Q. The BREXIT makes the global economic recovery more difficult. Discuss?

“We are in the midst of an age of competitive devaluation and beggar-thy-neighbor policy.When elephants fight, the grass suffers.”
(Mr. Raghuram Rajan)

For a very long period now there has been a fear of BREXIT. BREXIT in simple terms refers to Britain holding a referendum to decide whether it wants to continue membership under EU or not. The referendum was held on 23rd June 2016 and 52% voted for BREXIT whereas 48% voted for remaining within the EU. Although the referendum is not binding on the Britain’s parliament, the PM has announced that he has to respect the will of the people.

Background:

· Post the Second World War, two countries Germany and France came together and decided that they wanted to establish trade relations as it would prevent their countries waging war against each other in the future.
· The result was the 6 members (France, Germany, Italy, Belgium, Luxemburg and Netherlands) signed a deal covering resources like coal and steel.
· In 1957 a treaty was signed in Rome (Europe)-European Economic Community (EEC) or Common Market.
· This has expanded and now has 28 member states.
· There are four key institutions in the EU:

⦁ European Commission- based at Brussels (Belgium), it consists of 28 commissioners (1 each from the member states, it administers the money spent and also formulates new laws.

⦁ European Parliament- based at Brussels (Belgium), there are 751 members in the parliament, their function is to discuss and vote all the laws that have been proposed by EC.

⦁ Council of European Union- based at Brussels (Belgium), It is where the government of each member country will have their say and hold discussions as to in what political direction should the EU be moving. Usually the deals are signed at the end of the discussions.

⦁ European Court of Justice- based at Luxembourg. The function is to make sure that all the member states abide by the rules and regulations; will also come into picture if there are any frictions between the above three institutions.

The Great Britain:

· It became a member country in 1973 and held the first referendum in regards to EU in 1975 (when they voted to stay in EU). A referendum is basically a vote in which everyone of voting age takes part specifying –yes or no- answer to a question. Whichever side gets the majority of votes (of the total votes cast) is considered to be a winner.
Today the arguments in favor of BREXIT have increased because the representatives of BRITAIN are of the opinion that the EU over the decades has undergone a lot of transformation and has taken away the powers of Britain to decide on various matters.Some of the reasons for Britain to seek BREXIT are:

⦁ Sovereignty- Although the British Government has an influence in some form in selecting the members to the European Commission, the members are neither under the influence nor accountable to the British Parliament and some of the policy decisions such as competition policy, agriculture, copyright and patent law go against the interests of Britain (these laws override the domestic laws).

⦁ Regulations are becoming burden- some of the regulations such as –limits on the power of vacuum cleaners, non-recycling of tea bags etc have often been seen as a burden on some of the conservatives in Britain. As per Michel Gove these regulations have cost Britain to the tune of £3 billion per year.

⦁ Euro the disaster- although Euro is the common currency for EU, Britain still uses pound as its currency. Now if the euro had to be successful then it would have required greater fiscal and monetary integration and this cannot be achieved unless all the member states have the same currency. The problem with euro as a common currency has also been exposed wherein on one side countries such as Greece and Spain are suffering from high debt, high unemployment, whereas other countries such as Germany are enjoying higher growth. Now in this situation the ECB (European Central Bank) is in dilemma whether to go for fiscal stimulus or prudence.

⦁ Immigration- Britain is not a signatory of Schengen Border free zone (allows easy travel across Europe), over the last ten years there has been a quite an opposition towards migration into the country from within the EU and its effects on wages and public services especially post 2008 recession wherein the workers from Lithuania, Poland, Italy, Romania etc. have moved to Britain.The “leave” proponents show the example of Canada and Australia which follow a point based immigration system and say Britain could adopt such measure rather than being forced to follow the laws laid down by EU.Point based immigration system-under this the potential migrants are awarded points based on factors such as language, job skills, education and age. In simple words those who can contribute to the economy once they allowed to immigrate will be rated higher.

⦁ Finance- although EU doesn’t have the powers to collect the taxes from the people directly, it mandates member countries to make payments. In case of Britain it comes around $19 bn per year or $300/person. Although the funds are again used on Britain, the BREXIT supporters say, the money could be used more efficiently, if Britain is out of EU.

⦁ EU pro or anti corporate? - There has been a mixed response to this question. The far left in Britain argues that EU is too pro-corporate and the far right argues the vice versa.

Any measures taken to prevent call for BREXIT:
In the beginning of 2016, David Cameroon (Britain’s PM) sought an agreement to change the terms of Britain’s membership, the deal was conditioned on BREXIT outcome to remain within EU.
Some of the points under the agreement are:

i. Migrant workers will still be able to send child benefit payments back to their home country (Mr. Cameron had wanted this abolished), but the payments will be set at a level reflecting the cost of living in their home country rather than the full UK rate.

ii. New migrant arrivals will not be able to claim tax credits and other welfare payments straight away – but will gradually will gain the right to more benefits. (He had promised a blanket ban).

iii. Britain will retain pound also an assurance from EU that it will not be discriminated as it has a different currency and any money of Britain used to bail out the nations in crisis (in Euro Zone) will be reimbursed.

iv. Britain’s large financial service industry will be protected from imposition of euro zone regulations.

v. It will be incorporated in an EU treaty change that Britain will not be a part of “ever closer union” (one of the core principles of EU).

vi. Red card system- If 55% of national EU parliaments object to a piece of legislation then the legislation has to be rethought (the critics say it is not clear if this would ever be used in practice).

