Sample Economics Essay Paper on Economic Impacts of Brexit

Economic Impacts of Brexit

            The parties arguing against the decision of the United Kingdom to exit the European Union were mainly concerned with maintaining a union that reduces the risk of tyranny and conflicts. The formation of the European Union was based on the notion that countries that have close economic ties are less likely to be in conflicts. The economic cooperation of the 28 member countries reduced the intensity of conflict due to political differences.  The member states enjoy great profits from trade due to reduced trade barriers such as trade tariffs. Majority of the EU members also enjoy a central monetary system that allows the organization to implement uniform monetary policies for the member countries (Dhingra, Ottaviano & Sampson (2015). 

            Although the EU makes uniform monetary decisions in favor of the economic welfare the states, it is inefficient because of the diverse political, economic and cultural state of the nations.  This is the main reason that some members such as the United Kingdom and Denmark have been operating their monetary systems independently.  The monetary independence allows the countries to make economic decisions that best address the country-specific challenges.  The countries also have the advantage of being the lender of the last resort in cases of economic crisis (Ottaviano et al., 2014). Through their central banks, the non-euro nations have the capacity to increase the liquidity in the economy by buying bonds, but the euro members are not able to do this because the unified central bank does not buy bonds from the member states.  The monetary independence is also effective in controlling inflation through mechanisms such as interest rates.  The monetary independence by the United Kingdom affects different sectors of the economy including the financial sectors, households, tourism sector and government policies.  

Economic impacts of the monetary independence decision for UK and EU economy

            Although the UK is only one member state among 28 countries, its decision to exit the EU has the ability to benefit or harm the economic welfare of the tourism and hospitality industry, consumers, financial sectors as well as foreign trading agencies (Sevcikova, 2016). The UK economic status is also likely to be affected by the exit because it has to operate in a new economic environment.

Positive impacts

            The decision by the UK to operate outside the Eurozone may benefit or adversely affect the economic situation of the UK, especially the tourism and hospitality industries that greatly depend on foreign income.  Having an independent monetary system has a positive impact on the growth and development of the United Kingdom economy due to increased flexibility in decision making. In the Eurozone, member countries depend on the European Union to make its economic decisions but the United Kingdom is able to make its decisions freely. One of the primary decisions that enhances the economic growth and development of economy in the UK relates to the stimulation of local demand (Dhingra, Ottaviano & Sampson (2015). Using fiscal tools such as low interest rates on investment loans, the government encourages investors to expand their activities thus increasing the aggregate demand.   The increased investments would boost local tourism as the consumers have high disposable income. With high aggregate demand, the economic development goals are easily achieved but this would not be possible with the UK being a member of the European Union. Sevcikova (2016) also supports the exit of the country from the European Union, citing that it provides the UK the economic flexibility needed to make sound economic decisions such as offering attractive taxation policies.

            The other positive impact that results from the monetary independence is reduced contribution to the European Union budget. The amount of monetary contribution that UK makes to the EU exceeds the benefits that it reaps from the union, according to a report by Ebell & Warren (2016), implying that the exit has a positive economic impact. In a study conducted by Dhingra, Ottaviano & Sampson (2015), the United Kingdom is no longer obligated to contribute towards the EU budget thus it is able to focus its resources on national building initiatives such as providing incentives to the tourism and hospitality industry. The other benefit that the United Kingdom is likely to benefit from is the possibility to achieve a reasonable Sterling weakness, which benefits the United Kingdom exporters. In a study by Sevcikova (2016), the tourism and hospitality sector is among the sectors that are likely to be affected by the exit of UK from the European Union because it exports its services to foreign nations.

            In the European Union, the decision to exit may positively impact the economy. One of the positive impacts that the EU benefits by the exit of UK is increased demand for its products. Countries within the EU that compete with the UK in trade are likely to enjoy huge trade profits due to the high cost of doing business in the country, which makes it unattractive. The tariff and non-tariff barriers that the UK is likely to experience have the potential to reduce the number of investors in the country.

