Brexit meaning? Explaining what Britain's exit from the EU means

Confused by Brexit? You're not alone.

And it's no surprise really. When the European Union was formed after the Second World War, there was no expectation that any state would subsequently choose to leave. Countries that traded together, would stay together, right? Even though the UK joined a little later, with no end in sight, the provisions for quitting the bloc weren't set out in any detail. No matter which way you look at it, the EU and the UK are suddenly in uncharted waters - legally, politically, economically, and socially.

Brexit has potential implications way beyond the UK, and even the borders of Europe as a whole. Here's what you need to know about Brexit, it's meaning and possible impact for you.

We all know there are 2 sides to every story. But we know that, especially if you’re a global citizen who has lives or businesses across the UK borders, you have a lot of questions. Us too. So we’ve done our best, in October of 2017, to gather as much info as we could to see if we could get some of those burning questions answered.

This article will cover:

• What is Brexit?
• Who started the idea?
• What were the issues at hand when everyone voted?
• “Vote Leave” arguments
• “Stronger In” arguments
• Why did the UK vote to leave the EU?
• Pros of Brexit
• Cons of Brexit
• What happens with a hard / cliff-edge Brexit?
• What happens with a soft / smooth Brexit?
• When will the UK leave the EU?
• What is the Brexit divorce bill?
• What role does Theresa May play in negotiations?
• Brexit’s effect on Pound Sterling (GBP)?
• Brexit’s effect on EU businesses headquartered in the UK?
• Brexit’s effect on UK citizens living in the EU?
• Brexit’s effect on EU citizens living in the UK?
• Brexit’s effect on the US?

What is Brexit? The definition of Brexit.

It seems every major issue gets its own hashtag these days. The United Kingdom’s exodus from the EU is no exception. Brexit is the short term for the exit of Britain from the EU. #brexit, if you’re looking for the trending topic.

The EU, founded in its current form in 1993 shortly after the fall of the Soviet Union, is a political and economic union of 28 member states across Europe. However, on the 23rd of June 2016, 51.9% of UK voters chose to leave the union in a referendum. On the 29th of March 2017, UK Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty, which sets out provisions for leaving the bloc. The UK has 2 years from triggering Article 50 to negotiate a new relationship with the EU, after which it’ll automatically be ejected from the union.

Who started the idea of the Brexit referendum? (Stronger In and Vote Leave)

As a part of their party manifesto in the 2015 UK elections, the Conservative Party included the proposal to hold a referendum on leaving the EU. The Conservative Party then won. The Prime Minister at the time, David Cameron, then put the wheels in motion in May 2015 with the date for the referendum vote set for the 23rd of June 2016.

The campaigns for both ‘remain’ - known as Stronger In - and ‘leave’ - called simply Vote Leave - were run cross-party. That meant that politicians and activists from different political parties came together to promote their cause. Cameron supported ‘remain’, and resigned his Prime Minister position after his side lost the referendum.

What were the issues at hand when UK citizens voted for Brexit?

The campaigns on both sides of the argument were hard fought, and politicians and private citizens alike had extremely strong opinions on the subject.

Accusations flew throughout the campaign.

• Team ‘remain’ was accused of scaremongering about the implications if the UK were to leave.
• Team ‘leave’ was accused of lying about the money that could be saved as a result of Brexit.

A week before the vote, British Labour Party MP Jo Cox was murdered in her constituency by a man who had singled her out in part due to her support for the UK staying in Europe - highlighting just how high tensions were running at the time.

The Vote Leave campaign cited these issues as reasons to get out of the EU:

• Membership of the EU costs Britain £350 million a week, which could be better spent within the UK
• Outside of the EU, the UK would have better control over national borders and immigration
• Britain would be free to trade with the whole world if it were no longer an EU member state
• After leaving the EU, Britain will be free to set its own laws, and not subject to rules governing the union as a whole

The Stronger In campaign was based around the following arguments:

• Many UK-based jobs are reliant on maintaining trade with Europe - Brexit would put these at risk
• Within the EU there’s more opportunity for British citizens to live or travel abroad, to work, study or retire
• Being an EU member means lower prices for not only goods and services, but also energy, flights and mobile roaming charges
• EU law protects workers’ rights - something which could be reduced or scrapped if the UK leaves Europe

Breaking it down - Vote Leave arguments

So what exactly did the winning ‘leave’ side, say?