The critics pointed out that what was proposed under the agreements made no change and fell short of what he had promised when he had announced his plan for referendum.

Why Scotland voted in favor of staying:

As per the numbers it was found that 62% of the voters
in Scotland chose to remain within EU. The reasons for their decision are:

i. EU is a common market which not only allows the movement of four freedoms (finance, goods, services and labour) but also provides a huge market for Scotland to export.

ii. With Scotland being a part of EU, the trade barriers will be eliminated to a great extent (both for exports from and imports into Scotland).

iii. Scotland has been able in attracting foreign investments as a result of which there has been employment creation, contribution to growth etc (in 2013, 40% of the companies in Scotland were foreign owned which employed more than 3 lakh workers).

iv. When the EU negotiates a deal with other countries (has trade deals with more than 50 countries), it is automatically applicable to Scotland but with BREXIT, Scotland may be forced to sign all the deals again with the trade partners (the advantages may be lost).

v. As a member of EU, it will get access to various development funds (Regional Social Funding, Rural Development Program etc).

vi. With BREXIT, the citizens of Scotland may lose the freedom of movement i.e. to move freely in Europe.

In a nutshell Scotland is much safer than remaining within rather than moving out of EU. (On moving out it will face security/terrorist threats, climate change, trade barriers etc. all alone).

Global impact of BREXIT:

i. The globalization has increased correlation between the countries. If there is a disturbance in one country then there will be impact on other countries.

ii. The BREXIT would affect the global growth.

iii. It is a big blow when more countries are moving towards multilateral trade arrangements.

iv. It will further alienate the investors and the capital will move from risky markets to safer heavens.

v. The major exporting countries such as China and India would get affected as EU is one of the major export market.

vi. As per one of the estimates BREXIT would lead to 25% reduction in imports by Britain.

vii. BREXIT was a referendum which rode on many components-anti immigration, increasing protectionism etc. with this these sentiments are going to increase in other parts as well.

viii. Britain was one of the major financial and military contributors to the EU but with BREXIT, the financial of EU will suffer.

ix. With BREXIT there are calls for NEXIT (Netherlands exit), Italeave (Italy leaving) and FREXIT (France Exit) etc.

x. With BREXIT there have been demands for Scotland exiting from UK.

xi. Although the pro exit supporters have claimed that the Britain can sign bilateral agreements free of restrictions any restrictions imposed by EU now, but the experience has shown that it takes a long period to negotiate and sign a new a trade agreement.

xii. UK and EU both account for 23.7% of rupee’s effective exchange rate. BREXIT would lead to outflow of foreign portfolio investments and this may further weaken rupee. (On the positive side the central bank will try to maintain the liquidity in the market so the fear of fed hike of interest rate could be brought down).

xiii. Brexit is a blow to the commodity prices. As such because of lower global demand, slowdown in china and many European countries had led to drop in the prices of commodities and this will be further accentuated because of BREXIT.

xiv. The sectors that would get affected are-auto and auto components; IT sector, metals, oil, aviation, pharmaceuticals etc.

Brexit consequences on EU:

⦁ If we see the trade pattern then 51.4% goods export to EU from Britain in return to 6.6% from EU to Britain. A post-Brexit Britain will have to form a set of trading and institutional relationship.

⦁ EU will become smaller and weaker both in economic and geopolitical terms.

⦁ The EU share of the world population will fall from 7.0 to 6.1 percent. In terms of world GDP, in purchasing power parity, the EU share will decrease from 17.0% to 14.6%, and in current international dollars from 23.8 to 20.0 percent. The EU share in global exports of goods and services at current prices and exchange rate will fall from 33.9% to 30.3 percent.

⦁ The transition process may take several years. It would greatly increase legal and economic uncertainty, not only in the UK but also in EU.

⦁ The political and economic shock created by Brexit could be a step towards further disintegration of the union. Given the increasing strength of Eurosceptic parties in many EU member states
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⦁ It will further aggravate problems with completing the Banking Union, or accepting the burden sharing mechanism to tackle the refugee crisis. Due to its opt-out clauses the UK does not participate in these projects and there are other EU member states that are reluctant to accept larger degree of burden and sovereignty sharing related to them.

⦁ The free movement of people, goods and services has been affected by the Brexit from other EU member states.

⦁ Attracting and retaining this foreign talent will become harder after Brexit, when EU workers moving to Britain will no longer be able to take their pension rights with them, and the other conveniences of a single labour market which are lost.

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A man is not finished when he is defeated, he is finished when he quits!!!