Britain can benefit from Brexit

The British voters' decision to leave the European Union (EU), or "Brexit", has triggered a major reshuffling of global political and economic alignments. However, the economic consequences for Britain are expected to be minor and only in the short run but somewhat positive in the long run after it formally leaves EU in 2019. This assessment is in line with predictions offered by various forecasting companies and has been reiterated by all British and EU leaders. While we might see some moments of uncertainty that might best be compared with "solar flares", when the dust settles down, we will in five years see a very robust and prosperous Britain.  In this commentary, I will outline what Britain can do to keep the momentum going following the historical vote, and identify areas where it can act to counter any headwinds as it tries to navigate through some uncertain times. 

While Britain is yet to invoke Article 50 of the Treaty on European Union and notify EU of its plan to leave, this will happen within the next six to eight months and the new British PM Theresa May has strongly indicated that she will do so and completely quashed any discussions of "Second Referendum" on Brexit. UK already has a tough-talking new Foreign Secretary, Boris Johnson, and a realistic Brexit Secretary, David Davis, who together, are expected to play important roles in negotiating the terms of withdrawal and future relationship with EU. Ironically, Scottish First Minister Nicola Sturgeon is seeking a special dispensation for Scotland, declaring brashly, "We're in uncharted territory, and when you are in uncharted territory with effectively a blank sheet of paper in front of you, then you have the opportunity to try to think things that might have previously been unthinkable and shape the future." But Secretary Davis will have none of that and shot back, "And we will try as best we can - they can't have a veto because there are 17.5million people who have given us a mandate."

The exit process will involve UK and EU going through 80,000 pages of laws that bind these two now, and pick which ones may be kept--and there are precedents for that since EU has similar special relationships with non-members such as Norway and Switzerland. While the British voters have rejected EU membership by a 52-48 margin, a recent opinion poll reveals that 66 percent consider that access to the single market to be given the highest priority, as opposed to 31 percent who want restriction of freedom of movement to be at the top. For UK, these are two priority negotiations items. Fortunately for UK, the European Union is already reviewing policies to protect the borders in the wake of the recent refugee crisis. 

Overall, as negotiations proceed, rough passages can be expected in the following three areas: division of assets, budgetary issues (including Post-Brexit contributions by UK), and free entry and passport-related questions, the last one to set out the future rights of EU nationals in the UK and vice versa.  At the end of the process, the British team will push hard to retain the benefits that it received as a member of EU without the price it is now paying. EU heads of state on the other hand are keen to prevent disintegration of the union and a Brexit-led domino effect. Fearing that, EU will seek to prevent other countries from following the U.K. and will use the Brexit negotiations as an opportunity for a genuine conversation about its costs and benefits. 

And therein lies the main reason for my optimism that Britain could turn this process into a win-win situation. Some EU leaders are publicly stating that it is important during the negotiation that the EU leave the door open for the U.K. to return. "The more the EU sets out to punish or humiliate Britain during the negotiation process, the less likely its return is to happen."

Turning to the economic impact for UK, as economists now tally up the costs and benefits of Brexit under some alternative scenarios, the gains are likely to be in trade, migration, minimum wages, budgetary surplus, and foreign direct investment.  Brexit will eventually offer greater flexibility in economic policy, business practices, and regulatory freedom. As one observer commented, UK will be free of the "EU Yoke". Just to take one example, the Common Agriculture Policy (CAP) currently costs the UK at least £16bn per year. An Institute for Fiscal Studies' report released recently states that the precise scale of the fiscal consequences of a British exit is uncertain, and will depend on whether the U.K. continues to make a contribution to the EU budget to maintain access to the bloc's single market for goods and services. 

On the cons, there are continued economic uncertainty, reduced GDP, lower FDI, and higher unemployment in the short run. Theresa May's government will need to do more to counter any negative fallout. And the new government appears to be adjusting fast. To take the case of FDI, taking advantage of a cheaper pound, SoftBank, a Japanese company just offered more than $32 billion for AMR Holdings, a British microchip company. British leaders portrayed the deal as an endorsement of Brexit. 

All this will sound familiar to many of my readers, since none other than EU Chief, Jean-Claude Juncker said, "the economic consequences of Brexit are only short term" if any. IMF chief Christine Lagarde's assessment was no different from Juncker's when on July 7 she said that a global recession was "unlikely" despite Brexit, and it's growth forecast in Eurozone was revised upward, to 1.6 percent from the previously forecast 1.5 percent.

But that is not to suggest that we will not see a few more upheavals, moments of tension, and some tomfoolery by politicians in the two years leading up to the formal "decoupling" of a relationship that lasted for more than 40 years. In this context, an economist respected by all, Paul Krugman, who won the Nobel Prize in economics in 2008, said that "Brexit" was only a storm in a teacup, and characterised E.U. as "fundamentally at odds with democracy and the idea of a democratically elected government."

In recent days, UK is returning to more stable times. Mark Carney had before the vote raised an alarm warning that Brexit could bring in a disaster, but last week the central bank left the interest rates unchanged. The FTSE 100 index took a hit following the vote, but has recovered since then, rising from below 6,000 to close to 7,000 lately. In the foreign currency market, the pound dropped from a high of $1.50 against the dollar before the vote to $1.2798 and has edged up to 1.3197. The lower value of the pound will boost British exports which are expected to rise by 3.4 percent next year as pound sterling stays low. 

One area where the British people might see further uncertainty is in property values. However, Royal Institute of Chartered Surveyors (RICS) expects "housing prices to surge by an average of 14 per cent in the next five years".

The writer is an economist, and writes on public policy issues for this newspaper.