1. INTRODUCTION:
* It is the abbreviation of “British Exit” from the European Union (EU).
Brexit mirrors the term Grexit — a term which was coined and used by two Citigroup’s economists in February 2012 to refer to the possible exit of Greece from the EU.
* So, what is European Union?
- 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 the 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.
- It is an economic and political partnership comprising of 28 member nations. Politically, a law passed in the European Parliament is applicable and binding on all Member nations directly. Economically, the EU is the single market allowing the free movement of goods and people. EU has its own currency, the Euro, which is being used by 28 member countries. The capital of the EU is located in Brussels, Belgium.
- 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 European Union 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.
Therefore, basically the EU is an union where there us no restrictions to entry of human resources and trade. So, definitely the one who is powerful and capable is more prone to be exploited by those who are not that much relatively capable or efficient. EU seems to be a common platform rendering equitable justice in trade and human resource leveraging the more capable to feed the relatively less or weaker ones.
Also, the 'political' control the EU has over Britain is disturbing and definitely not agreeable by the citizens of Britain who are well aware of the sovereignty and might of her.
2. EXPLANATION:
* Referendum: There were growing calls from many MPs of the Conservative Party and the UK Independence Party (UKIP), for a new referendum. (In 1975, Britain had voted to stay in the EU in a referendum).
A referendum was held on June 23, 2016, to decide whether Britain should exit or remain in the European Union.
Eligible voters: All British, Irish and Commonwealth citizens over 18 who are resident in the UK, along with UK nationals living abroad who have been on the electoral register in the UK in the past 15 years.
51.9% of voters favoured exit of Britain from the EU. It is the first time since the EU was founded in 1957 that a member country is leaving.
* REASONS FOR BREXIT:
i). Migration
Migration of people from both within and outside EU, especially from the West Asia (Syria and ISIS Issue) and East European nations = Fear of losing jobs, social welfare benefits among the Britons.
Repeated requests of Germany to share the migrants across Europe and asking the UK to accept a number of them have been disliked by the Britons.
ii). Contributions to EU Budget
UK is one of the ten countries which contribute more to the EU Budget.
According to some studies, the UK’s contribution is not proportionate to the benefits it gets back.
iii). Failure of EU
The European Economic Community (EEC) had 6 members, 4 languages and 177 million population when it was founded. But now the EU has 28 members, 24 languages and 505 million population.
Thus the EU failed on several fronts in creating one community and one identity while solving the differences among its members, including Britain.
People feel that jobs, living standards were better offered during the early days of nation-states than now. (Click here to learn about the European states system through mind map).
iv). Sovereignty issue
Some of the Britons feel that they are being controlled by the diktats of Brussels bureaucracy rather than making their own decisions.
Although the British Government influences 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)
They view the institutions of EU as undemocratic and do not want bureaucrats in Brussels to decide what laws the UK should follow.
v). Germany’s domination
With the coming of Angela Merkel, Germany has started playing an influential and leading role in both global and regional affairs.
It has indirectly made Britain feel marginalized both within the EU and the region.
Considering their imperial past, Britons are in no way ready to tolerate an EU dominated by a German leadership.
vi). Economic model
Some Britons are not happy with the way EU central bank responded to the 2008 financial crisis which resulted in an economic recession. (Note: Recession means a widespread decline in the GDP, employment and trade lasting from six months to a year).
They were not satisfied with the economic model that is in place for three decades and its failure to serve the interests of various sections of the Britons.
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.
Particularly, the youth are concerned about career opportunities and the affordable homes that were never built by the State.
It is estimated that unemployment across Eurozone is more than 10 percent.
According to some studies, the UK’s economy is losing 600 million euros every week because of the burdensome regulations of the EU.
vii). Euro currency failure:
Euro is the common currency for the EU, Britain still uses the 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 the 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 a dilemma whether to go for fiscal stimulus or prudence.
* REASONS AGAINST BREXIT:
i). Image of UK
For the critics of Brexit including former PM David Cameron, the referendum was an utter insult to the entire country as it has reflected the great divide between Britain and EU.
They also claim that the UK’s image would get damaged by leaving the EU.
ii). Immigrants
Majority of the immigrants are young and hence would boost economic growth and will help pay for the public services.
iii). Trade
Trade gets a major boost for Britain if it stays with the EU. It is because selling products to other EU nations becomes easier with EU membership.
