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The British government has held a referendum wherein the majority of British citizens voted to leave the European Union. This phenomenon has been popularly named “Brexit” by the media. The fact that Britain will leave the European Union is certain. However, there is still a lot of uncertainty regarding the terms on which Britain will leave.
There are two possibilities. On the one hand, there is a total and complete exit from the European Union which is being called the “Hard Brexit.” On the other hand, there is a likelihood that Britain will retain some of the features of the European Union while abandoning the others. This mid-way arrangement is called a “Soft Brexit.”
In this article, we will have a closer look at the concept of Hard Brexit and Soft Brexit and the pros and cons of following each approach.
Hard Brexit means that the British government ceases to be a part of the European Union. This means that the United Kingdom will no longer have access to the single market, which allows free movement of goods, services, and people from the member countries. Hard Brexit would also mean that Britain would no longer be part of the single customs union. In the customs union, member nations of the European Union do not charge import duty to each other. Also, instead of individual countries signing trade deals with the rest of the world, the European Union signs trade deals as a group. If Britain chooses a hard Brexit, then it will have to sign its own trade deals.
A Hard Brexit is popular with the hardliners who voted to go out of the European Union. It would allow Britain to maintain its political sovereignty. However, there are considerable economic impacts. The foremost impact will be that British goods that flow into other European Union countries would attract a 10% tax. This would increase their price in these markets. As a result, the sales of these products will decline. This will lead to a fall in production and a recession in the United Kingdom. However, proponents of Hard Brexit argue that Britain was one of the founding members of the World Trade Organization. It has the economic clout necessary to negotiate deals with other nations which will allow them to make up for the loss faced due to Hard Brexit.
Another major problem with the Hard Brexit is that it is likely to affect the British pound in an extremely negative manner. Since the EU has more trading partners than the United Kingdom, many companies, as well as countries, will sell the pound and buy the Euro. This will help them trade with the European Union later on. However, this exchange is likely to bring the pound to record lows. The mere announcement of Brexit had caused mayhem in the currency markets. If the government decides to continue with a Hard Brexit, the British pound might see an unprecedented fall.
The Soft Brexit is actually a mid-way between leaving the European Union and staying in it. Britain will be entitled to some of the privileges that other EU members have. Britain is not the first country that will be trying this model. Countries like Iceland, Norway, and Liechtenstein are already using this model. As per this model, Britain will officially not be a part of the European Union. This means that they will have no political representation at the EU. However, they can continue to have access to the single free market as well as the single customs that other EU countries enjoy. This also means that the goods being sent to Europe from EU and vice versa will be subject to fewer border checks.
The biggest benefit of this arrangement is that Britain can continue with the free movement of goods and services. At the same time, they can restrict the movement of people. Hence, Britain can ensure that they control immigration and secure their borders. At the same time, they can also ensure that their fledgling financial services industry continues to flourish. Since the service sector will not be affected, London can avoid the mass exodus of financial services firms and can continue as the financial capital of the entire European region.
The problem with this arrangement is that Britain will have to pay a fee to the European Union to continue using these privileges. The question now arises whether the fee will be worth the price or whether Britain would be better off paying 10% duty on its exports. The answer depends upon the amount that the EU is likely to charge Britain. Many analysts believe that the EU will give Britain a concessional rate at first. However, since many European countries are on the verge of bankruptcy, the EU may try to hike these rates later in order to increase their revenues.
The conclusion is that hard and soft Brexit are options that Britain is thinking about. The stand of the European Union is not really clear. However, it is likely that they will make it difficult for Britain to leave in order to set an example for the other countries. This decision is strategic in nature. Any decision taken will have ramifications on the economic future of both parties as well as the economic future of the rest of the world.
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