Abacus: Brexit — What Happens In Europe Doesn't Stay In Europe
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For the past two years, our phones and social media have been blowing up about Brexit. But, what is Brexit and why should you care about Britain's messy divorce with the European Union?
The EU was created after World War II on the belief, that if countries had higher economic and political dependence on each other, it will diminish the chances of violent conflicts drastically along with putting a stronger front in the world economy. What started as a political agenda by the ex-UK Prime Minister, David Cameron, to win re-elections in 2016, has turned out to become a political and economic crisis in the UK.
UK voted to leave the EU to expand its trading opportunities with countries like the U.S. Leaving the EU referendum won by 51.9% to 48.1% with over 71 million votes from UK citizens. Operating as a single market with 28 countries, the EU is a major world trading power. They were the world’s largest exporter until 2014, accounting for 15.6% of the world's total exports. Since joining the EU in 1974, the per capita GDP of the UK’s economy grew by 102%, exceeding the 97% growth of the US. In the EU, the United Kingdom outperformed Germany’s 99% growth along with the deflated French economy’s 74% growth.
Despite an amazing economic growth rate, the UK government argued that the EU is turning into a bully and is unwilling to change with the developing world economy.
The UK government argued that the Customs Union of the EU imposed more than 13,000 tariffs on imported goods, making food, 17 percent more expensive in the UK as compared to the world market. According to Brexiteers, the Single Market system hasn’t been favorable for the Brits either. The Single Market system refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services to increase competition, trade and make the flow of goods and services fluid.
With no concrete evidence of the Single Market system boosting the UK economy, the government argued that goods exports to the 11 fellow founding members of the Single Market have grown just 1% per annum from 1993-2016. The UK exports to 111 other countries, and it trades under the World Trade Organisation (WTO) rules have grown at 2.88% per annum, nearly three times faster in the same time period.
Brexiteer also argued that leaving the EU will drastically save the heavy membership fee of $11 billion. In 2016, the UK contributed nearly $17 billion to the EU with a mere economic return of $5.9 billion. Immigration was one of the biggest issues for pro-Brexit Brits. In 2016, there were 942,000 eastern Europeans, Romanians and Bulgarians working in the UK, along with 791,000 western Europeans and 2.93M workers from outside the EU. Many UK citizens argued that such a heavy free flow of immigrants, due to no borders of EU, have led to housing problems.
The UK spends nearly £4 billion a year providing housing and other social benefits to EU migrants. It is estimated that the cost in supporting unskilled EU migrants is about £3500 per year, per adult migrant. Leaving the EU makes sense right? The economics of Brexit runs deeper than it looks on the surface. The British economy recovered faster than the US economy after the 2008 financial crisis.
The median income in the UK grew 79 percent since 1974, compared with the US’ 16 percent growth. The UK also saw an average of 1.36 percent in GDP growth since 2007, compared to 1.31 percent in the US. The UK’s annual GDP growth rate outperformed the U.S.’s since joining the EU in 1974. Sticking with the EU gave the UK economic support, with a faster chance of recovering from the 2008 financial crisis.
The UK’s economic performance was way better since joining the EU in 1974 as compared to its glory days of ruling half the planet from 1872 to 1914. British Empire’s per capita growth was only 0.9%, compared to the UK’s exponential growth of 2.1% since joining the EU.
With a rise in globalization after becoming a member of the EU, Britain’s economy has become more dependent on trade. Currently, exports to the members of the EU, account for 45% of the UK’s total exports. The European Union might decide to hike up tariffs on imports from the UK when it leaves the EU. Brexiteers proposed that they are willing to just trade with the Commonwealth countries like Australia and Canada. But exports to those countries only make up for 2.6% of UK exports. UK plans on expanding its trade outside of the EU with countries like the U.S. and China who accounted for 11% and 6% of UK exports in 2014. New trade agreements with the U.S., seem too far fetched as well since the messy Brexit might leave the UK economy in shambles.
Long story short, the UK’s economy blossomed and got support during times of crisis since it joined the EU. Leaving the European Union can induce economic disturbance in the UK.
So what is happening now?
Britain was supposed to leave the European Union on 29th March. Theresa May won the elections on the political agenda of ‘Brexit Means Brexit,’ but failed to negotiated an exit deal in her two-year term and missed the UK set exit date of 29th March to exit the EU.
For now, the EU, being the bigger person has extended the deadline till 12th April, giving the UK another chance to stick with the EU or negotiate a deal at least before crashing out of the European Union. A Hard Brexit is a nightmare for the Britishers. The UK, if not able to reach a deal, would not only have to leave the EU but also the Single Market system, with no deal at all.
Though Britain will have harder control over its borders and immigration, it will be time-consuming and costly. A hard Brexit also means that the UK will be leaving the Free Trade agreement. This will give them the power and authority to make its own independent trade agreements with countries like the U.S. and China. Having the power to negotiate independent trade deals means higher control on tariffs - giving Britain, the control to save their domestic productions from foreign investments or open borders for Foreign Direct Investment (FDI).
However, negotiating deals would be harder without the backing of 28 nations, leaving the UK alone in the international market.
A Hard Brexit is not the only choice in front of the Brexit debacle architect Prime Minister, Theresa May. When the UK decided to leave the EU, they just voted on leaving the EU, leaving many options on the table. The UK can leave the EU but negotiate a deal to stay in the Single Market system and the Free Trade agreement, getting the best out of both worlds. But with time slipping away like sand, Prime Minister May might be running out of options for allegedly “procrastinating” the deal and came under heavy criticism.
So what?
Fortunately or unfortunately, what happens in Europe doesn’t stay in Europe. With globalization and interdependence of economies around the globe, the ripples of Brexit will reach the US too. Immediate effects will be noticed in Wall Street. Experts forecast that the UK leaving the EU will induce a slump of nearly five percent in S&P 500 companies, because of their trade agreements being affected with the UK.
Leaving the EU will force the UK to make new agreements with other trading countries - which will take a lot of time. Till then, either the trade will run ungoverned, which is highly unlikely, or trading might stop until an agreement is reached. Both scenarios are not favorable for the UK. Unable to trade with countries due to lack of trade agreements can push the UK into a recession. For instance, American companies like J.P. Morgan can cut hundreds of jobs in its UK branches to be more cost efficient until the dust is settled.
Pro-Brexiteers argue that leaving the EU is beneficial for the UK in the long run. The implications of Brexit will be felt in the U.S., but how it will affect the average the American, depends on whether the UK leaves the EU, or crashes out of it.