Foreign companies may not be willing to invest in the UK if it is not part of the EU. Moreover, they may also move their bases out of the UK as it will not be a part of the single market since it would face problems with different EU regulations.
iv). Security
According to Brexit critics, leaving the EU may affect the ability to fight cross-border crime and terrorism. They believe that Britain would be more secure as part of the EU.
3. CONSEQUENCES:
I). On UK:
- As per International Monetary Fund (IMF), a vote to exit the European Union in the referendum could leave Britain’s economy more than 5 per cent smaller by 2019 than if it stays in the 28-nation club.
- Brexit could cause the country’s economy to be between 3.8 and 7.5 per cent smaller by 2030.
- The pound expected to fall by around 20 per cent. This would mean that exports to the UK will suffer and imports from the UK will gain. Export companies operating in the UK will gain, while import companies will lose.
- More foreign tourists will visit Britain in the coming days as the currency value has fallen.
- More foreign students may prefer Britain for higher education as the fees may seem cheaper.
- EU citizens in Britain and Brits living in other EU nations would have to update their immigration statuses.
- Companies operating in both the UK and the EU would have to verify that they’re compliant with two sets of laws.
- US President Obama has warned that it could take 10 years for Britain to negotiate a new trade deal with the US.
- The referendum results (52:48) is very close. This means a major division of opinion in Britain which has social implications too. While the less educated and the old seems to favour the ‘leave EU’ campaign, the young and the employed are more in favour of Britain staying in the EU.
- Brexit could encourage England, Wales, Scotland, or Northern Ireland to appeal for quitting the United Kingdom.
- The weakening of pound: The value of pound weakened to a 30 year low after the Brexit referendum. It will negatively impact the country’s imports and exports.
- Trade agreements: the UK has to separately enter into trade agreements with the rest of the world.
- The breakup of the United Kingdom: Scotland (part of UK) had voted in favour of EU during the referendum campaign. Thus Brexit would boost the demand for independence of Scotland from the United Kingdom.
- The Irish question:Ireland is an island to the west of Britain and has 2 major regions – North and South, with different demographic features. “Protestant majority Northern Ireland” (a UK territory) and “Catholic majority Irish Republic” (an independent country in the south), have had serious ethnic tensions within and between them. Numerous agreements and EU’s integrated markets system have thus far been a considerable influence in resolving these tense and violent trends. Since UK plans to leave EU, the Irish question has come to haunt all concerned governments since there is a fear that a new era of violence might start.
II). On EU:
- Britain is an important country in the EU. Without Britain, the EU may lose much of its influence as a global power bloc. It may result in a resurgence of the nation-states that once ruled Europe. Because, with Brexit, right-wing political groups in Italy, France, Sweden, Belgium, Poland, Germany, Spain, and Hungary have started demanding the exit of their own nations from the EU. (click here to learn about the European states system through mind map)
III). On World:
- Remittance from the UK to countries outside in terms of Pound will fetch lesser returns compared to the past.
- Export dominated countries may be affected, whether exporting to the UK or not. If the UK is the major trading partner, the effect will be more.
- The United States will bear the major brunt of a Brexit being the UK’s biggest trading partner.
- A direct impact on Asian economies from Brexit is unlikely in the long term because as a percentage of GDP, exports to the UK is less than 2% for most economies.
- But businesses in some major Asian economies – like India and Japan- will be hit.
- Companies which have set up operations in the UK to gain access to EU markets will be affected.
- BREXIT would likely allow any US Dollar strength to play out. This may cause other currencies to decline in value.
iv).On India:
India is one of the top investors in the UK.
There are about 800 Indian-owned companies in the country employing roughly 110,000 people. (Eg: Jaguar Land Rover is owned by the Tata group)
Many of these firms made investments with the wider European market in mind.
Together, the UK and Europe account for over-a-quarter of the country’s IT exports, worth around $30bn.
The UK is the third-largest source of foreign direct investment in India and India’s largest G20 investor.
India is the third-largest source of FDI to the UK in terms of numbers of projects. India invests more in the UK than in the rest of Europe combined, emerging as the UK’s third-largest FDI investor.
The key sectors attracting Indian investment include healthcare, agritech, food, and drink.
In November 2015, Prime Minister Modi has said, ”As far as India is concerned, if there is an entry point for us to the EU, that is the UK.”
