreements, the Canada approach may not be as feasible as many people think. CETA agreement negotiations have lasted seven years already.

What Brexiters are overlooking is what Canada is giving up, or more importantly what Canada can afford to give up. Canada already enjoys free trade with the United States via the North American Free Trade Agreement (NAFTA). So with NAFTA already in place the importance of a trade agreement with the EU is not as important for Canada as it would be for the UK. Moreover, CETA does not include financial services, which is a substantial part of the UK's trade with the EU.

WTO: Go It Alone

You want out? You're out. A full break from the EU and the UK relying solely on the World Trade Organization (WTO) in dealing with the EU would be the most conclusive split with the EU and access to the EU's "Single Market." It would be a true go-it-alone approach. The UK would have no requirements for the movement of people in the EU (the pro-Brexit main argument); they would have no obligations to pay money into the EU budget, and the UK would have to renegotiate its co-operation on crime and terrorism with the rest of the EU.

Not only would the UK be giving up its trade agreement with the EU, but it would also surrender trade agreements with 53 other countries it is entitled to via the EU's Free Trade Agreement.

While the WTO has frameworks to ensure there is no discrimination between countries when organizing trade deals, there is a danger that, if after two years the UK hasn't negotiated individual agreements and there is no extension under Article 50, then the UK would fall back on the basic WTO agreements the EU has with its other trading partners. One part of the standard agreement is a common tariff the EU has on all countries with no prior agreement. The 10% tariff on all imported cars to the EU would be a financial disaster for Britain.

Impact on the U.S.

Companies in the U.S. across a wide variety of sectors have made large investments in the UK over many years. American corporations have derived 9% of global foreign affiliate profit from the United Kingdom since 2000. In 2014 alone, U.S. companies invested a total of $588 billion into Britain. The U.S. also hires a lot of Brits. In fact, U.S. companies are one of the UK’s largest job markets. Output of U.S. affiliates in the United Kingdom was $153 billion in 2013. The United Kingdom plays a vital role in corporate America's global infrastructure from assets under management, international sales and research and development (R&D) advancements. American companies have viewed Britain as a strategic gateway to other countries in the European Union. Brexit will jeopardize the affiliate earnings and stock prices of many companies strategically aligned with the United Kingdom, which may see them reconsider their operations with British and European Union members.

American companies and investors that have exposure to European banks and credit markets may be affected by credit risk. European banks may have to replace $123 billion in securities depending on how the exit unfolds. Furthermore, UK debt may not be included in European banks' emergency cash reserves, creating liquidity problems. European asset-backed securities have been in decline since 2007. This decline is likely to intensify now that Britain has chosen to leave.

The day after the vote, the British pound dropped to historic 30-year lows against the dollar. Moreover, weakness in the pound could be contagious and affect the euro as well. A weaker British pound and euro will likely hurt the bottom line of U.S. export companies doing business with customers in the United Kingdom and European Union, as the cost for American products and services would increase, tempering demand.

Jim O’Sullivan, chief economist at High Frequency Economics, said Brexit would not have major impact for the U.S. public outside of financial markets. "But a significant impact on Wall Street would negatively affect confidence on Main Street," he wrote shortly after the vote, adding that the firm had not "seen anything thus far to suggest a major impact on the U.S. banking system, especially given the starting point of high capital ratios, as was evident in the annual stress test results released yesterday."  

Who Will Be Next to Leave the EU?

In 2013, former Prime Minister David Cameron promised an in-out referendum on EU membership if his Conservative party won the 2015 election. He said the referendum would be held by the end of 2017, following a renegotiation of the terms of Britain's relationship with the bloc. At the time, the promise was widely seen as a bid to outflank the UK Independence Party (UKIP), an outfit that was focused almost entirely on ending Britain's EU membership. A BBC report at the time quoted former Labour leader Ed Miliband, who accused Cameron of "running scared" from UKIP.

Cameron won the battle. The Tories earned a resounding victory in the 2015 general elections, holding UKIP to just one seat, practically banishing their erstwhile coalition partners the Lib Dems from Parliament and shaving Labour's representation by around 10% (see map above). But Cameron – if not the Tories – lost the war. After wrenching the euroskeptic issue from UKIP he found himself forced to put on a tough façade in negotiations with Europe, declare victory after extracting a few concessions, then campaign to stay in the EU based on this "new settlement." The process struck voters on both sides of the Brexit debate as political theater. When the UK voted to leave, Cameron resigned. His party, now led by Theresa May, stayed in power due to a lack of effective opposition.

These dynamics are familiar in several other European countries. Most EU members have strong euroskeptic movements that, while they have so far struggled to win power at the national level, heavily influence the tenor of national politics. In a few countries, there is a chance that such movements could secure referendums on EU membership. 

In May 2016, global research firm IPSOS released a report showing that a majority of respondents in Italy and France believe their country should hold a referendum on EU membership.


Matteo Salvini, the head of Italy's Northern League, called for a referendum on EU membership hours after the vote, saying, "This vote was a slap in the face for all those who say that Europe is their own business and Italians don't have to meddle with that." The Northern League has an ally in the populist Five Star Movement (M5S), whose founder, former comedian Beppe Grillo, has called for a referendum on Italy's membership in the euro – though not the EU. The fragile Italian banking sector has driven a wedge between the EU and the Italian government, which has provided bail out funds in order to save mom-and-pop bondholders from being "bailed-in," as EU rules stipulate.


Marine Le Pen, the leader of France's euroskeptic National Front (FN), hailed the Brexit vote as win for nationalism and sovereignty across Europe: "Like a lot of French people, I'm very happy that the British people held on and made the right choice. What we thought was impossible yesterday has now become possible." She lost the French presidential election to Emmanuel Macron in May 2017, gaining just 33.9% of votes in the second round. (See also, What the French Election Means for Europe.)