Q. The BREXIT makes the global economic recovery more difficult. Discuss?

We are in the midst of an age of competitive devaluation and beggar-thy-neighbor

policy. When elephants fight, the grass suffers.
(Mr. Raghu ram Rajan)

For a very long period now there has been a fear of BREXIT. BREXIT in simple terms
refers to Britain holding a referendum to decide whether it wants to continue
membership under EU or not. The referendum was held on 23rd June 2016 and 52%
voted for BREXIT whereas 48% voted for remaining within the EU. Although the
referendum is not binding on the Britains parliament, the PM has announced that he has
to respect the will of the people.

Background:

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
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.
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 EU 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.

The Great Britain:

It became a member country in 1973 and held the first referendum in regards to EU in
1975 (when they voted to stay in EU). A referendum is basically a vote in which
everyone of voting age takes part specifying yes or no- answer to a question.
Whichever side gets the majority of votes (of the total votes cast) is considered to be a
winner.
Today the arguments in favor of BREXIT have increased because the representatives of
BRITAIN are of the opinion that the EU over the decades has undergone a lot of
transformation and has taken away the powers of Britain to decide on various matters.
Some of the reasons for Britain to seek BREXIT are:
 Sovereignty- Although the British Government has an influence in 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).

Regulations are becoming burden- 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.

Euro the disaster- although Euro is the common currency for EU, Britain still uses
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 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
dilemma whether to go for fiscal stimulus or prudence.

Immigration- Britain is not a signatory of Schengen Border free zone (allows easy
travel across Europe), over the last ten years there has been a quite an opposition
towards migration into the country from within the EU and its effects on wages and
public services especially post 2008 recession wherein the workers from Lithuania,
Poland, Italy, Romania etc. have moved to Britain. The leave proponents show the
example of Canada and Australia which follow a point based immigration system and say
Britain could adopt such measure rather than being forced to follow the laws laid down
by EU. Point based immigration system-under this the potential migrants are awarded
points based on factors such as language, job skills, education and age. In simple words
those who can contribute to the economy once they allowed to immigrate will be rated
higher.

Finance- although EU doesnt have the powers to collect the taxes from the people
directly, it mandates member countries to make payments. In case of Britain it comes
around $19 bn per year or $300/person. Although the funds are again used on Britain,
the BREXIT supporters say, the money could be used more efficiently, if Britain is out of
EU.

EU pro or anti corporate? - There has been a mixed response to this question. The far
left in Britain argues that EU is too pro-corporate and the far right argues the vice versa.

Any measures taken to prevent call for BREXIT:

In the beginning of 2016, David Cameroon (Britains PM) sought an agreement to change
the terms of Britains membership, the deal was conditioned on BREXIT outcome to
remain within EU.
Some of the points under the agreement are:

i. Migrant workers will still be able to send child benefit payments back to their home
country (Mr. Cameron had wanted this abolished), but the payments will be set at a level
reflecting the cost of living in their home country rather than the full UK rate.

ii. New migrant arrivals will not be able to claim tax credits and other welfare payments
straight away but will gradually will gain the right to more benefits. (He had promised
a blanket ban).

iii. Britain will retain pound also an assurance from EU that it will not be discriminated as
it has a different currency and any money of Britain used to bail out the nations in crisis
(in Euro Zone) will be reimbursed.

iv. Britains large financial service industry will be protected from imposition of euro zone
regulations.

v. It will be incorporated in an EU treaty change that Britain will not be a part of ever
closer union (one of the core principles of EU).

vi. Red card system- If 55% of national EU parliaments object to a piece of legislation
then the legislation has to be rethought (the critics say it is not clear if this would ever
be used in practice).

The critics pointed out that what was proposed under the agreements made no change
and fell short of what he had promised when he had announced his plan for referendum.