The EU costs Britain £350 million a week, which could be better spent within the UK

Britain is a net contributor to the EU. That means, by some measures at least, more goes into the EU from Britain than is given back. The cost of membership of the EU is £350 million every week, which could be better spent on schools and hospitals in Britain. This figure became the centrepiece of the leave campaign, but doesn’t include money given back to the UK, for example as part of the rebate negotiated under Prime Minister Margaret Thatcher way back in 1984.

Outside of the EU, the UK would have better control over national borders and immigration

After leaving the EU, Britain would have full control over its own borders. Current EU rules regarding the right to live and work in any EU member state would be revoked. That means that Britain gets to decide who can come and who cannot, to visit, live or work, with no say in the matter from the EU in Brussels. Immigration from countries outside of the EU aren't affected by Brexit, as all member states are already free to set their own policies regarding immigration for so-called ‘third country nationals’.

Britain would be free to trade with the whole world if it were no longer an EU member state

EU legislation stops countries unilaterally making trade deals with other countries. Any deal must be negotiated with the entire bloc, making it a slow and complex process. Trade terms have to be designed to fit the needs and local interests of a very broad range of countries. Unsurprisingly, this means that there are winners and losers in any deal brokered. Leaving the EU would mean the UK negotiates trade deals on its own terms, with whichever country it chooses.

After leaving the EU, Britain will be free to set its own laws, and not subject to rules governing the union as a whole

Huge amounts of legislation in the UK actually comes from Brussels, and is applicable to every country within the EU. That means that the UK can’t set its own laws in some areas, a situation which would be reversed after Brexit.

Breaking it down - Stronger In arguments

But how about ‘remain’? The referendum went against them, but how persuasive were their arguments?

Many UK-based jobs are reliant on maintaining trade with Europe - Brexit would put these at risk

One in every 10 jobs in the UK is linked to trade with the rest of the EU. The ‘remain’ team argued that these jobs could be put at risk by leaving because if businesses can’t trade freely, then they may have to reduce their workforce. Businesses may also choose to relocate their offices away from the UK to remain part of the EU, and retain trading rights.

Within the EU, there’s more opportunity for British citizens to live or travel abroad, to work, study or retire

European citizens have the right to live and work in any member state without the same sort of restrictions needed from third country nationals. That means no visas are needed for European holidays, and people are free to work, study or retire in other EU countries. Leaving the EU means the potential end of freedom of movement for British citizens, and a loss of benefits such as free healthcare for Brits living abroad.

Being an EU member means lower prices - for goods and services, but also energy, flights and mobile roaming charges

Leaving Europe, it was argued, would leave you out of pocket. Economists forecast that Brexit could cost each family £350 a year. That’s because competition within the EU single market drives down prices and makes it cheaper for EU citizens to buy goods and services.

EU law protects workers’ rights - something which could be reduced or scrapped if the UK leaves Europe

EU law is what protects workers’ rights, including statutory holiday, sick pay and maternity leave. Much of the legislation which governs the workplace, including that covering issues such as discrimination and unfair dismissal, comes from Europe. Leaving the EU means this can all be renegotiated - or even scrapped.

Why did Great Britain vote to leave the European Union with Brexit?

The results of the referendum were very close, with the Vote Leave campaign winning by 51.9% compared to 48.1% of the vote for remain.

However, this vote distribution was not even. The majority of Scottish voters, for example, voted to remain part of the EU, but England’s higher population swung it for Vote Leave.

Even within England there were huge disparities. In part, these differences reflected the spread of ethnic mix and economic successes across the country. In the capital of London, which is fairlyy international by any measure, almost 60% voted to stay in the EU.

In the end, the then UK Prime Minister David Cameron said that populism, and a global wave of frustration, which also resulted in the election of President Trump in the US, was to blame for the Brexit result. Those in charge of the Vote Leave campaign, however, argued that Britain voted to leave the EU because the country is stronger outside of Europe. It's safe to say that Brexit remains a hot topic of conversation for the UK media, and indeed much of the British population.

What were the pros of Brexit?

The arguments for Brexit centred largely around the fact that being a member of the EU meant that the UK as an individual country didn’t have full control over policies, laws and costs which affected it. As a member of the EU, for example, Britain couldn’t turn away immigrants from other EU states because the right to live and work anywhere in Europe was enshrined in European law.

One of the central claims of the leave campaign was also that leaving the EU would save Britain money. The figure used was £350 million a week, which was widely disputed. However, the facts show that the UK is one of only 9 members states that puts more into the EU than they get back.

