Case No. 10 BREXIT: WHY AND WHAT NEXT?

A) Britains Exit (BREXIT) from the European Union (EU) could not be stopped despite hectic efforts
by the Prime Minister of UK, Mr. David Cameron. On the 23 rd of June, 2016 UK held a referendum
to decide the fate of Britains membership of the EU. A thin majority, 52% of the 30 million
voters decided to leave the EU as against 48% who voted to remain in the EU. The breakup of
the voting pattern (given as under) within the UK, leaves one more thing to worry about; i.e.
whether this will lead to breaking up UK itself?

States within the United Kingdom Leave % Remain %

England 53.4 46.6

Wales 52.5 47.5
North Ireland 44.2 55.8
Scotland 38.0 62.0
Total UK 52.0 48.0

The result of the referendum sent shock waves throughout Europe, plunging the stock markets
all over the world and forcing David Cameron to resign. His Home Secretary Ms. Theresa May
took over from him as the next P.M.

Senior Conservative MPs like Mr. Boris Johnson (Foreign Secretary) have been skeptical of the EU
membership right from the beginning and always voiced a concern regarding UKs wisdom of
joining the EU at different platforms.

Footnotes:

1) Only about a year ago, in a separate referendum, Scotland and North Ireland voted to remain
within the United Kingdom. Now they want to remain within the EU, but UK as a whole has
voted to leave the EU. This might cause a split in the United Kingdom itself.

2) Over the past few decades, UKs trade deficit has been has been more or less offset by the
revenues from the newly found North Sea Oil.

3) Out of the total current exports of UK, about 50% are to the countries in the EU. But exports to
Asian countries (China, India) are increasing rapidly.

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B) The European Union:

EU is, at present, an economic and political partnership involving 28 European countries. The
union formally began life in 1957 as the European Economic Community (EEC), often called the
common market. The name was changed to European Union in 1993, in order to emphasize
that integration was spreading from economic sphere to the political and social spheres of
European life.

EU is the product of fifty years of political and economic activity aimed at creating a prosperous
and cooperative environment for Europe. It is, on one hand, the largest and richest unified
market in the world a post war success story. It is, on the other hand, the weakest of political
alliances imaginable, ever on the verge of a collapse. The fundamental question that the EU
seeks to answer today, is whether economics is more important than the politics?

Regionalism is a distinctive feature of the International Political Economy (IPE) in the twenty
first century, and that this is so comes, perhaps, as a bit of a surprise. The need to look after
Homeland Security in all its forms compels pursuit of national interest and hence the
importance of the Nation State. From economic standpoint, the world is defined by markets,
not by the state boundaries and many of the markets (especially the financial market) are indeed
global. These forces pull the IPE away from the Nation State towards a Global Market.

Regionalism refers to the process by which groups of nation states, usually in the same
geographic region, agree to cooperate and share responsibility to achieve common objectives.

Economic Integration is the process by which a group of Nation States agrees to ignore their
national boundaries for, at least, some economic purposes, creating a larger and more tightly
connected system of markets. There are three levels of economic integration:

1) Free Trade Area (FTA): where there are no tariff barriers for trade of goods and services
produced by member states, but each one can have different rates of tariffs, for products
from outside the FTA.

2) Customs Union: where in addition to being an FTA, the states agree to have a common tariff
barrier for products from outside the FTA, for better flow of products and services within
embers.

3) Economic Union: where non tariff barriers are also eliminated along with tariff barriers thus
making a fuller economic and political integration. The members agree for the following
Four Freedoms: The freedom of movement of Goods, Services, People and Capital.

These four freedoms, not only represent significant limitations on national sovereignty, but
also have significant effect on economic activity. EU is very close to an Economic Union in its
present form.

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 The Democracy Deficit of political regionalism means many important decisions are
taken at the regional level (Union level) and not at the national level. These can sometimes
be perceived as decisions thrust upon the nation states by the regional union. Thus it
weakens the link between the voters (the common man) and the political decision makers.

C) Drivers for Unification of Europe:

If we look at the intentions of different European Nation States to form a European Union after
the World War II, some stark differences emerge as under:

1) USA supported the post war union of European countries because it wanted to create a
strong Anti Communist ally in Western Europe, to check the influence of USSR.

2) Many smaller European countries (especially France) supported the EU, because they
wanted to see a long term solution to the German Problem i.e. a way to live with this
mighty nation without being dominated by it.

3) Germany itself, wanted to erase the pre war image of a NAZI State, by being a part of a
super-national institution around it.

4) UK supported the formation of EU with a view to create a United States of Europe to

balance the influence of USA in the post war era.

Considering the diversity of fears and hopes one wonders, what was the real driver for the
formation of the EU. The two wars proved that the concept of coexistence of sovereign
nation states had failed in the past. There was a commonly felt need to find a political
solution to restrain excessive nationalism, which was the main cause behind the two wars.

