Brexit

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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. Following a snap election (skip to section) on June 8, 2017 she remains Prime Minister, but the Conservatives have lost their outright majority in Parliament. 

"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. Talks began on June 19. 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?)

BREAKING DOWN 'Brexit'

Brexit negotiations began on June 19 in Brussels. Britain's representative is David Davis, a Yorkshire MP, while the EU's is Michel Barnier, a French politician. Preparatory "talks about talks" have exposed divisions in the two sides' approaches to the process. The UK wants to negotiate the terms of its withdrawal alongside the terms of its post-Brexit relationship with Europe. Brussels wants to settle on divorce terms before moving on to a trade deal. According to reports, British negotiators will reluctantly take Brussels' approach. Due to the two-year deadline set by Article 50, an extension or a provisional deal may be required – or Britain could fall out of the EU without a deal in place.

From the time of the referendum, the EU has presented a united front. Prime Minister May told the BBC in October that she would like to begin "preparatory work" on a deal before triggering Article 50, but she was rebuked, first by a European Commission spokesman ("no negotiations without notification"), then by German Chancellor Angela Merkel ("first Article 50, then common guidelines from the European Council, and then negotiations"). 

Britain, by contrast, is divided in the wake of an election that May called to give her a mandate to pursue a "hard" Brexit – to leave the EU's single market, which includes freedom of movement, and the customs union. While May has remained prime minister, her government's negotiating position is perceived as weak. On June 13, German finance minister Wolfgang Schäuble went so far as to say that Britain "would find open doors" if it decided to remain in the EU; French President Emmanuel Macron echoed the comment later that day. Davis' office responded on the 18th with a statement: "there should be no doubt – we are leaving the European Union, and delivering on that historic referendum result."

Issues Under Negotiation

According to a statement from the European Commission, the initial stages of Brexit talks "will focus on issues related to citizens' rights, the financial settlement, the Northern Irish border and other separation issues." 

Citizens' Rights

One of the most politically thorny issues facing Brexit negotiators is the rights of EU citizens living in the UK and UK citizens living in the EU. According to Migration Watch UK, a think tank that advocates for lower levels of net immigration to the country, there were 3.3 million EU-born migrants living in the UK in 2015, compared to 1.2 million UK-born migrants living in the EU.

Britain's Parliament has already scrapped over the rights of EU citizens to remain in the UK after Brexit, publicly airing domestic divisions over migration. Following the referendum and Cameron's resignation, May's government concluded that it had the right under the "royal prerogative" to trigger Article 50 and begin the formal withdrawal process on its own. The British Supreme Court intervened, ruling that Parliament had to authorize the measure, and the House of Lords amended the resulting bill to guarantee the rights of EU-born residents. The House of Commons – which had a Tory majority at the time – struck the amendment down and the unamended bill became law on March 16.

Conservative opponents of the amendment argued that unilateral guarantees eroded Britain's negotiating position, while those in favor of it said EU citizens should not be used as "bargaining chips." Economic arguments also featured: while a third of British expats in Europe are pensioners, EU migrants are more likely to be in work than native-born Brits. On the one hand, that fact suggests EU migrants are greater contributors to the economy than their British counterparts; on the other hand, "Leave" supporters read these data as pointing to foreign competition for scarce jobs in Britain.

Britain's white paper on Brexit says, "We want to secure the status of EU citizens who are already living in the UK, and that of UK nationals in other Member States, as early as we can." This statement does not necessarily mean that EU citizens in the UK would have the same rights as they currently do, something the EU's negotiating positions explicitly call for: "equal treatment in the UK of EU27 citizens as compared to UK nationals, and in EU27 of UK nationals as compared to EU27 citizens, in accordance with Union law." The biggest sticking point could be the EU's demand that the European Court of Justice have jurisdiction over EU migrants' status in Britain. 

