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All people talk about nowadays is Brexit. Two Prime-Minister resignations and three Brexit Extensions later, many of us are left huffing and puffing, exhausted at the long marathon of twists and turns over the Brexit situation. Then again, what is Brexit and why is it important? Should a fellow student from Malaysia even work up a sweat over this? 

Brexit is simply a shorthand for Britain’s split from the European Union (EU), changing its relationship with the bloc with regards to trade, security, and migration. A study conducted by NatCen Social titled “Understanding the Leave Vote” found that issues concerning the Economy, Immigration and Sovereignty were the main reasons the Brits chose to leave.

Researchers found that people’s views on the current state of the UK greatly affected their vote to stay, even if these views were unfounded and are not in tandem with current statistics.

Politicians bicker and sprout half-truths, with Boris Johnson declaring that the economic risk of crashing out of the UK is “absolutely zero”. Unlike UK politicians, mainstream economists generally agree that any form of economic disintegration will always be frowned upon. This could cause a myriad of disadvantages such as a reduction of Foreign Direct Investment, a reduction in real income per-capita, reduced funding for research and education, and a reduction of trade between countries.

The risk associated with economic disintegration could be mitigated or heightened depending on the pathway chosen by the UK to leave the EU. In theory, the options can be separated into four categories which are Hard Brexit, Soft Brexit, On Hold and No-Deal Brexit.

Hard Brexit
Hard Brexit is your text-book version of a typical divorce from a tasteless marriage. Your lawyer drafts up an agreement for your spouse to sign whereby the assets are divided equally while you receive a modest alimony. It is the standard outcome from a typical divorce with the underlying rationale being equal division of responsibilities and assets. Although Hard-Brexit is the text-book solution to exit the EU, the UK is expected to lose so much more than the EU in terms of trade negotiating power, foreign direct investments, industry productivity, wages, private consumption, capital remuneration, value-added creation, and many more as the EU has a far bigger and more sophisticated market than the UK.

Supporters of Hard Brexit advocate for the freedom to formulate their own trade rules and terms. However, formulating such a deal may not be timely and the UK may have to resort to unfavorable World Trade Organization trade terms before further negotiations could take place.

Soft Brexit
A soft deal Brexit on the other hand, is the most favourable outcome. It is similar to gaining 100% of the assets from your divorce, full custody and the and receiving a lucrative alimony. It is the UK’s best case scenario whereby they would retain the rights to the single market so as to minimise the disruption to trade and supply chains.

However, the EU was persistent that access to the single market will only be granted if all its principles, including free movement of people is adhered to. To most Brexiteers, this goes against the concept of Brexit as regaining control of Britain’s borders is a large reason for leaving the EU. Essentially, the UK wants the benefits of the EU single market but without the “disadvantages” of it. This outcome is unlikely. The EU will not allow them to have their cake and eat it too.

A no-deal Brexit is an overnight detachment from the EU single market without formation of any agreements to cushion against uncertainties and adverse shocks to the economy. Unlike hard Brexit, which theoretically includes some type of agreement with the EU and potentially sets out a transitional period to negotiate free trade deals, a no-deal presents no precautionary measures at all.

Experts estimated that a no-deal Brexit could happen which will cause border delays to increase, food variability to decline, domestic house prices to plummet, and cause other economic catastrophes. Moreover, such effects could cause a ripple effect to the rest of the world and potentially trigger another Global Financial Crisis.

Brexit On-Hold
Last but not least, the UK government could simply place Brexit On-Hold. This is a more savoury option as it gives politicians the necessary time required to iron out the details that will accommodate the different parties in the UK and EU. Not all is rosy, however. The prolonged uncertainty of Brexit will weigh heavily on investment decisions by firms and households alike. Businesses are less able to make accurate predictions of the future, hindering their plans for future investment. Households might constrict current spending to smoothen future consumption, leading to a fall in spending across the economy.

In short, politicians in the UK are divided between the Brexit they want while accommodating terms set by the EU. It is difficult to accurately predict if Britain will secure a hard or soft Brexit agreement, or call a second referendum that could see the decision to leave completely revoked. The recent appreciation of pounds suggests that traders are confident that Brexit will be put on-hold. That is some cause of cheer coming into the festive season. But put your luxurious spending on Christmas gifts on hold, for uncertainty looms over the horizon.