In June 23rd a referendum was held to decide if the United Kingdom (UK) should leave the European Union (UE); this referendum was commonly named “Brexit”. The UK is formed by two islands, the island of Britain (formed by England, Wales and Scotland) and the island of Ireland. Currently the UK is the 5th largest economy in the world.
What were the results of the referendum? According to the BBC news website, 51% of UK citizens voted for Brexit and the 49% voted against. It was an important event, because not one of the 28 UE member countries had done something similar before; the economic effects of the UKs decision will take some years to develop; however, just a few hours after speculation was rampant, causing economic and financial repercussions around the world; falling stock markets, currency depreciations, changes in monetary policies; among others.
But, why did the Brexit won? One of the main reasons was the desire for independence in policy making and freedom from regulations imposed by the UE, as the voters considered that its policies harmed the economic development and social welfare of the UK; they also claim that they would have more trade relations with first world economies and other countries. However voters against Brexit differ, as 40% of British exports are made to UE members, so they considered that this measure would negatively affect the UK economy and the rest of the UE.
According to the Organisation for Economic Co-operation and Development (OECD), the UK´s GDP could contract by 5% in 2030; also in 2020 the UK´s GDP could be reduced to 3% after it leaves the UE.
But, How Brexit affects other economies? In the US, one of the main trading partners of the UE, the exports would be adversely affected by the appreciation of the dollar, causing a decrease in trade with the US. In addition, US companies located in the UK could be relocated to some UE countries because of geographical and commercial strategy. It also has been said that political relations with the UK will not be affected in the future and they could carry out new trade agreements.
At the early hours of June 24, 2016, the Mexican stock market collapsed, the exchange rate reached 19.25 pesos per dollar at banks and 18.20 pesos per dollar in exchange centers.
One may think that is partly by the bilateral trade agreements between the UK and Mexico; as background, during 2015 the exports to that country accounted for only 0.5% of total exports from Mexico (mainly: gold and automotive parts); while the imports from the UK to Mexico accounted for 0.6% of total imports (mainly: Whisky and Aero parts).
The biggest reason of the financial turmoil in Mexico was that there are many foreign investors who manage debt instruments and stocks, and these financial instruments decreased in value in 2015 and the Mexican international reserves were affected; along with the fall in oil prices. Furthermore, given the speculation and economic turmoil, investors are trying to find financial instruments based on safe currencies such as the dollar, causing the leak of dollars in our country and therefore a depreciation of the peso.
Given this situation and to counteract the effects of Brexit, the Ministry of Finance in México decided to cut public spending to 31.715 billion pesos; while last June 30, 2016, Mexico’s central bank increased the interest rate by 0.5%, and is now at 4.25%; such measures taken by the central bank were to try to avoid future increases in inflation following the depreciation of the peso. However, this measure could in the future discourage consumption and public investment, as interest will grow on the existing debt and therefore would require cutting the spending on new public infrastructure.
In my opinion, although other countries are making changes in their economic and social policies, Mexico needs to update and create new trade agreements with other countries to increase the foreign trade in order to reduce the trade deficit which currently has; along with the creation of internal structural policies to avoid that the decisions of other economies could negatively affect the country.
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