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The Brexit – A Step Forwards or Backwards?

22nd April 2016

With just 60 days to go till the EU Referendum, or more commonly know as the Brexit, Holborn Assets has put together a video explainer on the Top 10 Brexit questions being asked  before the UK vote on the 23rd of June 2016.

10. When and for what reasons did Britain join the European Union (EU)?

The United Kingdom joined the European Community on January 1st, 1973. The main reasons for this move are explained from an economic perspective, though you can also include the geopolitical and historical aspects.

The EU Signing 1973

                       Britain joining the EU on January 1st 1973
Image Source: http://www.theguardian.com/theguardian/from-the-archive-blog/2011/jun/02/guardian190-britain-enters-eec-1973

Obviously, the procedure for Britain to join the EU took many years, and there were many obstacles for Britain until it finally reached an agreement. In January 1960, the United Kingdom and several other countries that were not included in the EEC (European Economic Community, at that point), had formed an alternative organisation – the European Free Trade Association. Great Britain, however, soon realized that the EEC was a more effective concept from an economic viewpoint and decided to join. Its example was followed by Ireland and Denmark, the economies that were significantly dependent on trading with Britain.

A similar decision was taken by Norway. The first attempt was in 1961-1963, however, this ended in failure due to the fact that French President Charles de Gaulle vetoed the decision on the accession of new members to the European Economic Community. The scenario became possible just after General de Gaulle was succeeded by Georges Pompidou in 1969. After several years of negotiations and adaptation of legislation, the United Kingdom joined the EU on January 1st, 1973.

9. What exactly is the EU?

The European Union is an economic and political union of 28 European states, aimed at their regional integration. Legally the union was enshrined by the Maastricht Treaty, which entered into force on 1 November 1993, on the principles of the European Communities. The EU is preceded by the European Coal and Steel Community (ECSC) and the later European Economic Community (EEC).

The EU unites half a billion people and its goal is to open borders for free movement of goods, services, money, and obviously of people. The European Union is a unique international formation: it combines features and aspects of international organizations and states, but formally is neither one nor the other. The Union is not a subject of public international law; however, it has the authority to participate in international affairs and plays a major role in them. The structure is a union of European states involved in the process of European integration.

The EU Flag

With the help of a standardized system of laws, which is in force in all member countries, there was created a common market which guarantees the free movement of people and goods, also making possible the abolition of passport controls within the Schengen Area, which includes both Member States and other European states.

The Union passes laws (directives, legislations and regulations) in the field of justice and home affairs, as well as developing a common policy on trade, agriculture, fisheries and regional development. Its institutions are: the European Parliament, the European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union, the European Central Bank, and the Court of Auditors. The European Parliament is elected every five years by EU citizens.

Seventeen Union countries have introduced into circulation a common currency, the euro, creating the Eurozone.

In total, the European Union includes 28 countries: Belgium, Italy, Luxembourg, Netherlands, Germany, France, Denmark, Ireland, Great Britain, Greece, Spain, Portugal, Austria, Finland, Sweden, Poland, Czech Republic, Hungary, Slovakia, Lithuania, Latvia, Estonia, Slovenia , Cyprus (except the northern part of the island), Malta, Bulgaria, Romania, and Croatia.

8. What does Brexit stand for?

The term “Brexit” is formed from the combination of the words “Britain (UK)” and “Exit” (similar to Grexit – Greece + Exit), and it refers to a scenario in which the United Kingdom exits the European Union. In recent years, it has been one of the most discussed topics in the EU.

According to opinion polls conducted in the UK, 43% of the population of the country insists on the necessity of Brexit. Those who wish to keep the membership in the Union consist of 40%.

What Does BREXIT Mean?

The UK exit from the EU has been a vivid topic, almost since the country joined the Union in 1973. In periods of global crises the subject attracts more attention.

At this time, the reason for such an active discussion is the migrant crisis. According to David Cameron, the UK Prime Minister, the social protection system operating in the UK, makes this country an attractive place for refugees. Since the UK’s social protection system cannot be touched because of the migrants, the Prime Minister proposes to refuse providing social benefits to foreigners, or to introduce a similar system in all EU countries.

The UK has four requirements which if accepted by the EU, make the Brexit scenario irrelevant. These requirements are:

  • Cancelation of social benefits for visitors from other countries during the first four years of their stay in the UK
  • Change of the EU legislation on working hours and work on weekends, or free the United Kingdom from the action of these laws
  • Change the EU’s security policies or not to extend them to the U
  • Introduce amendments to the Criminal Code

David Cameron promised the voters that if voted in, he would organize a referendum on the Brexit issue.

