Brexit: Deal or No Deal?
Contributed by Tax GO
09 July, 2019
In the past 3 years, we have heard a lot about Brexit. It has certainly been a predominant subject of debate and not just in the Parliament and the UK in general, but across the globe as well.
In 2016, the majority of British people voted for leaving the European Union, and yet, it's 2019, and the UK is still officially part of the EU.
It turned out that leaving the EU is not as easy as one may think.
At times, it was hard to keep up with the latest news about Brexit. The complex Brexit drama is simplified in this article.
The Referendum and the Aftermath
The referendum took place in 2016 and people were asked a simple question: Should the UK leave the EU? 52% of Britons voted for leaving the union.
The world was shocked. However, the dissatisfaction with the EU didn't occur overnight. In fact, it began a while ago and only grew in time.
Among the things the UK resented, in particular, were the influx of workers from Southern Europe as well as the damaging fiscal policies. It appears that the 2008 economic crisis caused some strong anti-EU feelings. This was only furthered by the migration issues and terrorist attacks, among other things.
The referendum showed that people were fed up with the EU and wanted to leave the union. The UK wants to regain control over its own affairs and leave the EU. The negotiations began the following year and have been ongoing ever since.
However, Members of Parliament failed to agree on how the UK will leave the EU. Prime Minister and Conservative leader Theresa May had negotiated a withdrawal deal (dubbed the "divorce deal") which determines how the UK will leave the EU. The agreement covers the basic issues such as how much money will the UK have to pay to the union, etc.
The agreement also concerns UK citizens who live and work in the EU and vice versa as well as the return of the physical border between Northern Ireland and the Republic of Ireland. The 585 pages long withdrawal deal was published in 2018 followed with a much shorter political declaration which determines the relationship between the UK and the EU. Unfortunately, MPs have rejected May's withdrawal agreement three times.
In an attempt to make Brexit less painful for everyone and as part of the withdrawal agreement, the EU and the UK have agreed on a transition period until December 2020. Until then, British citizens are free to move and live in the UK and vice versa. The transition period would also allow businesses to adjust to new rules which will be in effect after December 2020. The agreement states that the transition period could be extended.
The UK was to officially leave the EU on March 29, 2019, but Brexit didn't occur. The EU has agreed to postpone the date in order to avoid a no-deal departure. The next Brexit date was April 12 but MPs again failed to agree on a withdrawal agreement causing May to ask for another extension. This time, the date is October 31.
May was heavily criticized for agreeing to another extension. This was contrary to her initial promises and it meant the UK would have to take part in the European Parliament elections even though it would be pointless since the UK voted to leave the union.
Back when the extension was granted, Prime Minister May hoped that they would be able to ratify the withdrawal deal and leave the EU before the European elections. Having failed at that too, May confirmed her decision to step down as Prime Minister but will remain on her position until a new prime minister is chosen. She had failed to deliver Brexit but whoever assumes her place in July will face the same impossible task.
Since it did not leave the EU on time, the UK was obliged to take part in the European elections.
"Soft" or "Hard" Brexit and The Economic Impact
All these negotiations were part of an effort to secure a so-called "soft" Brexit and make leaving the EU less damaging to both parties. Even though Parliament had rejected May's deal three times, MP's do not want the UK to leave the EU without a deal.
If the UK leaves the EU with a deal, the UK would continue to abide by all EU rules. While this is contrary to the initial desire to regain control of its own affairs, the UK would benefit from such a departure.
A "soft" Brexit would allow the UK to remain part of the single market thus minimizing disruptions to trade. Businesses would continue to operate with only slight changes. UK citizens in the EU and EU citizens in the UK would be able to retain their residency. Moreover, those who move during the transition period would be allowed to remain in that country.
Needless to say, leaving the union without a deal would have catastrophic consequences on trade. A "hard" Brexit would mean the UK cuts all ties with the EU upon leaving the union. That means there would be no transition period and new rules would apply immediately. Businesses would suffer and citizens might not have the right to live and work in the EU. The UK would have to abide by new rules regarding trade with the EU.
As a member of the European Union, the UK is currently part of the trade agreements that the union has with over 70 countries. As part of the single market and customs union, the UK exported goods to the rest of the EU with no checks of tariffs so far. This would change immediately in case of a "hard" Brexit.
If the UK leaves the EU without a deal, new tariffs would be in place for all imported goods as per the rules of the World Trade Organization. As a member of the WTO, the UK would have to create a list of tariffs and quotas which apply to other countries.
Leaving the European Union will affect the UK's economy. In fact, it already has. Many are concerned about the economic stability following Brexit and the concern is justified. Studies conducted after the referendum predicted a negative impact on GDP in the long run (3.9% in 15 years' time in today's prices). As it turns out, GDP growth has already slowed down since the referendum while investments declined and overall productivity is reduced.
The value of the pound has also dropped following the referendum causing costs to go up. Import of goods has also slowed down while import costs increased. The vote to leave the EU has also affected the purchasing power of Britons. The consequences of Brexit are still not clear and depend on the conditions under which the UK leaves the EU.
It seems that politicians are not quite sure about the type of Brexit they want. Brexit is scheduled for October 31, but the UK could leave earlier if an agreement is reached. The new prime minister will replace Theresa May in the second half of July. Currently, it's down to two contenders, Boris Johnson and Jeremy Hunt. Johnson, the frontrunner, will continue the work that May began.
Johnson promised that the UK will leave the EU on October 31 with or without a deal. However, lawmakers in parliament oppose a no-deal Brexit. Both the Conservatives and the Labour party are working on making sure that the UK does not leave the EU without a deal in place.
We are yet to hear more about Brexit and if previous events have taught us anything, it's that anything is possible. A "soft" Brexit, a no-deal Brexit, or a no Brexit at all.
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