Financial Settlement

The "Brexit bill," or financial settlement the UK is likely to owe Brussels following its withdrawal, is a major point of contention for the two sides. "Leave" campaigners often cited the money that British taxpayers pay into EU coffers, though the figure they used was inflated (see below). A large financial settlement, even if it is a one-time payment, would therefore rankle many Brexit supporters.

The EU has not attached a number to the settlement yet, but it has released a document listing the 70-odd entities it would take into account when tabulating the bill. The Financial Times estimated that the gross amount requested would be €100 billion; net of certain UK assets, the final bill would be "in the region of €55bn to €75bn." The FT also cited a previously undisclosed EU estimate of €64 billion gross, €40 billion net. 

The UK government's Brexit white paper does not rule out participating in certain EU programs and making "an appropriate contribution." Assuming payments to Brussels stop entirely after the financial settlement, however, the FT estimates that Britain's budget savings would pay for the bill in approximately seven years. On the other hand, harm to the UK economy related to Brexit could reduce tax revenues and have a considerably larger effect on the budget than any EU commitments.

Northern Irish Border

For decades during the second half of the 20th century, violence marred Northern Ireland, and the border between the British country and the Republic of Ireland to the south was militarized. The 1998 Good Friday Agreement turned the border almost invisible, except for speed limit signs, which switch from miles per hour in the north to kilometers per hour in the south. 

Both British and EU negotiators worry about the consequences of reinstating border controls, as Britain may have to do in order to end freedom of movement from the EU. The UK's white paper says "we aim to have as seamless and frictionless a border as possible between Northern Ireland and Ireland," while the EU's negotiating directives say the bloc "is committed to continuing to support peace, stability and reconciliation on the island of Ireland." The directives add, "Nothing in the Agreement should undermine the objectives and commitments set out in the Good Friday Agreement."

The issue may be complicated by the Tories' choice of the Northern Irish Democratic Unionist Party, which opposed the Good Friday Agreement and – unlike the Conservatives' leader at the time – campaigned for Brexit. Irish Taoiseach (Prime Minister) Leo Varadkar expressed concern at the Tories' choice of a coalition partner, but told reporters following a meeting with May on June 19 that he was "very reassured."

Arguments For and Against Brexit

"Leave" voters base their support for Brexit on a variety of factors, including the European debt crisis, immigration, terrorism and the perceived drag of Brussels' bureaucracy on the British economy. Britain has long been wary of the European Union's projects, which Leavers feel threatens the UK's sovereignty: the country never opted into the European Union's monetary union, meaning that it uses the pound instead of the euro. It also remained outside the Schengen Area, meaning that it does not share open borders with a number of other European nations.

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 May it was down 12.8% from its June 23 close to $1.2905.

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 the end of May, however, the FTSE, DAX and S&P are all up by more than 14%. American banks have more than recovered due to optimism about a Trump-era cull of financial regulation.

Economic Response

Until an exit deal is finalized or the deadline for negotiations set by Article 50 expires, Britain remains in the EU, both benefiting from its trade links and subject to its laws and regulations. Even so, the decision to leave the EU has already had an effect on Britain's economy due to the weaker pound. Shortly after the referendum, the currency's decline was seen as a blessing as British manufacturers' wares became more attractive to foreign buyers. The Markit/CIPS UK manufacturing purchasing managers index (PMI) rose by a record 5 points to 53.3 in August 2016 as firms enjoyed the "win-win" of EU membership and a pound that had priced in the end of that membership.

Such a situation is by definition unsustainable, however, and the Markit/CIPS survey contained an implicit warning: nearly 44% of manufacturers reported higher purchasing costs, as the weak pound drove up import prices. Nearly a year later, the higher price of imports has been passed onto consumers; CPI inflation was 2.9% in the 12 months to May 2017, a four-year high that well exceeds the Bank of England's 2% target and outstrips regular wage growth of 2.1% (as of March 2017).

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. Polling at the time suggested May would expand on her on her slim Parliamentary majority of 330 seats (there are 650 seats in the Commons, so 326 seats are needed to form a majority). Labour gained rapidly in the polls, however, aided by an embarrassing Tory flip-flop on a proposal for estates to fund end-of-life care. 

