Leaving the European Union is certainly going to have an impact on the UK economy. Almost immediately after the referendum results were announced, the exchange rate of the sterling dropped to a 31-year low. This was due to the very low consumer confidence caused by the instability leaving the EU would bring to the UK economy. This depreciation in the pound will decrease the price of exports and increase that of imports, causing exports to increase in competitiveness while that of imports to decrease. This causes aggregate demand to increase, causing demand pull inflation and positive economic growth. Costs of production are also increased as imports are a key part of firms’ production, which cause short run aggregate supply to decrease, causing inflation and reduced economic growth, in a phenomenon known as cost push inflation. Despite the depreciation of the currency slowing down, it shows how much of an effect the EU membership can have on the UK economy. The long term economic effects of the UK leaving the European Union depend on one huge factor, which are the negotiations and transition taking place after Article 50 of the Lisbon Treaty is triggered. Currently, the UK has around 40 countries which it has free trade deals with thanks to its EU membership. However, it has to pay a membership fee to allow the European Union to operate. The UK will likely attempt to ensure that the free trade deals that the UK currently has remains unchanged. However, some have expressed concerns that the EU is likely to be stringent with the exit of the UK from the EU to make an example for other stronger countries in the EU such as Germany. If the EU decides to be lenient and allow the UK to retain its free trade deals, then not much is going to change in terms of trade. However, if the EU were to in any way restrict the UK’s mean of trading, it could deal a major blow to the UK economy. Currently, the UK is suffering from a current account deficit, which means the value of its imports exceeds that of its exports. Decreasing the current account deficit is one of the objectives of the government, but it may increase following its exit from the EU. If the EU were to stop the free trade deals, the UK will lose one of its major exporting partners. This will reduce its exports and worsen the current account. As a result, aggregate demand will decrease, causing disinflation or even deflation as well as negative economic growth in a phenomenon known as malign deflation. This may even cause a deflationary spiral, a situation caused by delayed consumption as a result of deflation which constantly causes decreases in aggregate demand. Leaving the European Union may also cause a drastic decrease in foreign investment. Before Brexit, the UK was very successful at attracting investors as it plays a huge part in the EU and has a large amount of its stock. However, Brexit will make the UK a less appealing place to invest. The main reason is that the UK will have tougher restrictions which make it more troublesome for foreign companies to set up factories and offices in the UK. This decrease in investment will also cause a decrease in aggregate demand, resulting in deflation and negative economic growth. Moreover, the decrease in investment may cause a decrease in long run aggregate supply of the UK economy, also known as the productive potential. This may cause the economy to ‘slow down’, and suffer a decrease in long run growth. From an economic perspective, the costs of leaving the European Union far outweigh the advantages. Immigration is another factor which will change after Brexit. The government no longer needs to follow EU regulations after Brexit, and can now establish a better immigration system, allowing the more talented in and others out. Immigration is one of the main reasons that people support Brexit. More stringent border controls can reduce local competition for jobs, as well as relieving the heavy strain on the NHS. However, the UK will also likely be a less attractive place for talented individuals as there are more restrictions on border control. Furthermore, Brexit has caused many hidden problems to surface, such as a divided country and prejudice
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