A study conducted by Fichtner et al. (2016) indicates that the EU member states are likely to benefit from the decision of UK to exit due to expected low demand for its products. The authors cite that the high uncertainty of UK economic success may discourage investors from trading with the country, leading to slow economic development and growth in UK (Sevcikova, 2016). As a result, the high demand for EU products may lead to economic development in the member states.  The other benefit that the EU is likely to experience is increased profitability by households living in EU member countries. The increased demand for the products implies faster economic growth thus increased income for the households. Firms such as those operating in the financial sector are likely to develop due to increased liquidity in the economy.

Negative impacts

            The exit of United Kingdom from the European Union has adverse impacts that affect its ability to develop its economy.  The exit implies that the firms operating in the tourism and hospitality industry will have to pay higher tariffs to trade with the country. Being a non-member of the European Union denies the United Kingdom the trade benefits it enjoyed as a member such as inexistence of trade barriers between the member countries. To trade with the European Union members, the United Kingdom must pay trade tariffs that are paid by other non-EU countries.  A study conducted by Ottaviano et al. (2014) indicates that the United Kingdom’s economic welfare is likely to be negatively affected by the increased tariffs due to reduced earnings.  The authors explain that the reduced welfare gain from trade is likely to adversely affect the growth and development of United Kingdom’s economy. Apart from the high trade tariffs, companies operating in the United Kingdom are also likely to suffer from non-tariff costs that are even higher than the trade tariffs.  Some of these barriers as identified by Ottaviano et al. (2014) include legal barriers, transaction costs and high transport costs.

            One of the economic activities that contribute towards economic development of the United Kingdom is exports, mainly in the form of earnings from tourism sector. When foreigners from other nations visit as tourists, they pay for the goods and services offered by the industry but the earnings are likely to reduce with the United Kingdom out of the European Union. A study conducted by Dhingra, Ottaviano & Sampson (2015) indicates that the tourism industry is likely to be adversely affected by the exit of UK from European Union due to increased trade barriers. This implies that the tourists visiting the United Kingdom from the EU member states will have to pay higher compared to when the country was a member of EU. The increased costs discourage the tourists from visiting the countries and may opt for other destinations that are cheaper.  The reduced earnings by the firms operating in the tourism and hospitality industry is likely to affect other economic aspects such as employment as the companies strive to maintain low operating costs.

            Reduced competition is the other adverse impact that is likely to result from the decision by United Kingdom to exit from the European Union. Among the primary advantages of the economic union of members of European Union is high competition as the countries strive hard to be the leading economies.  The reduced competition among the firms in the United Kingdom reduces their effort to produce high quality products. As a result, the demand for local products is likely to decrease and this affects economic growth negatively. The other negative impact that is likely to be experienced by the individuals operating in the tourism and hospitality industry is reduced earnings that are likely to lower their living standards. According to Sevcikova (2016), the individuals are likely to suffer the adverse impacts of reduced foreign income from the tourism and other industries. Further, the financial sector in the UK is likely to suffer from reduced liquidity resulting from slow economic growth and development. The author cites that there is high likelihood of reduced foreign direct investments due to high tariffs and non-tariff barriers. The high uncertainty about the economic success of the country is also factor that is likely to reduce the number of direct foreign investments in the country due to perceived high business risks.

            The tourism and hospitality industry in the UK is also likely to be affected by its weak bargaining power on matters pertaining to tourism (Sevcikova, 2016). One of the major benefits that the EU members reap is the ability of the organization to bargain business deal with other regions collectively. This implies that countries that are not in the EU have to negotiate trade agreements on their own, which is less effective, compared to the collective bargaining done by the EU. Consequently, the United Kingdom is less likely to negotiate better terms of trade such as trade tariffs that affect its tourism and hospitality sector. The EU member states benefit from commonality of policies, making it easier to regulate economic activities such as tourism. In the current scenario, the tourism and hospitality industry in the UK is likely to be adversely affected by the exit from EU due to increased difficulties in managing the sector (Tarlow, 2016).

            The European Union’s economy is likely to be negatively affected by the exit. One of the parties that are likely to incur huge economic costs is the firms trading in foreign goods, especially those dealing with products between the UK and the EU members. The reduced trade between these parties due to increased tariff and non-tariff barriers will affect the amount of money that the companies earn (Sevcikova, 2016). The employees working for these firms are likely to be affected by the exit through increased risk of losing their jobs as the companies strive to maintain high profitability. The firms operating in the financial sector within the EU are also likely to experience low business as a result of the UK exit because of reduced liquidity, but the impact may only last in the short term. The EU may also face the risk of unfavorable trade agreements due to reduced bargaining power. The bargaining power of the union is enhanced by the number of members, thus the exit of UK weakens the European Union.  Without the UK in its membership, the EU may seem unattractive to other trading blocs because the country has a great stake in the union. This is a risk for the union as other member states may be tempted to exit due to the reduced benefits of EU membership.