Why Scotland voted in favor of staying:

As per the numbers it was found that 62% of the voters

in Scotland chose to remain within EU. The reasons for their decision are:

i. EU is a common market which not only allows the movement of four freedoms
(finance, goods, services and labour) but also provides a huge market for Scotland to
export.

ii. With Scotland being a part of EU, the trade barriers will be eliminated to a great
extent (both for exports from and imports into Scotland).

iii. Scotland has been able in attracting foreign investments as a result of which there
has been employment creation, contribution to growth etc (in 2013, 40% of the
companies in Scotland were foreign owned which employed more than 3 lakh workers).

iv. When the EU negotiates a deal with other countries (has trade deals with more than
50 countries), it is automatically applicable to Scotland but with BREXIT, Scotland may
be forced to sign all the deals again with the trade partners (the advantages may be
lost).

v. As a member of EU, it will get access to various development funds (Regional Social
Funding, Rural Development Program etc).

vi. With BREXIT, the citizens of Scotland may lose the freedom of movement i.e. to move
freely in Europe.

In a nutshell Scotland is much safer than remaining within rather than moving out of EU.
(On moving out it will face security/terrorist threats, climate change, trade barriers etc.
all alone).

Global impact of BREXIT:

i. The globalization has increased correlation between the countries. If there is a
disturbance in one country then there will be impact on other countries.

ii. The BREXIT would affect the global growth.

iii. It is a big blow when more countries are moving towards multilateral trade
arrangements.

iv. It will further alienate the investors and the capital will move from risky markets to
safer heavens.

v. The major exporting countries such as China and India would get affected as EU is one
of the major export market.

vi. As per one of the estimates BREXIT would lead to 25% reduction in imports by
Britain.

vii. BREXIT was a referendum which rode on many components-anti immigration,

increasing protectionism etc. with this these sentiments are going to increase in other
parts as well.

viii. Britain was one of the major financial and military contributors to the EU but with
BREXIT, the financial of EU will suffer.

ix. With BREXIT there are calls for NEXIT (Netherlands exit), Italeave (Italy leaving) and
FREXIT (France Exit) etc.

x. With BREXIT there have been demands for Scotland exiting from UK.

xi. Although the pro exit supporters have claimed that the Britain can sign bilateral
agreements free of restrictions any restrictions imposed by EU now, but the experience
has shown that it takes a long period to negotiate and sign a new a trade agreement.

xii. UK and EU both account for 23.7% of rupees effective exchange rate. BREXIT would
lead to outflow of foreign portfolio investments and this may further weaken rupee. (On
the positive side the central bank will try to maintain the liquidity in the market so the
fear of fed hike of interest rate could be brought down).

xiii. Brexit is a blow to the commodity prices. As such because of lower global demand,
slowdown in china and many European countries had led to drop in the prices of
commodities and this will be further accentuated because of BREXIT.

xiv. The sectors that would get affected are-auto and auto components; IT sector,
metals, oil, aviation, pharmaceuticals etc.

Brexit consequences on EU:

If we see the trade pattern then 51.4% goods export to EU from Britain in return to
6.6% from EU to Britain. A post-Brexit Britain will have to form a set of trading and
institutional relationship.

EU will become smaller and weaker both in economic and geopolitical terms.
 The EU share of the world population will fall from 7.0 to 6.1 percent. In terms of world
GDP, in purchasing power parity, the EU share will decrease from 17.0% to 14.6%, and
in current international dollars from 23.8 to 20.0 percent. The EU share in global exports
of goods and services at current prices and exchange rate will fall from 33.9% to 30.3
percent.

the transition process may take several years. It would greatly increase legal and
economic uncertainty, not only in the UK but also in EU.

the political and economic shock created by Brexit could be a step towards further
disintegration of the union. Given the increasing strength of Eurosceptic parties in many
EU member states
.
it will further aggravate problems with completing the Banking Union, or accepting the
burden sharing mechanism to tackle the refugee crisis. Due to its opt-out clauses the UK
does not participate in these projects and there are other EU member states that are
reluctant to accept larger degree of burden and sovereignty sharing related to them.

The free movement of people, goods and services has been affected by the Brexit from
other EU member states.

Attracting and retaining this foreign talent will become harder after Brexit, when EU
workers moving to Britain will no longer be able to take their pension rights with them,
and the other conveniences of a single labour market which are lost