For many people, Brexit was an opportunity to bring decision-making closer to home. The EU is seen by many Brits as a distant and bureaucratic organisation. The way that European laws and policies are set are poorly understood. Many pro-Brexit campaigners wanted the chance to bring the power to make decisions back to the UK, as they felt that British politicians represent their interests better than European institutions.

To summarise, the 3 main arguments for Brexit:

• As an EU state, the UK didn’t have full control over policies, laws, and costs
• Leaving the EU was purported to save the UK millions of pounds
• Many Brits felt like European lawmakers making policy were too far removed from their everyday UK citizen interests and that it was important to re-empower the UK to make their own decisions

What were the cons of Brexit?

The costs of the EU, and the impact of leaving on the economy became central to both arguments for and against Brexit. The Stronger in campaign said that, although leaving the EU would mean that the UK no longer had to contribute to the European budget, it would also cause huge uncertainties and reduce options for free trade - ultimately resulting in a bigger loss to the UK than any possible gains.

It was also argued that coming out of the single market would cause prices to rise, hitting all consumer goods and business services. Stopping freedom of movement of people would result in businesses struggling to attract talent, and a flight of investment and professionals from the UK, damaging economic performance.

Other arguments against Brexit say there is increased security offered by being part of the bloc, both in terms of military cooperation, and in sharing of intelligence. The fact that EU legislation can’t be undone by national governments is also seen as some protection in the case of things like workers rights, and anti discrimination laws.

To summarise, the 4 main arguments against Brexit:

• Leaving the EU would mean lost options for free trade, costing an even greater loss than the gains of no longer paying into the European budget
• Leaving the EU could lead to higher consumer prices in the UK
• Stopping EU people from freely living and working in the UK would mean businesses would struggle to attract talent and many businesses may flee the UK
• Leaving the European bloc might mean leaving behind additional security, military cooperation, and intelligence.

What will happen if there’s a hard or cliff-edge Brexit?

Hard Brexit means that the UK would leave the EU, including the single market and the customs union, outright. This would likely mean that the UK has to fall back on World Trade Organisation (WTO) trading rules to be able to trade with any other countries, before renegotiating trade treaties on their own terms. While this allows the UK freedom to negotiate with whichever country it wants, it also means that - in the short term at least - British goods and services could be subject to increased tariffs when exported.

Whatever the long term outcome of reverting to WTO rules, there would certainly be a period of uncertainty. This would leave the legal status of British imports and exports in question, and could be problematic for businesses based in, or trading with the UK.

Another problem predicted if the UK ends up working with WTO rules, it that some segments of the British economy, such as agriculture, could also be victim of cheap imports. These could flood the UK market and damage British business, once the protection of EU laws is removed.

What will happen if there’s a soft or smooth Brexit?

Soft Brexit, which is now the preferred outcome of many of those who voted to stay in the EU in the first place, means that although the UK would leave the EU, the country would still remain in the customs union, and be able to trade fairly freely within the EU.

Without EU membership, the UK wouldn’t have MEPs (Members of the European Parliament) nor be represented in the European parliament, but in the case of a soft Brexit, Britain could keep other arrangements as close as possible to the status quo. The European Economic Area (EEA), which includes countries such as Norway and Iceland, is held up as a potential model of this Brexit outcome.

In the case of a soft Brexit, it's likely that a ‘transition period’ will come into force once the 2 year negotiating window ends. This could last for a couple of years, and would be intended to support a smooth transition, especially for business and for those individuals who are especially affected, such as EU citizens living in the UK.

When will the UK leave the EU?

Hard or soft, Brexit is scheduled to take effect on 29th March 2019, two years after Article 50 was triggered.

However, in September 2017, UK Prime Minister Theresa May proposed a 2 year transition period to allow for ongoing negotiations and ease the shift to new ways of working between the UK and EU. This could effectively mean that Britain keeps the same relationship with the EU right through to 2021, and was reported in the UK media as ‘delaying Brexit’. The proposal is not popular with everyone, and would need EU agreement before it could even be considered. Until the negotiations progress, it’s probably safest to assume a 2019 exit, as set out in Article 50.

What is the Brexit divorce bill?

The 2 year time gap between Britain formally confirming its intention to leave the EU, and Brexit actually coming into effect, is being used to negotiate the terms of the exit. One of the major issues to be settled before talks can progress, is that of the so-called Brexit divorce bill. Under current estimates as of October 2017, the UK could be forced to pay a bill of anywhere between €60 billion and €100 billion in order to settle its European tab.

Unsurprisingly, this is a controversial topic in the UK, but also in all other EU member states. The European budget will fall significantly once Britain leaves and, as such, ensuring a fair financial settlement is a hot topic throughout the bloc.

