When Great Britain voted to leave the European Union last June, it shocked the global markets, to say the least. Top U.S. indexes like the Dow Jones fell over 500 points, while almost every international index plunged. The British pound fell below its 30-year low, and stateside banks like JPMorgan JPM, Citigroup C, and Bank of America BAC took huge hits.
About midday Wednesday, Brussels time, Prime Minister Theresa May formally invoked Article 50 of the Lisbon Treaty, which is the measure necessary for Brexit to happen. A handwritten letter notifying the EU of the U.K.’s decision to leave was delivered to Donald Tusk, the president of the European Council, by U.K. ambassador to the EU Tim Barrow at around 1:30 pm Brussels time.
The Article 50 letter. #Brexit pic.twitter.com/SO5R5BTvhw— Donald Tusk (@eucopresident) March 29, 2017
What is Article 50?
Article 50 of the Lisbon Treaty provides any member the right to leave the EU, and outlines a path for the procedure for doing so. It gives the leaving country two years to negotiate an exit deal, but this time frame can be extended. So, from this moment forward, the U.K. has two years to work out a deal for exiting the EU, though many believe it could take much longer. However, any deal must be approved by a “qualified majority” of EU member states, and can be vetoed by the European Parliament.
The Lisbon Treaty was originally created to make the EU “more democratic, more transparent, and more efficient.” Before it was signed in 2007—the treaty became law in December 2009—there was no way to legally leave the EU.
What are the biggest Brexit concerns?
Triggering Article 50 will surely be the easy part for the U.K. Agreeing to new trading relationships, especially with its biggest partners like Germany, will be much harder. Prime Minister May said back in January that she wants to negotiate a clean break with the EU and a new free trade deal at the same time. Investors should note that if a trade agreement is not reached before the U.K. leaves the EU, trading terms are set to default to the World Trade Organization (WTO) standards, which are significantly less beneficial for both sides.
This is just the tip of the iceberg. During the next two years, the U.K. and the EU will also have to pay the required exit bill to the EU for the price of leaving, establish what tariffs and other barriers to entry are permitted, as well as agree on obligations like free movement and deal with the volatile political situation between Northern Ireland and the Republic of Ireland.
Will Brexit affect travel?
Short answer: yes.
Since 1994, any EU airline has been free to fly between two points in Europe thanks to the “Open Skies” policy, which is one of the best things about visiting Europe.Cheap, no-frills airlines like EasyJet EJTTF and RyanAir RYAAY grew into lucrative businesses, forcing legacy carriers like Air France AFLYY, British Airways, or BA, and Lufthansa DLAKY to cut costs and fares in. The “Open Skies” policy, however, could face bureaucratic hurdles going forward, especially for British airliners.
New air service agreements will most certainly have to be made, but because London is both a key destination for many airlines as well as a top business and tourist city, it is unlikely that many routes to and from the U.K. will be affected. The future of low-cost, wide-choice airline routes for customers will depend on results from the upcoming negotiation period.
Which industries will be affected by Brexit?
In addition to the travel and airline industries, Brexit will certainly affect the financial services industry. This market has a huge presence in London; London not only is the world’s number one location for trading foreign currencies, but about 12% of the U.K.’s total GDP comes from the financials industry. According to CNNMoney, “A deal that preserves some banking access to EU markets would be a major win [but] a failure could cost London thousands of well paid jobs and billions in business.”
The auto manufacturing industry could also be hit hard, especially if the U.K. winds up trading under WTO rules. Automakers will face new taxes on cars shipped over to Europe, in addition to increased costs on imported car parts. CNNMoney also notes that vehicles assembled in Britain receive almost 60% of their parts from outside of the country, mostly from the EU, and 56% of those cars are sold back into the EU.
Official Brexit talks could begin as soon as April 29 at the next planned summit in Brussels, bringing together the leaders of the 27 remaining EU member states, notes CNBC.
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