The Case of “Brexit” The effect of UK and the EU

TheCase of “Brexit”: The effect of UK and the EU

Brexit refers to United Kingdom’s (UK) withdrawal from the EuropeanUnion (EU) following the referendum where the majority of votersvoted for leaving the Union. Brexit simply refers to Britain Exit.The exit was spearheaded by UK’s Prime Minister Theresa May whoannounced government’s intention to invoke the treaty on EU thatprovides the formal procedure for withdrawal and do so by March 2017.However, the fact that the majority voted for the exit provides astrong signal that the exit process will be successful (Brugge etal., 2016). The UK joined the European Economic Community (whichwas the predecessor of the EU) in 1973 with its membership beingconfirmed in 1975 after a referendum with 67% of the voters votingfor the entry.

Before the UK voted for Brexit, discussions regarding the positiveand negative consequences following the action were gainingconsiderable popularity across the globe. Both the scholars andnon-scholars appreciated the fact that Britain’s exit from the EUwould have a major impact on both the UK and EU. Differences arosewhen it came to identifying the specific consequences. Most notably,the different stakeholders disagreed on whether the exit would haveaggregate positive or negative consequences (Dhingra et al.,2016). As evident in this discussion, Britain’s exit from the EUwill economically impact on firms in various sectors including theleisure sector. This report provides a comprehensive discussion ofthe aforementioned consequences as well as recommendations on howfirms in the hospitality and tourism sectors can overcome potentialchallenges and instead take advantage of the situation.

A critical assessment of the rationale for Brexit shows that majorityof the proposers base their decision on boosting Britain’s economy.Unlike the opponents who think that the exit will shrink the economy,the proponents think that the decision will lead to an economic boom.The argument is that the UK will make its trade deals with othernations making it more competitive than before. The increasing levelsof bureaucracy in the EU also provide a suitable ground for UK’sexit. By leaving the Union, UK will eliminate external regulation andcontrol. It will position itself in a better way to control itseconomic destiny (Koutrakos, 2016). Forming a strong basis forBrexit’s rationale is the fact the commodity (especiallyagricultural and manufacturing products) are going to reducesignificantly. One of the main roles of the EU, as a custom area, isto protect the agricultural and manufacturing industries. It does soby setting quotas that eventually lead to increased prices of goods.In most cases, therefore, UK (as well as other members of the EU)acquire commodities at prices that are higher than the rest of theworld (Pigou, 2013).

Among the main reasons against Brexit include the fact that theeconomic relationship between the UK and other members of the EU willdeteriorate. The UK still needs EU for economic prosperity. This caneasily be proven by the fact that EU takes nearly half of all UKexports while the UK only takes 10% of the EU’s combined. Thisinsinuates that, economically, the UK needs EU more than the viceversa. Besides, retaining the status quo is the best option to avoidscary uncertainty. The decision to exit implies the government aswell as private businesses should set up new ways to conduct theirbusinesses (Pisani-Ferry et al., 2016). This may reduceinvestor’s confidence, and the economy is likely to experience atemporary recession. In addition to the rationale for retention ofthe status quo is the fact that Brexit would heavily hit thehouseholds economically. According to economists (London School ofEconomics data), if Brexit succeeds, the UK economy will be 6%smaller by 2030. UK households save approximately $500 for being partof the EU. Arguably, there is no better alternative than this in asfar as British households are concerned.

As pointed out earlier, UK’S exit has both positive and negativeconsequences on both the UK and EU. This section provides adiscussion on both the negative and positive consequences of Brexiton the UK. One of the main negative impacts on the UK if it leavesthe EU is increased the rate of inflation. According to the IMF, UK’srate of inflation is expected to rise from the current 0.3% to 0.6%and above in the first few months after the exit. From an economicpoint of view, the general increase in prices of goods will be demanddriven (Page, 2014). Imports as well as business operations will bedisrupted and consequently influence the importation and productionof goods in the UK market respectively. This will lead to anuncontrollable increase in the price of the available goods. Besides,UK’s economic instability is inevitable upon the decision to leavethe union. So many tariffs, treaties and trade agreements will beinfluenced. Investors will as well be scared away (Blockmans &ampWeiss, 2016). All these will lead to economic instability. Before thevote in favor of exit, the IMF advised that if the UK decided to doso, they should focus on developing policies that are geared towardseconomic stability and certainty. Among the main positive impactsinclude the fact that the UK will gain considerable flexibility overindustrial policy. Besides, it will retain a strong competitive edgeover other members of the EU. The competitive edge may, however, notbe beneficial since it is likely to lose largely in business. The UKwill also gain financially because the EU will cease to perform itsbudget disciplinarian roles on it.