The argument is about how to split assets and liabilities once the UK leaves Europe. So, for example, the UK has legally committed to pay a certain amount into the EU budget, which is set already for some years to come. That means, Britain could still be legally obliged to contribute to the European purse even after it leaves. There are also other liabilities, such as paying pensions for EU officials, which Britain will still be subject to even after leaving.

On the other hand, the UK has a considerable stake in the European Investment Bank (EIB). Its 16% share in this supranational lender owned by all EU member states could be worth some €10 billion, which pro-Brexit MPs are demanding back from Europe. Some are even adamant that there’s no legal reason the UK should pay the EU anything at all after leaving - and instead, Britain should simply get its money back with no strings attached.

The Brexit bill is so complex in part because it’s uncharted legal territory. It's also not simply a question of making the math work. Even some of the loudest voices looking to leave the EU, agree that even if there's no legal need to pay up, there is a moral obligation. A significant amount of goodwill would be lost if the UK was seen to renege on its duties, which could be problematic when negotiating future relations with Europe.

The decisions about who pays what, why and when, are likely to be settled in a negotiating room rather than a court, as this is really more a political than a legal issue at heart.

What role does UK Prime Minister Theresa May play in the negotiations?

If the UK wants to retain some relationship with the EU after Brexit, any deal on trade reached will have to be given the OK by the heads of state of all 28 countries, plus several devolved regional parliaments. Naturally, Theresa May, as UK Prime Minister, will play a role in the negotiations, and has several times spoken publicly about the topics on the table. She, alongside German Chancellor Angela Merkel are considered to be the most powerful players in hammering out a deal.

However, the team who are fighting out the detail of the deal are made up of 4 negotiators from the UK side, and 4 from the EU side, taking in politicians, civil servants and diplomats. The EU chief negotiator is Michel Barnier, while Britain has David Davis leading its team of negotiators.

How will Brexit affect Britain’s pound sterling?

In the immediate aftermath of the Brexit referendum, the pound fell to a 31 year low on currency markets - some 10% decrease against the dollar, and 7% against the euro. This has a number of root causes - uncertainty in every sense is damaging to markets, but there were also real fears that the British economy would crumble, making it a poor place to hold cash. Limits on exports were another fear among traders and investors - if it is difficult to export from the UK, then sterling’s value will fall to compensate.

The immediate impacts were rather varied. On the one hand, Brits’ summer holidays suddenly became much more costly due to the change in exchange rates. GBP 1 didn't even buy you EUR 1 at a couple of points over the summer of 2016. However the flip side to this was that foreign visitors suddenly found they could get more pounds sterling for their money, as the exchange rates favoured them significantly. That lowered the cost of visiting and shopping in the UK and led to a leap in visitor numbers.

Since then, the pound has continued to have a rocky ride. In August 2017, sterling was 11% lower against the dollar, and 15% lower against the euro, compared to pre-referendum levels. There have also been some fairly large swings, as the markets reacted to speculation or statements about how the Brexit process will map out. Some predictions suggest that by the end of 2017 the value of the pound will hit parity with the euro, and about $1.10 if you're buying dollars.

Changes in exchange rates have impacted anyone who does business abroad, travels, or sends money overseas to friends and family. The ups and downs in exchange rates means it can be difficult to know exactly what your money is worth when converted.

A good way to keep up with changing exchange rates is by using an online currency converter to keep track of fluctuating rates. But if you're making a currency exchange, you also need to check that the service you choose is offering a fair rate. Many banks and currency exchange services add a markup to the real exchange rate, to make sure they can make a profit. This isn't always obvious, and the extra costs can be painful.

An alternative is to use Wise, where you can always guarantee you'll be offered the real exchange rate with just a small upfront charge for your conversion.

Another option to help you manage the fluctuations in exchange rates, is a borderless multi-currency account. With a borderless account you can hold your money in dozens of currencies, and then switch between them when the rates look good. This means you never need to be hit by a sudden drop in rates, as you can keep your cash in whichever currency you like, and just convert when the exchange rates are good. The account also lets you make and receive direct payments, and bank like a local in the UK, US, the eurozone and Australia.

How will Brexit affect EU businesses headquartered in the UK?

Brexit is sure to impact businesses based in the UK, which have customers or suppliers based in the EU. Unfortunately, though, it's hard to predict exactly what the effects of Brexit will be, until negotiators move onto the thorny issue of future trade terms. Until new trade terms are agreed on - or the negotiations are deemed to have failed, and the WTO terms are adopted - nobody can say for sure what restrictions or tariffs might be imposed on businesses based in the UK and trading with Europe.

