Bracing for Brexit

Last year’s Greek acceptance of the ECB bailout package was far from the end of turmoil within the EU. Once more, a referendum on EU membership will be held, and this time the potential impact is substantially larger. On June 23rd Great Britain’s be, or not to be, in the European Union will be put…

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Last year’s Greek acceptance of the ECB bailout package was far from the end of turmoil within the EU. Once more, a referendum on EU membership will be held, and this time the potential impact is substantially larger. On June 23rd Great Britain’s be, or not to be, in the European Union will be put to a vote and a withdrawal, commonly abbreviated Brexit, might become reality. If that happens, things are very likely to get messy and potentially nasty.

As one may assume, the domestic opinion is deeply divided, hence the referendum. Tory Prime Minister, David Cameron, advocates future membership in the EU, but is feeling the increasing pressure of immigration. This is the main issue. British taxpayers have started to lose patience and grown tired of the increasing tax burden that comes with immigration, and are even considering leaving the EU.

What does the rest of the world think?

Quite unanimously, they believe it is a fundamentally bad idea. Major British politicians and some influential business leaders, are advising people to vote against Brexit. In the words of UK Chancellor of Exchequer, George Osborne, the prospect of Brexit is “deadly serious”. Large investment banks have maid gloomy predictions of a Brexit’s economic consequences. Moreover, head of IMF, Christine Lagarde, called it “A negative on all fronts”, insisting that Britain and EU live in symbiosis and that Brexit would benefit from neither of them.

50 % of British Exports go the EU, and in the case of a Brexit, a new trade agreement has to be formed, which is far from an easy process. Furthermore, a significant portion of those exports are services and not goods. Great Britain is the world’s largest exporter of financial services, more than doubling the worth of American Financial Services exports. There is absolutely no guarantee that EU will strike a free-trade agreement for services.

For instance, Switzerland has been able to strike a free-trade agreement on goods, but not services with the EU. Also, these goods need to comply with EU regulation.

If the British people does vote for Brexit, what will be the consequences?

No one can say for sure, as there is significant uncertainty. Using the anomaly of a divorce, the terms of the divorce have to be settled and the child care agreement worked out. Just as in the case of a common divorce, only requested by one party, a Brexit will by no means be easy nor quick.

One consequence, however, expected from a Brexit would be the resignation of David Cameron, and the election of a new prime minister. This would further prolong the negotiating process with the EU and other trading partners, such as the US. This would add on top of the already existing market insecurity. Bankers and Pundits have expected a drop, a potentially sharp one in the value of the pound. This was clearly evident when the Pound dropped at the announcement of the referendum.

In the best of cases then?

WThen the US and EU will quickly strike deals with Britain, leave considerable concessions and agree on some sort of free-trade agreement with restricted immigration. This case is highly unlikely though as free movement within EU is one of its pillars. US trade representative Michael Froman made it clear that his government would not keen on agreeing on a separate free trade deal with Britain, and that Britain could have to pay the same tariffs as any non-free-trade partner to US would have to.

Another question that could be brought up to life again by Brexit is the Scottish independence. If Britain decides to leave EU, it is not unlikely that the Scottish Independence movement might regain momentum from the “break-free” sprit of a Brexit. Also, the Scottish might be less keen than rest of Britain on Brexit and would like to have their say on the matter.

This “break-free” spirit could be very dangerous. The EU partnership is strained and shaky as it is, due to the immigration crisis and recession. If Britain were to leave, there might be a contagion, of which the risk is very hard to predict. While Germany functions as the de facto guarantee of the current EU cooperation, Great Britain is the second largest EU Economy and an important net contributor to the EU. How big a hole would they leave behind?

Perhaps big enough to evoke referendums in perhaps France and other major European economies. A Brexit would undeniably undermine the EU cooperation and further grow dissent within EU. In the worst of cases, it could signal the start of a series of membership referendums and a disintegrating EU. This particular risk is hard to gauge, but is nevertheless an unpleasant and real one and the most severe of potential long-term drawbacks from Brexit.

If Brexit does happen, the severity of implications will be hard to predict, but a scenario where the benefits outweigh the drawbacks is highly optimistic. Brexit concerns everybody in the European continental economy, and the British should consider when they vote on June 23rd that Britain does not exist in a void and what signals a Brexit would send to the rest of Europe, which they are dependent upon.

Photo: Dora Pete

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Founded in 1948 and has since been an important part of student life in the economics program at Lund University. Nådiga Lundtan covers a wide range of topics related to economics, society, and politics, as well as careers, entrepreneurship, and innovation. It is a platform for students to share their ideas and opinions on economics and related fields.

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