The most severe negative impact of Brexit on the EU include the factthat the balance in the European Council will shift away fromliberalization. This will make it considerably difficult to form ablock against measures that are not liberal. As a result, moremembers may opt to leave the union making it even weaker. In additionto this, the EU block will as well experienced economic instabilitywith business as well as households suffering from loss of liquidity.The cost of financial services in member countries is also likely toincrease going by the fact that the UK played a substantial role inthe union. Like the UK, the EU will as well suffer from uncertainty.The EU will not only suffer from business uncertainty but also frompolitical contagion from ‘proof of concept’ of leaving the EU(Franklin, 2016). In addition to the negative consequences is thefact that the EU appears to be a less attractive partner in theabsence of the UK. It will, therefore, lose a crucial member statewho adds substantial political weight in its negotiation deals.Beyond losing a crucial political bigwig, it will also lose a keybudget disciplinarian and net contributor. The positive impacts onthe EU include the fact that foreign investments may be rerouted fromthe UK to other members of the EU. Foreign investors do this fearingthe considerable economic instability associated with Brexit.Besides, the other EU members will gain from the fact that the UKwill cease to be perceived as an entry point to Europe by othernon-EU countries. Aggregately, the Brexit has more negativeconsequences on the EU than the positive consequences (Walras, 2013).

It is highly likely that ‘bad blood’ will be developed betweenthe UK and other members of the EU after the exit. This will have amajor impact on the tourism and hospitality sectors. As a matter offact, it is highly likely that the overall impact will be negative(Hong, 2016). It is important to point out that 63% of the totalnumber tourists in the UK are citizens of other EU countries withGermany, Spain, and France taking the lead. The average annual numberof UK tourists from other EU member countries is nine million. From atourist development point of view, the UK’s tourism sector canaggregately be classified above the consolidation stage and close tothe stagnation stage (as per the Butler’s Model of tourismdevelopment). The model appears as depicted in the figure below:

Figure1: The Butler Model

Source:http://geographyfieldwork.com/ButlerModel.htm

Being in a critical range, Brexit means substantial stagnation on thenumber of tourists followed by a considerable decline. As such, UK’sgovernment revenue from the tourism and hospitality sector willreduce significantly (Tribe, 2015). It is important to consider thefact that the sector is among the main UK sectors that provideemployment. It accounts for 9.5% of the total employment in the UK asat 2016. The sector generates a total revenue of £127.4bn withinbound tourism accounting for 21.8% as per the provisions of thetourism alliance. This accounts for 7.1% of the country’s GDP hencea significant source of government revenue. As such, the decline intourism will lead to a decline in government revenue, andconsequently, government expenditure will as well reduce. As such,going by the provisions of the Keynesian multiplier principles,reduced government spending will lead to reduced employment andreduced business spending that leads an economic recession.

As a result of increased cost of travel and imposition of tariffs andtariff-related charges, the number of tourists in the UK from otherEU countries will reduce significantly. The price of goods andservices in the hospitality and tourism sector in the UK isdetermined through the price mechanism (Tisdell, 2013). The priceelasticity of demand in the sector is said to be relatively elasticwhere a proportionate change in demand is higher than proportionatechange in price. The figure below provides a detailed illustration ofrelative price elasticity in demand the case in UK’s tourismsector.

Figure2: Relative Price Elasticity of Demand

Source:Adapted from Author’s Excel Sheets

While this is so, the elasticity of supply in the sector can be saidto be inelastic because percentage change in price does not to aproportionate change in quantity supplied. This is mainly because thestartup capital for the business in the leisure industry is highmaking both entries into the industry and exit expensive (Thomas,2013).