D) The United Kingdom:

For the founding nations of the EEC (France, West Germany, Italy, Belgium, Netherlands and
Luxembourg) economic integration was the best means to achieve closer political integration. UK
is a group of islands separated from the mainland Europe. Their boundaries are naturally fixed.

French president, Charles de Gaulle, actually vetoed the entry of UK in the EEC in 1963. Only
after several rounds of negotiations, over the next 10 years, UK was given a green signal and was
finally admitted in EC in 1973, along with Denmark and Ireland.

The mainland European countries were always different in their desire for unity, than was UK
because:

a) UK being an Island had a separate and constant identity. The borders of mainland European
countries were altered several times in the past few centuries, due to wars and treaties.

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 b) UK never joined the Euro Zone, when a single currency was introduced in 1999 across the
EU. Thus they could adjust the rate of exchange of their local currency (Pound Sterling) to
the market needs.

c) UK always had closer ties with USA, than any other European country had. ( English
speaking)

d) UK had another group aligned exclusively with it in the British Commonwealth, which is a
significant alternative market.

E) BREXIT- Pros and Cons:

The British Foreign Secretary, Mr. Boris Johnson always opposed the PM, Mr. David Cameron and
gave the following reasons for not going with the EU, leading ultimately to BREXIT.

1) As regards the National Security concerns, UK is already a member of NATO and that is
enough.

2) The Pound Sterling was a free floating currency and hence UK could address the issues of
productivity drop or inflation by allowing the exchange rate to vary. This was not possible
with other individual / member states of the EU because Euro was the common currency
and its rate has to be fixed by the considerations of the group as a whole, although
differences / gaps in productivity were apparent between various individual states within the
EU.

3) Free movement of the people was not acceptable to UK, as the influx of job seekers would
come in to UK from the other lesser developed states and not vice versa. (During 2015,
180,000 workers came into UK as against only 30,000 British citizens went out to the other
EU states for jobs). EU was reluctant to give membership without free movement of people
(along with free movement of goods, services and capital) in the single market.

4) In the short run, UK will have to shell out much more for the union, than the benefits it
would receive from the membership of the union.

5) It was argued that in the long run the benefits will outweigh the costs for UK. However, the
long run was indeed very long, with several member states not performing their respective
duties ( read sacrifices) well and the PIGS seeking bailout packages from the relatively better
disciplined economies (UK, Germany, France), only to keep the unity intact. Hence, especially
for the middle aged and elderly citizens in UK, the trade- off between short term losses for
long term gains was meaningless and illusive.

6) Meanwhile, British jobs were lost to the cheaper labor in the poorer member states of EU
and this would cause unrest in the UK voters.

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 7) The Pound was expected to fall by around 10% by the shock wave, but this would help UK
exports in the rest of the world (USA, Middle East, BRICKS etc.) to compensate the loss in the
EU, because of the new tariffs which would be introduced after BREXIT.

8) English would still remain the trade language in the EU, despite UK leaving it.

9) Some degree of free trade can still be negotiated with the EU, based on mutual needs.

10) New bilateral arrangements can now be made by UK with the emerging markets much
better, without the pressure of seeking the common benefit of the EU.

F) WHAT NEXT?

Out of the 30 million citizens who voted in the referendum on the 23 rd of June, 2016, only 52%
voted in favor of leaving the EU. Prime Minister, Mr. David Cameron, who pleaded to remain with
the EU, was defeated and had to resign. His successor Ms. Theresa May (also a supporter of
remaining with the EU) will now have to do the tricky job of negotiating the withdrawal of UK.
For UK to leave EU, it has to invoke the agreement called the Article 50 of the Lisbon Treaty
(2009) which gives the two sides two years to agree the terms of the split. Each of the 27
member countries will have to get the approval of their parliaments for this. Ms. Theresa May is
unlikely to kick off this process before the end of this year (2016). That means we have to wait
till December 2018 to see what kind of deal UK will seek from the EU on trade and immigration
issues.

Few other questions still remain unanswered:

- Will UK itself split? (Scotland and North Ireland separating from England and Wales)

- Whether product safety will be compromised?

- What will happen to the retirement plans, health care etc. when the value of the
investments dwindle?

- Will there be another referendum in the near future, before the formal action and
negotiations for leaving the EU begin? Will it give a different result?

Let us wait and watch.

Q1: Was the BREXIT an aftermath of the European Crisis in 2014-15?

Q2: Was it a correct decision for the UK, not to join the Euro zone and keep Pound Sterling as its own
separate / independent currency?

Q3: Will any other country leave the EU in the near future?

Q4: Was formation of EU the right solution for the concerns of the post World War II, European
Countries?