As of June 10 the Conservatives have lost their majority, winning 318 seats to Labour's 262. The Scottish National Party won 35, with other parties taking 35. The resulting hung Parliament has cast doubts on May's mandate to negotiate Brexit and led the leaders of Labour and the Liberal Democrats to call on May to resign.

Speaking in front of the Prime Minister's residence at 10 Downing Street, May batted away calls for her to leave her post, saying, "It is clear that only the Conservative and Unionist Party" – the Tories' official name – "has the legitimacy and ability to provide that certainty by commanding a majority in the House of Commons." Reports on June 9 indicated that the Conservatives had struck a deal with the Democratic Unionist Party of Northern Ireland, which won 10 seats, to form a coalition. The party is little known outside of Northern Ireland, judging by a wave of curious Google searches that caused the DUP's site to crash.

Implications for Brexit

May presented the election as a chance for the Conservatives to solidify their mandate and strengthen their negotiating position with Brussels. Having lost their majority, that position appears weaker. It remains uncertain whether the new government will be able to stick to the Brexit goals it laid out in its manifesto: cutting annual net immigration to the tens of thousands – from 248,000 in 2016 – and pursuing a "hard Brexit," that is, leaving the EU's single market and customs union. The Tories have promised to walk away from negotiations, arguing that "no deal" is better than a bad one. They have also proposed a "Great Repeal Bill" which, despite the name, would write all applicable EU law into British law while ending the EU's ability to effect British law through the European Communities Act.

Labour, which according to Corbyn "won this election," has criticized the Conservatives' immigration targets and argued that "'no deal' is not a viable option." The party has opposed the Great Repeal Bill – apparently treating as though its name matched its function – and promised instead to pass "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." 

Following the election, the government's Brexit position may soften. Some interested parties see an opening: the day after the election, the Freight Transportation Association said the government should consider staying in the EU's customs union, given the "lack of a clear mandate from British voters."

European leaders deliver muted, if mixed reactions to the election's results. The British government's weaker position could benefit them, but it could also gum up the process by intensifying British domestic squabbles. The focus appears to be on timing: "We are ready to start negotiations,” European Commission president Jean-Claude Juncker told Politico after the election. "I hope that the British will be able to form as soon as possible a stable government. I don't think that things now have become easier but we are ready."

Michel Barnier, Europe's chief Brexit negotiator, tweeted a slightly less hurried message, but made it clear that timing was on his mind: "“#Brexit negotiations should start when UK is ready; timetable and EU positions are clear. Let's put our minds together on striking a deal.”

Article 50 sets out an extremely narrow two-year window to negotiate an exit agreement and an agreement governing the UK and Europe's future relationship. CETA, a trade pact between Canada and the EU, is not yet in force after nearly nine years. Its signing was held up for weeks in 2016 when the Walloon regional parliament in Belgium threatened to veto it. Fear is rife that any of Europe's 38 regional and national parliaments could similarly delay or torpedo a Brexit deal. If a deal cannot be reached by the spring of 2019, the 27 EU member states must decide unanimously to extend the two-year Article 50 deadline, or Britain will depart on WTO terms (see below).

The End of Britain? Scotland's Independence Referendum

Politicians in Scotland have pushed for a second independence referendum in the wake of the Brexit vote, but the results of the June 8 election have cast a pall over their efforts. 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.

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.

The snap election on June 8 threw a wrench into the SNP's independence push, however. The party won only 35 seats; the anti-independence Scottish Tories, which won 13 seats, accounted for most of the SNP's lost representation.

What Would Independence Look Like?

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.

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 2016 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%. But Cameron – and to an extent 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, called an election based on the impression that Labour did not offer effective opposition. Instead of gaining, however, the Tories lost seats and have been forced to enter into a coalition.

Electoral wrangling over Europe is 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.

Italy

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.

France

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.)