Experts are divided on the likely implications of Brexit for UK business. If Britain loses access to the European single market, tariffs are likely to go up for UK companies working in Europe. That'll make it much more expensive for British based businesses to export to Europe, unless new terms are agreed before Brexit takes effect.

The loss of free movement within Europe is also a worry for British-based businesses, many of which employ significant numbers of workers from elsewhere in Europe. If immigration into the UK is capped, for example, this might make it hard for companies to find the right talent for their vacant roles, both in skilled professions, and in seasonal jobs.

Whatever happens longer term with regards to trade terms and immigration, British businesses face significant uncertainty over the next few years. A creative approach to help manage this uncertainty is being offered by one of Europe’s smallest countries - Estonia.

Estonia is very advanced in terms of digital governance, allowing citizens to set up a business, pay taxes, and even vote online. One attractive option now being offered for many entrepreneurs and business owners is to apply for e-Residency, and become a digital resident of Estonia. And the good news for UK entrepreneurs, is that you can apply for this even if you've never set foot in Estonia.

The e-Residency scheme, which is the first of its kind in the world, allows you to register as an e-Resident, and therefore access digital services in Estonia, no matter where in the world you are. Crucially, Estonia is a member of the EU, so if you have e-Resident status, you can set up your business in Estonia, and maintain a headquarters in the EU, even if you live outside the bloc. Although Estonia is the first country to establish e-Residency, it's thought that other states, such as Singapore, are also looking into settling up their own similar schemes.

How will Brexit affect UK citizens living elsewhere in the EU?

About 1.3 million Brits live in the EU in countries other than the UK. Over 300,000 live in Spain, and about 250,000 British people have relocated to the Republic of Ireland. It's not clear what the implications of Brexit will be for these expats.

As part of the ongoing Brexit negotiations, as of October 2017 the EU representatives have made clear that their priorities are to settle the ‘Brexit bill’, agree on the approach to the Republic of Ireland’s border with Northern Ireland, and guarantee the rights of UK citizens in the EU, as well as EU citizens in the UK. Until progress is made on these subjects, the negotiations will not progress to the topic of trade. That means that, although it's not clear what will happen to British expats in Europe after Brexit, it's likely to be one of the first subjects settled once negotiations start to move forward.

How will Brexit affect EU citizens living in the UK?

Around 2 million EU citizens live and work in the UK. As with Brits in the EU, their future rights are unclear once Brexit takes effect.

The issue for both groups is as much a political one as it is a legal quandary. Whatever deal is agreed upon is likely to apply to both Brits in Europe, and citizens of all other EU states who live in the UK. Because of this reciprocal arrangement, neither the EU nor the UK are expected to make life too difficult.

One suggestion is that EU citizens living in the UK, who arrived before the Brexit vote, will have individual ‘acquired rights’ under the Vienna Convention of 1969. That'll mean that they should be offered a way to stay in the UK, such as a ‘settled’ status. If this happened, the chances are that the same offer would be extended to Brits living in the EU at the time of the Brexit vote. So far, as of October 2017, UK politicians have made some steps towards agreeing a process and approach to allowing EU citizens in Britain to settle permanently. However, the concessions currently offered haven't gone down very well with EU leaders, who want more protection for their citizens currently living in Britain.

How will Brexit affect the US?

The most immediate effect of Brexit, was felt by Americans coming to the UK on vacation, and US businesses dealing with Britain. As of October 2017, the dramatic fluctuations in the USD to GBP exchange rate has meant that your dollars could buy you a lot more in the UK now than before the Brexit vote. Tourists in the UK have benefited from the weak pound, and British goods exported to the USA are cheaper.

However, how the US will feel the longer term impact of Brexit is yet to be seen. The general uncertainty in financial markets is a concern for American business. That said, both America’s President Donald Trump, and the British Prime Minister Theresa May have talked about agreeing a new trade agreement which could be favourable to both sides. If this happens, British American relations could become stronger.

Like so much, when it comes to Brexit, the longer term effects for the US are still unclear.

Negotiations rumble on, and with the complex political environment of the UK - not to mention the 27 other EU states - it could be some time before we start to get answers. As elections in EU member states also mean that the ruling parties or coalitions change over time, the scene could shift significantly before final deals are done, on citizens rights, trade or immigration. Watch this space.

| ----- |
| This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. |