But, the UK is only India’s 12th largest trade partner, well behind other European countries such as Germany and Switzerland.
Interestingly, the UK is also among just seven in 25 top countries with which India enjoys a trade surplus.
- Trade: India-UK trade will get a boost. The stringent regulations of the EU which were the biggest obstacle can be done away with. For example, the EU had banned Alphonso mangoes from India after it reportedly found fruit flies in the consignments. The weakening of pounds will also be advantageous for Indian imports. It will also benefit tourists and Indian students studying in the UK.
- Indian Businesses in the UK: may find it hard to access the single market of EU since their products may become uncompetitive if they are asked to pay import duties upon entering the EU. Thus Indian businesses will not be able to utilize the UK as the gateway to the European Union. Indian IT firms which have considerable exposure to the European markets, particularly the UK, will be affected since there is a risk of a decrease in growth levels in the EU and UK.
- Tourism: Due to the weakening of pound, there will be a decrease in tourists flow into India from Britain.
- Immigration: After Brexit, it is expected that there will be more restrictions on immigration in the United Kingdom thus affecting Indian immigrants.
- FDI: Brexit will affect the flow of Foreign Direct Investment (FDI) in India. It will result in financial instability and a legal regime overhaul in the long-term.
- Indian students in the UK: will get benefitted since the number of applicants from EU nations to the universities in the UK is likely to decrease after Brexit. Also, the weakening of pound may lower down the total cost of education for Indian students. Furthermore, there may be a decrease in international student fee since the low fee structure for EU students may be withdrawn. It has to be noted that, the EU students were availing fee concessions which are being cross-subsidized by a higher international student feeI-
- India’s Forex (currently a record 363 billion dollars) may diminish, particular if the currency is stored in Euros or Pound (this comes around 20% of total forex).
- Brexit will have a negative impact on the $108 billion Indian IT sector in the short term.
- Many Indian companies are listed on the London Stock Exchange and many have European headquarters in London. Brexit will take away this advantage.
- Due to fall in the value of Pound sterling, Indian exports to the UK will suffer. Cheaper rupee will make Indian exports, including IT and ITeS, competitive. Indian import companies operating in the UK may also report a loss. Also, note that India is exporting more than what it is importing from Britain.
Therefore, for India, there are both set of positive and negative impacts, but the overall weigh is that, it is positive for India on long term, since it's simple, that if Britain is out from EU, the chances of trade, economy and foreign studies (which favors us) will be prioritized to Indians still more, eventhough we can tackle certain negatives in a good relationship with Britain
4. What will happen to Northern Ireland?
- Brexit would involve North Ireland’s departure from the EU as it is part of the UK.
- In the absence of another arrangement, checks would be required along the 499-km Irish Border as different trade rules would apply to north and south of Ireland after Brexit.
- This creates a security risk because a physical border infrastructure would be considered as a potential target for militants.
- To avoid this, an effective insurance policy called the Backstop was originally agreed by the UK and the EU in the withdrawal agreement.
- However, this was opposed by Northern Ireland’s lawmakers as it risked breaking up of the UK.
- Ultimately, the Backstop was replaced by Northern Ireland Protocol in order to avoid trade border emerging on the island of Ireland.
- The protocol was formed as part of last year’s withdrawal agreement.
- It prevents hardening of borders between Northern Ireland and the Republic of Ireland.
- According to this protocol, Northern Ireland (NI) will remain in the EU single market for goods.
- Northern Ireland will also apply EU customs rules at its ports, even though the region is still part of the UK customs territory.
- The protocol will also see Northern Ireland follow certain EU rules on state aid and VAT on goods.
- It also mandates checking and controlling of goods arriving from Great Britain from January 1.
- However, goods going into the Republic of Ireland and the wider EU will face no new checks or controls.
- This arrangement would still have applied even if the wider trade deal failed to be implemented.
- There were concerns regarding Northern Ireland becoming a tariff-dodgers’ backdoor into the EU’s customs union.
- It was addressed by allowing deeming of several goods as “at risk” and hitting them with EU tariffs as they entered from Great Britain to Northern Ireland.
- The tariff could be rebated if these goods were shown to be consumed in Northern Ireland.
- The overall UK-EU trade deal eliminates tariffs on all goods traded, minimising the number of transactions being deemed as at risk.