7. Why should we care about Brexit?

We should care about Brexit because this scenario can lead to important changes in the UK and European economy, employment, trade, investment, politics, and more.

When analyzing this possibility in terms of economic aspects, we can predict that the decline in direct foreign investment and foreign trade of the UK can cause a drop in GDP to 2-2.5% per year. Moreover, these losses can get to the level of 6-9% if we consider the probability of cancellation of the free trade agreement between the UK and the EU.

In addition, it should be noted that EU membership involves a number of valuable advantages in terms of employment. The EU membership is almost the first reason for which certain international companies, engaged primarily in the financial and automotive sectors, prefer to invest in the UK. In this regard, in case of a Brexit scenario, the money flow from these companies will move to other countries. Under such conditions, about three million people could lose their jobs.What Could A Brexit Mean

With regard to migration, the question requires special attention. Currently in the UK there are visa restrictions to reduce the flow of migrants from countries outside the EU. At the same time, because of all sorts of arrangements, it is not possible to limit migration from the EU member states. In these circumstances, the introduction of appropriate restrictions after a Brexit scenario is seen as an opportunity to reduce the flow of migrants coming from EU countries.

A possible departure of the UK from the European Union is seen by European bankers as a serious threat which is more dangerous than the Greece default and Grexit.

President of the Institute of International Finance, Tim Adams, said a Brexit for him is a big nightmare, as the participation of the UK in the Eurozone influences part of the European economy and ecosystems.

General forecasts are reduced to the fact that a Brexit may shake the EU’s stability and undermine the credibility of the single European currency and the stability of the bloc’s economy. Donald Tusk, president of the European Council, went even further with a frightening prospect about an EU collapse in the case of Brexit.

International banks and rating agencies also believe that a walk out of the EU would harm the British economy. According to their forecasts, the pound sterling could drop by 5-10% against the dollar and the euro.

The European Association of Engineers – CEEMET predicted that Brexit would entail a reduction in trade volumes and industrial productivity. The result could be a slowdown in economic growth by 0.5% per year over the next 15 years.

There may be other consequences that cannot be predicted because we don’t have any other example of a country leaving the EU.

6. When is the EU referendum?

The EU referendum in the UK and Gibraltar is planned to take place on the 23rd June 2016. The Electoral Commission proposed the wording, which has been approved by MPs: “Should the United Kingdom remain a member of the European Union or leave the European Union?” The options for voters will be ‘Remain a member of the European Union’ and ‘Leave the European Union’.

The official campaign period is from the 15th April to the 23rd June. The Electoral Commission will designate official campaigns to display both arguments – pro and against – which will be entitled to TV broadcasts and help with campaigning costs.

The vote counts will start when polls close at 22:00 GMT on Thursday, 23 June at 382 local centers around the UK. Finally, a chief counting officer will announce the total result at Manchester Town Hall.

5. What could happen in Britain left the EU?

Many experts are horrified by the idea of Britain quitting the EU, in particular as most British businesses recognise that it is not to their benefit to leave the EU. This is due to the fact that more than 50% of Britain’s trade flows are with the EU and trading costs in the EU are some of the lowest globally.

The End of the EU

If the British majority votes to leave the EU, most of the alternatives to full EU membership are unattractive. The EU will not disappear as an institution or a big market. A post-Brexit UK will have to form a set of trading and institutional relationships with it. The uncertainty is over what these would be – and how long they might take to negotiate.

Broadly, there would be five models for the future to choose from. The first is to join the European Economic Area (EEA), a solution adopted by all but one of the European Free Trade Association (EFTA () states. But the EEA now consists of just small countries, Norway, Iceland and Liechtenstein. The second option is to try to emulate Switzerland, the remaining EFTA country. It is not in the EEA but instead has a series of > 20 major and 100 minor bilateral agreements with the EU. The third is to seek to establish a customs union with the EU, as Turkey has done, or at least to strike a deep and comprehensive free-trade agreement. The fourth is simply to rely on normal World Trade Organisation (WTO) rules for access to the EU market. The fifth, preferred by most Eurosceptics, is to negotiate a special deal for Britain alone that retains free trade with the EU but avoids the disadvantages of the other models. It would however probably be extremely hard or even impossible to negotiate this in a post-Brexit atmosphere.

