Brexit consequences: How will the UK’s divorce from the EU impact global markets?

The deadlines for both a Brexit deal and for the UK’s final departure from the EU are fast approaching. And yet, despite more than four years of preparation, many of the possible outcomes of this monumental shift in Europe’s economic landscape remain in the dark. Will there be a deal? Which of the sides will benefit, if any? And many other questions still loom. There are many possible scenarios, some of which will be discussed below.

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What is Brexit?

“Brexit” is short for “British Exit” and is the end of the UK’s longtime membership in the European Union. Back in 2016, a referendum was carried out in Britain, in which the people of the UK voted whether or not to stay in the Union. After the vote, it was decided that the Kingdom and the Union will part ways.

Brexit impact in the past

Immediately after the results of the referendum were made public in June 2016, the economic impact of Brexit began to be felt. The British pound sterling (GBP) crashed to levels not seen in more than 30 years, and other key financial instruments, such as the UK100, also suffered greatly.

From a political standpoint, the vote was quite the earthquake. Then prime minister David Cameron, who was deeply disappointed by the vote, resigned quickly afterwards, leaving Theresa May to handle the Brexit process. However, May’s term was short-lived, and she also eventually resigned in March of 2019, after failing to muster the support needed to pass her Brexit deal with the EU. When current Prime Minister Boris Johnson took office, it was quite clear that a “No-Deal” Brexit outcome had become more possible.

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How does Brexit affect Europe and the UK?

Has Brexit been a success or a failure? Depends on who you ask. It was clear that the overall sentiment in markets immediately after June 2016’s vote was that Brexit was definitely bad for the UK and might also be bad for the EU. There are number of reasons for this:

  • Free trade: Perhaps the most significant aspect of being a part of the European Union is that there are no import or export taxes or tariffs. When members of the Union export their goods and services to other members, from a taxation point of view, it is as if they are in the same country. This is a major advantage for any corporation or government which wishes to conduct some of its business outsides the borders of its own country. This is also an advantage the UK may lose.
  • Human mobility: Another important aspect is the fact the EU citizens can live and work in any member country. This means that cheap, legal labour has been more readily available and that individuals who wished to explore employment opportunities or get an education in another country could do so with ease. However, this was also a strong point of criticism from pro-Brexit advocates, as they felt this was harmful to the UK’s social fabric.
  • Tourism: For members of the EU, travel within the Union is quite effortless, as no passport is needed and the Euro is accepted almost everywhere. Moreover, EU passports are also well respected in many airports around the world, including the US. More bureaucracy for travelling to and from the UK may also serve as a factor when EU members choose their next vacation destination.

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What are the advantages of Brexit for the EU?

Despite the widespread notion that Brexit may be bad for all sides, it may also carry some advantages for the European Union. Firstly, even without the UK, the EU has one of the three largest economies in the world, alongside the US and China. This means that it has great financial power and can apply much more leverage than its counterpart across the English Channel. Moreover, with the GBP out of the picture, there are no longer two major currencies competing within the same Union.

That being said, there is no doubt that the Union would have had more influence as a whole with the UK a part of it. However, considering the ongoing negotiations regarding the potential trade deal between both parties, it is possible that the differences outweigh the benefits in this case.

Brexit update: Deal or no deal?

Naturally, there is no way of knowing how markets will react the day after Brexit. There are numerous potential scenarios and when considering just how unpredictable 2020 has been, the possibility of surprise is always there. However, the outcome will most likely fit one of these two categories:

  • The UK and the EU strike a trade deal: This is the scenario many on both sides are hoping for. A trade deal between the two neighbouring economies would mean that much of the current relationship will remain, especially when it comes to import/export and employee mobility. However, the deadline for the deal, December 31st, is just around the corner, and with the holiday season starting a week before, there is  a good chance that the deal will not be signed in time.
  • A “No-Deal” Brexit: Prime Minister Boris Johnson has said from day-one that he is not scared of this scenario. If this happens, the UK will have the same status as its non-EU peers when dealing with the EU. This could have a tremendous impact on the British economy and the lives of the Queen’s subjects, as the UK economy has been intertwined with that of the EU for decades. Everything from the most basic foods to luxury items will incur import and export fees, potentially making life more expensive for the average Brit. However, this could also be an opportunity for local brands and service providers, who would now be able to better compete with their non-UK counterparts.

Furthermore, it is important to remember that this divorce will impact more than just the two parties separating. The UK could now sign new trade deals with other countries, and economic superpowers, such as the US or China could use the opportunity to try and gain more strength.

So long, and thanks for all the fish (and chips)

Regardless of the outcome of the ongoing negotiations, one thing is certain: On 1st January 2021, the UK will officially leave the European Union. Naturally, due to the geographical proximity and cultural similarities, the relationship between the two will continue, and there is good reason to believe that it will be friendly and mutually beneficial. And yet, there is no doubt that some of the negative sentiment from the breakup could be a serious factor in years to come.

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