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Saturday, 25 June 2016

Brexit: Global Impact and Scope for Emerging Economies


Brexit, a term associated with Britain’s referendum on whether to continue with European Union (EU) or part ways has been pronounced. Many had expected that Britain will vote in favor of sticking to European Union (EU) but sadly that has not happened. Global Markets reacted sharply to the news and there is a sense of uncertainty hovering around as one cannot be sure about the future implications of such a move. Pound fell to its lowest levels since 1985 and with even Euro is under pressure. Equities fell sharply as Global markets lost about $2.1 trillion in a single day trade after the verdict while interest in Precious metal like Gold and Silver rose as Investors considered it a safer option. Coming few months will determine the true impact of the fallout. Currently, one should remains cautious about the developments and hope for stability at the earliest.

Potential Reasons behind Brexit:

Reasons behind Brexit is both political as well as being economical one. Britons felt that they were being hard done by the European Union policies which imposed various sanctions on trade which benefitted other EU members at the expense of Britain.

Immigration Issue: This is one of the major concern for Britain as the immigration from member EU nations have risen in the past few years apart from the fact that a good portion of workforce comes from the Asian nations as well. Immigrants from Eastern Europe which is economically weak compared to Western counterparts is another cause of concern for Britain. Jobs and housing is an issue which Britons feel could be handled better if they go alone.

Economic Concerns: European Economy is going through a lean period with UK being the second largest economy may be required to contribute in the bailout packages for the fellow members, scenario they would like to avoid. Moving out of EU will also not require UK to contribute in EU budget which forms a considerable chunk of Government spending.

Currency Valuation: Britain also has concerns about moving to Euro from Pounds as currently it enjoys a comfortable exchange rate scenario. Hence, moving to Euro will result in losing out on the exchange rate cushion.

Fiscal Policy: Staying in EU will mean following norms set for all the members which would restrict the independent decision making process for United Kingdom. Thus they believe going independent will arm them with much more flexibility.

Impact of Brexit Globally

The knee jerk reaction observed on Friday may continue for a brief period but Investors will soon settle down with markets regaining stability. Going forward, Dollar will strengthen but one cannot be sure about the impact on Pound and Euro. However, Britain will take around 2 years to completely move out EU which gives time to the economies to adapt.
Gold and Precious metals are expected to do well as concerns over the equity market looms large and Investors will look for safer investment avenues.

Potential Impact on Emerging Economies and India

On a short term perspective, India may be faced with some adverse scenario as companies with exposure to UK may see their operation cost going up and they may have to realign their business. IT sector may suffer due to devaluation of Pound in trade.

However, India may benefit from Brexit in the longer run. Britain would no longer enjoy the trade benefits it enjoyed while being a member of EU. Hence, would look to forge new trade relation with Emerging Economies and especially with India. Improved trade relations may open up new Investment avenues and bolster the employment opportunities for skilled Indian workforce. 

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