4. What are the economist’s views on Brexit?

Much of the economic impact – positive or negative – would depend on the trade deals Britain managed to negotiate with the EU and rest of the world after its exit.

The best-case scenario, according to think tank Open Europe, is that the UK would be better off by 1.6% of GDP a year – by 2030. That is assuming the UK carried out widespread deregulation after its Brexit and managed to strike favorable trade deals. The think tank adds: “A far more realistic range is between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030, in scenarios where Britain mixes policy approaches”.

Brexit Forecasts

The Center for Economic Performance, at the London School of Economics, says the worst-case scenario is a 6.3% to 9.5% reduction in GDP, “a loss of a similar size to that resulting from the global financial crisis of 2008/09”. The best case, according to their analysis, is a loss of 2.2% of GDP, although it does not take into account as wide a range of factors as the Open Europe study.

Therefore there is quite a strong consensus that a Brexit would bring a heavy short-term disadvantage and a long term economic advantage can only arise if the UK would be able to negotiate highly beneficial trade conditions – a path that cannot be taken for granted at all.

3. What are the arguments for staying?

The UK economy is deeply integrated with European allies – economically, militarily and culturally. It’s likely that a Brexit would lead to plummeting stock markets and an economic recession, possibly worse than the 2008 financial crisis.

Trade: Britain exports 45% to the EU and avoids export fees. Also as an EU member, Britain can obtain better trade deals because of the size of the EU.

EU Budget: The estimated income per household for the UK from the EU is at £3,000, while the cost per household is estimated at £340.

Regulations: The EU combines 28 national standards into one single standard, reducing red tape and generating a benefit for business. If in the EU, the UK can contribute to this in contrast to just accepting it from the outside.

Immigration: Leaving the EU does not mean reduced immigration. Also currently other countries in the EU, like Germany, have higher immigration flows, also from inside the EU. A Brexit would also mean restrictions and hassles in order travel to the EU – e.g. visas for visits for a holiday in France, annual driving tests for the British inhabitants outside the UK and this could also again reignite requests for a Scottish independence.

Political Influence: Currently the UK is represented strongly by the UK’s foreign secretary and EU high representatives. This helped fight piracy and Ebola efficiently. The UK Parliament’s joint committee on national security strategy has warned that leaving the EU would risk “crucial connections are being missed” in the war on terror and minimized political influence in the NATO.

2. What are the arguments for leaving?

For Eurosceptics’ on the other side, the impositions of European Union bureaucracy are daily restrictions, with Britain supposedly ceding control to Brussels of immigration policy, of its legal system and of its famously curved cucumbers.

Trade: Britain can negotiate new EU trade deals, also taking a strong economic position in order to make bilateral trade agreements to e.g. China, India and the US without being bound by EU law or other coordinative efforts.

EU Budget: The UK can stop spending GBP 350million on the EU every week. This sum could be spent for economic stimulus, research and new industries as well as education.

Regulation: Regulation is perhaps the Eurosceptics’ biggest focus. When trying to show how much Britain might gain from leaving the EU, all the costs of EU regulation are summed up. Leaving the EU could return control over EU regulated areas like employment, financial services and health and safety regulations.

Immigration: Britain could choose a more beneficial path than the current system which offers an open door to all EU citizens and blocks non-EU immigrants who could potentially contribute more to the society.

Political Influence: Britain is just another member of the EU. Being outside the EU, Britain could use its strong economic position and negotiate better trade deals with international institutions, fostering free trade with important partners.

1. If Britain left, could she come back?

The nightmare of a Brexit is now more than ever present in the EU’s top minds. The economic and political implications are huge and the impact on both Britain and the EU as a whole, from a Brexit, is hard to predict in the long term.

The EU is already doing its best to take the UK’s specific interest into account, from hindering EU wide immigration to the UK in order to protect its welfare system, special free trade agreements and looser regulations – in particular in the financial sector – compared to other European countries.

It is highly likely that even after a Brexit it would be possible for Britain to step back into the EU– but this would then probably be under a weaker political position than the current one, leading to long-term disadvantages like higher regulations, higher contribution to the EU budget, a weakened political position and maybe some trade tariffs; in other words, exactly what Eurosceptics are trying to get rid-of.

If in a post-Brexit world the economy is blossoming there could of course be a chance to re-join – the EU with even higher individual benefits. This however seems like an unlikely path, since a referendum would most likely not be a favorable decision for the EU if things work out fine for the EU after a Brexit.

Well, now you know more about the Brexit, which way would you vote?

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