Measures that can be taken to overcome the challenges

            The firms and households operating in the tourism and hospitality industry, the financial sector as well as companies that trade in foreign products need to formulate measures that prevent adverse impacts of the UK exit from EU. The adverse impacts of the exit have the potential to reduce the welfare of the society, but this can be avoided through implementation of effective measures. One of the factors that are likely to affect the welfare of the above parties is reduced earnings due to increased tariff and non-tariff barriers (Barrett et al., 2015).

            To ensure that the parties overcome this challenge, it is crucial for the UK government to negotiate for better terms of trade in favor of the parties. The fact that the UK government has an independent monetary system makes it possible to use fiscal tools to stimulate business (Purdue, Huang & Economics, 2015). This implies that the government may stimulate the economy by reducing tariffs that exporters incur to ensure that they continue enjoying the benefits of international trade. The government may also use fiscal tools such as low interest rates on loans to stimulate local demand. This reduces the need to import products from the other countries, thus overcoming the challenge of dealing with high tariff and non-tariff barriers.

            The other measure that the UK government needs to implement to overcome the challenges is provision of incentives for foreign direct investments. Among the challenges that the UK economy is likely to face is reduced earnings due to low direct foreign investments. This is because the investors shy away from conducting their activities in a nation where the economic progress is uncertain (Schoof et al. 2015). To overcome the challenge of reduced direct foreign investments, the UK government may implement different incentives such as tax holidays for foreign investors. The government may also consider investing in diverse industries to ensure that a fall in the demand for tourism services does not greatly affect the entire economy.

            The preventive measures also apply to the European Union as it is also affected by the exit of UK.  One of the measures that the organization may consider implement is revising the unified monetary system to avoid the risk of having other member states exit. The organization should consider allowing each member state to formulate their economic policies that address their varying needs. The organization may also consider revising the non-tariff trade barriers such as quotas to ensure that the firms and households that depend on products sold to and bought from UK do not suffer reduced demand (Schoof et al. 2015). This is also a measure to reduce the huge financial losses that may occur in the financial sector. It is clear that the UK and EU economies are likely to be affected by the exit but the negative consequences outweigh the positive ones. It is thus crucial for the UK government and the EU to implement effective measures to prevent the possible adverse impacts. The reduced welfare of the parties does not only affect the European Union and UK economies, but also the other nations that trade with the countries. It is thus important to ensure that the potential adverse impacts of the UK exit are addressed amicably.  

References

Baker, J., Carreras, O., Kirby, S., Meaning, J. & Piggott, R. (2016). Modelling events: the             short-term economic impact of leaving the EU. Economic Modelling58, 339-350.

Dhingra, S., Ottaviano, G. & Sampson, T. (2015). Should we stay or should we go? The   economic consequences of leaving the EU. CEP Election Analysis Paper, (22).

Ebell, M. & Warren, J. (2016). The long-term economic impact of leaving the EU. National           Institute Economic Review236(1), 121-138.

Fichtner, F., Große Steffen, C., Hachula, M. & Schlaak, T. (2016). Brexit decision is likely           to reduce growth in the short term. DIW Economic Bulletin,6(26/27), 301-307..

Ottaviano, G. I., Pessoa, J. P., Sampson, T. & Van Reenen, J. (2014). The costs and benefits         of leaving the EU.

Purdue, D., Huang, H., & Economics, N. T. M. A. (2015). Brexit and its Impact on the Irish         Economy. National Treasury Management Agency, Dublin.

Schoof, U., Petersen, T., Aichele, R. & Felbermayr, G. (2015). Brexit–potential economic             consequences if the UK exits the EU. Policy Brief# 2015/05.

Sevcikova, M. (2016). Analysis of The Main Causes of Brexit and Its Potential      Consequences. on European Integration 2016, 961.

Tarlow, P. (2016). Brexit and its impact on tourism. ESRI Research Series48.