Figure3: Relative Price Elasticity of Supply

Source:Adapted from Author’s Excel Sheets

As such, the decline in the number of tourists is likely to lead to adecreased prices in the hospitality industry due to the high numberof suppliers for lowly demanded services. Besides, Brexit will affecttourism by a weakened British pound. This has a major impact onhouseholds and individual consumers in that their purchasing power isreduced. Consequently, the disposable income is also reduced therebyleading to the decrease of demand for goods and services in thehospitality, tourism, and leisure sector (Muthu &amp David, 2014).Weak British pound implies that the amount of goods and services thatone pound can purchase will be lesser than those that the same poundwould have bought before Brexit. The exchange rate fluctuations willas well discourage a considerable percentage of London tourists.

Aspointed out earlier, the IMF predicts that the post-Brexit periodwill be characterized by high rate of inflation in the UK which willrise from 0.3% to 0.6%. This rate is yet to be attained because it istoo early to experience the full impact of Brexit. Besides, it is yetto be confirmed Brits just voted in its favor. With the high ratesof inflation, the government through the federal bank will lay downstrategies, through the monetary policy, to control the supply ofmoney. The monetary policy introduced will be contractionary. Inspite of the fact that it curbs the rate of inflation, acontractionary fiscal policy is likely to aggravate the rate ofunemployment and recess the economy (Feenstra, 2015). Consumer’sdisposable income will be low, and they will rarely demand servicesin the hospitality, tourism, and leisure sector. This will aggravatethe unemployment situation in this sector, and the government may becompelled to counteract using expansionary monetary policy. Anexpansionary monetary policy will help to ease the unemployment issuebut will, again, lead to increased rate of inflation as proved byPhilip’s Curve. The figure below illustrates the relationshipbetween employment and inflation as per Philip’s Curve.

Figure4: Philip’s Curve

Source:http://study.com/cimages/multimages/16/phillips_curve.png

Owed to the problems associated with using the monetary policy toboost the rate of employment, the best option for the government isthe fiscal policy. In the post-Brexit period, the government shouldincrease its spending in the tourism, hospitality, and leisure sectorso that more jobs are created. Besides, tax subsidies and incentivesshould be given to firms in the industry to boost their performancein the difficult economic times.

Furthermore, UK’s exit from the EU will have a major impact onforeign trading activities. Once its formal exit has been confirmed,it will be compelled to form a new trade deal with the EU. Thecurrent import and export of commodities with no tariffs imposed isas a result of UK’s membership of EU. Once it leaves, the new UK-EUtrade deal may be characterized with both parties imposing tariffs oneach other (Rios et al., 2013). Like it is the case for othercountries that are not members of the EU, the Union will impose a 5%tariff on all UK exports including cars and the UK may be compelledto do so on a tit-for-tat basis.

There is no doubt that Brexit will result in challenges for the UKhospitality, tourism and leisure industry since it heavily relies onconsumer expenditure. However, the challenges may be short termbecause firms in the industry may define proper strategies toovercome and take advantage of the opportunities that arise from them(Waligo et al., 2013). One of the main situations that thesector may take advantage is the weakened British pound as a resultof Brexit. Tourists from overseas will cheaply make it travel to theUK because the pound will be weak. Besides, upon their arrival, theavailable goods and services in the tourism, hospitality and leisuresectors will be cheap and well affordable to them. Ceterisparibus, this will encourage more foreign tourists into thecountry. Besides, firms may take advantage of the situation byencouraging more foreign investors to invest in the tourism,hospitality and leisure industry since the cost of doing so will becomparatively cheap (Shepherd, 2013). In addition to this, firms maytake advantage of the increasing number of overseas tourists whovisit to assess business feasibility as UK’s decision to leave EUbecomes clear every day. They should increase the prices for theirservices as early as now to counter the future negative impact ofBrexit.

To sum up, the impact of Brexit on both the UK and EU cannot beunderestimated. It has a major impact ranging from general economicinstability to specific issues such demand and supply of goods andservices in the hospitality, tourism, and leisure sector. Exchangerates change as a result of currency fluctuations the governmentwill be compelled to develop new monetary and fiscal policies andforeign trading activities will be influenced to a considerableextent (Gee et al., 2016). The consumption patterns ofhouseholds of individual consumers will change, and this will have amajor impact on the performance of the tourism, hospitality, andleisure sector. In the short term, the impact of Brexit to thetourism, hospitality and leisure sector is negative, but it could bepositive in the long run depending to the sector’s (individualfirms) reaction and efforts to overcome post-Brexit challenges(De-Grauwe, 2016).

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