“Brexit” – a tragic split

June 23rd. A day when the unthinkable became the new reality.

It would be unreasonable to say that no one imagined this coming. Britons did start whining very vocally about the bloated concept of a Union and all those unsought migration workers, befuddling regulations and overblown bureaucrats a year before. But the fact that they would actually show the guts collectively to leave the club of countries so rich in its offerings and so accommodative in absorbing more than half of Britain’s exports, defies rational behaviour in more than one sense. Although Brexit is an event to be regretted, 34m people cast their ballot and one simply needs to accept the verdict.

Let’s begin by taking a sneak peek into the minds of all those who wanted Brexit.

According to them, Britain is overregulated because of EU membership.

They feel that Britain is contributing an insane amount (19 billion pounds a year) to the EU, without drawing equivalent benefits from the club. The misplaced belief that power in relationship between Britain and EU, in terms of trade, lies with Britain made them reach to a conclusion that Britain would come out with a wonderful trade deal with EU and continue receiving all of EU’s benefits with none of its obligations.

Immigration issues. This swayed majority of the votes. EU mandates free movement of people across countries and Britons feared this establishment. Their wages and jobs were challenged by the cheap immigrant labour. The additional spending the government had to do to accommodate these immigrants didn’t make sense to many in Britain. A mere possibility that a terrorist may slip in among the bunch of immigrants created security concerns in the minds of many.

While all this was going on, the EU economies weren’t doing anything remotely remarkable. This made many conclude that the club system is fundamentally flawed and Britain is better outside this non-performing set of countries.

Amazing arguments, right? Let’s get some counterviews from the Bremaineers first.

The very broad conclusion that EU is unsuccessful has no grounds to stand. Even the communist countries have lined up to join the democratic union, which talks quite a lot about its success.

Talking about Britain, since 1973, Britain’s GDP per capita has grown faster than France, Germany and Italy. EU provides a large unified market for the companies to operate and many institutions including several financial ones have established themselves predominantly in Britain.

The political clout that Britain derives from the club gives it greater power at negotiating tables worldwide.

Around half of Britain’s exports and FDI come from EU, and it would be irrational to think that an independent Britain would have more negotiating power while reaching agreements on trade with EU.

Another concern was a huge budget outflow because of the membership. The figure of 19 billion is misleading as it doesn’t factor in the rebates that Britain gets in form of subsidies and grants. This amounts to roughly 5 billion. Further, the Brexit would entail a hit in the tax revenues amounting to 8 billion pounds. This would affect the finances adversely.

To talk about the most derided immigrants, they end up playing a positive role in the economy. The irony is most of the residents take out more than they put in whereas immigrants are net positive contributors to public finances. Security issues should be dealt with proper border checking and other mechanisms. Shunning the free movement of people is not helping anyone.

Wow, Bremaineers clearly seem to be winning here. Wait, why did Brexit happen then?

Every large international body went gaga over the fact that Brexit would entail lower growth, lower trade and less investment for Britain. Why would people trust these experts? The economy wasn’t doing anything great anyway. What’s the harm in trying something new that might work?
Again. Poor campaigning by the Bremaineers here. They failed to convince people that immigrants actually bring economic benefits. Nor were they able to point out that half the Britain’s annual immigrants come from outside the EU.
As a poll survey pointed out, old people were strongly against the EU. They were also more likely to vote. Younger generation did show some enthusiasm at the fag end, but old turned out to be gold in this case.

Brexit has happened. What about EU now?

Even if Britain’s membership had always been half-hearted, Britain still was EU’s second largest economy and a prime negotiator in some of its major reforms. Its exit casts a huge shadow on the sovereignty of the union itself.

Will anyone else be tempted to leave as well?

Only 38% people in France hold a favourable view of the EU. Italy and Greece loath the austerity imposed by Germany. Eastern European countries oppose the reforms like gay marriage. In short, many countries in the union are not overwhelmingly happy with it, and a contagion effect may very well ensure that the world’s biggest single market crumbles into pieces.

Enough troubles for EU. What about the UK?

Not a pleasant situation in UK either. Scotland and Northern Ireland voted to remain in EU. Now that its wish of a union was not fulfilled, Scotland may well go into another referendum for independence. If Britain restricts free movement of people, a hard border between Britain and Northern Ireland would be necessary. This all would disintegrate another union, UK.

Seems a very gloomy picture. Anything else?

We haven’t even started. There are many more negative repercussions bound to take place or already in motion.

Pound slumped 10% to its lowest level against dollar in the last 30 years and banks lost a third of their value on the very next day. Uncertainty of Union’s future didn’t bode well in Asia as well and the equity markets crumbled quite a bit.

Quite an overreaction, isn’t it?

After all Britain accounts for just 3.9% of world’s output, and is in no way comparable to America or China. But then, China has its own debt issues and US isn’t particularly robust anyway. Savings friendly Europe depends on Britain to consume its products. With Brexit, EU slows down and so does the world economy.

Corporates will fear the uncertainty of losing a common market and will defer large investments. Property values have started falling already.

Collapsing pound will increase the inflation, hurting the pensioners. Jobs would be lost.

How about China?

Exports to EU would go down and strengthening dollar would hurt Yuan.

Come back to Banks. They will have to decide whether they need to shift their business away from London, the financial capital of Europe. They needed to be prepared for this eventuality, right? Well, no one is doubting their stability. But the fact that banks and other firms, which used to serve customers in all other EU countries operating from London, would lose out on this convenience is bound to create some ripples.

Who is gaining out here?

Gold and Russia.

Gold prices rose about 4.5% on June 24th as investors turned to gold as a safe haven.

Russia. Anything weakening the West would tangibly or intangibly strengthen Russia. Period.

Enough of this melodrama. Tell me what all can Britain do now?

Join Norway in European Economic Area. It would preserve full access to the single market. Good. What’s the catch? Make hefty contributions to EU budget. Follow every EU trade rules without having a say in them, and accept the free movement of people from the EU. Are you kidding me? Why would the post-Brexit government accept this? No way.
Free trade deal like EU’s with Canada. This has so many non-tariff barriers and does not even include financial services.
Forget everything and revert to trading with EU as China, US and India do, under WTO rules. Not bad, eh? This is even worse than the previous option. It brings back tariffs on cars, food and what not. Financial services are again excluded.

Alright. Seems as if the things that were promised to gain votes are illusions. There is no way EU allows Britain to have all of its benefits without any obligations. This means whatever deal takes shape in Brussels may again have to be put to the public for another referendum.

Hang on. What about a re-election? Well, this would be no fairer than allowing English football team another shot at Iceland.

Finish it off, will ya?

June 23 will be remembered as a landmark day in European History. The negotiations will test tolerance of many, both inside and outside EU.

Immediate priorities, thus, should be negotiating a deal with EU quickly and effectively. The whole episode shouldn’t eventually result into a smaller EU, with other countries leaving it.

However, Recession in Britain and the economic hardships around it might bring in the possibility of an undignified “Breversal”. This might sound awkward, but is welcome anyway.

The winter is coming for the Britain and the EU!

Written By : Nishant Shah
Nishant shah is a PGP First year student at IIM Ahmedabad

Nishant Shah

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