Impact of Brexit on the EU Economy

Understanding Brexit and the EU Economy

Brexit refers to the UK’s ‘exit’ from the European Union (EU). It came into effect as a result of the referendum held on 23 June 2016. Brexit had an impact on the economic situation of both the UK and the EU.

The EU, which stands for the European Union, is the union of 27 European member states for economic and political benefit. The EU was established to ensure the free movement of people, goods, services, and capital.

Impact of Brexit on the EU Economy Overview

The main impact of Brexit on the EU economy is the uncertainties surrounding it. Relations with the EU were dependent on the withdrawal agreement.

After that, citizens can keep their right of residence if they have sufficient means and legality and are related to someone who has the same rights. Many EU citizens left the UK after the referendum.

With the exit of the UK, the total population of the EU also decreased to about 13%. On the other hand, Brexit could inspire other Union countries to leave the European Union and curtail all policies and conditions to act individually.

Another significant impact was the loss of trade and unrestrained movement, as the UK was the largest economy and support system in the EU. The massive trade restrictions affected essential sectors such as the automotive industry, the pharmaceutical industry, and the financial services sector – some positively, some negatively.

Brexit had both positive and negative impacts on automotive, pharmaceutical, and financial services due to trade restrictions. The EU gained in the financial services market as part of the London derivatives market moved to Amsterdam.

Impact of Brexit on the EU Finances

The UK’s withdrawal from the EU had many positive impacts on the EU as well, including the following:

• 10% of UK banking assets have moved or are being moved to the EU.

• Approximately 440 banking and financial institutions have left the UK and relocated to the EU.

• 7500 jobs have been exported to the EU in the financial services sector.

Amsterdam, rather than London, became the most critical location for European equity trading, while London’s derivatives trading lost 75% of its euro volume to New York and Amsterdam.

However, the EU received less foreign investment for its projects after Brexit compared to the UK.

Impact of Brexit on the EU Automobile

For all EU countries, car manufacturers had chosen the UK for assessment and certification, which allowed EU countries to produce and market their cars. However, with Brexit, the UK certification will no longer count as approval and carmakers associated with the EU will no longer be able to market their car with the UK certification. Under the new proposals, carmakers will have to obtain type approval from individual EU states.

The EU is the primary importer of cars from the UK, accounting for about 70% of about €42 billion.

If no agreement is reached between the UK and the EU, the UK will lose a large portion of its business, as the EU is its largest importer of cars. In the event of a no-deal Brexit, the UK would risk losing up to £55 billion in the auto industry due to high tariffs on imports to the EU.

Figure 1. EU’s exports, imports and trade Balance, StudySmarter Originals.Source: Eurostat, ec.europa.eu/eurostat

As we can see in Figure 1 above, EU car exports peaked in 2015. From 2016, after the Brexit vote, EU car exports declined. EU car imports peaked later in 2019 but began to decline in 2020.

Impact of Brexit on EU Economic Power

In 2017, after the Brexit referendum, both the EU and the UK grew at similar rates, around 2%. The COVID -19 pandemic negatively impacted both the EU and the UK, but the pandemic hit the UK worse, with GDP growth of -9.396% in 2020.

The UK was the largest contributor to the EU budget, so the EU had to adjust its budget after Brexit. It had to cut spending, increase contributions from its member countries, or a combination of both.

The Brexit led to a wider gap between the EU’s spending and revenues and caused the debt level to rise further in 2020.

Impact of Brexit on the EU International Trade

Of all the countries associated with the EU, Germany had the greatest impact of Brexit on its many industries, as it is the largest trading country in the EU after the UK. Industries such as pharmaceuticals, goods, and road vehicles were hit hard.

After Brexit, trade relations between the EU and the UK deteriorated compared to the EU’s trade relations with other countries. European companies reduced their investments in the UK after Brexit.

Trade between the US and the European Union totalled approximately $627 billion in 2021, an 18% increase from the previous year. Trade relations between China and the EU also saw a 17% increase, with trade totalling €558 billion. However, post-Brexit trade between the UK and the EU in the same year increased by only 2% to £308 billion.