Brexit: A European Divorce

david-cameron

On June 23, 2016, global financial markets entered a frenzy as the people of the United Kingdom voted 52% to 48% to leave the European Union. Almost immediately, the British pound went into freefall, growth forecasts were slashed, and many were predicting a recession. UK Prime Minister David Cameron resigned after the vote and was quickly replaced by Theresa May. Additionally, Nigel Farage, the leader of the far-right populist party, the United Kingdom Independence Party (UKIP), resigned shortly after stating that his political ambition to get the UK out of the EU had been achieved.[1] Despite these economic and political shakeups, the UK remains a member of the EU and will be until at least 2019.[2] The question many are asking is whether the UK’s exit from the EU will lead to the prosperity that UKIP promised, or if the UK will become permanently poorer as a result.

The recent wave of right-wing populism that prompted the vote to leave presents a clear threat to the economic and social stability of the UK. This leaves Theresa May’s administration with a hard choice of whether to steer the nation away from populist sentiment despite the political upheaval or to accept the result of the referendum and take the nation onto a path of protectionism and nativism. Not only is Brexit a divorce of the UK and Europe, but it may also signify a conflict between the pillars of liberal ideology: free markets and democracy. But to fully understand the implications of Brexit, we must first answer the question that many Brits googled immediately after news of the referendum results broke: “What is the EU?”[3]

The EU is a collection of 28 economically and politically integrated nations, unified under seven political institutions, the most notable of which is the European Commission in Brussels. The EU nations share a single market, allowing for the free flow of goods, services, and capital across borders. Born out of the ashes of two devastating world wars, the EU was intended to maintain political stability within Europe, as well as to encourage trade between the countries of the region. The EU has been held up as a success of regional integration, showing how strong international ties can lead to peace and economic growth. However, this was before the 2008 global financial crisis, the European sovereign debt crisis, and the Syrian refugee crisis, all of which have put a severe strain on the once-praised institution. This political and economic turmoil partially explains the UK’s desire to leave.

While the UK has always kept its neighbors on the continent at an arm’s length, the Kingdom’s  flat out rejection of the institution tasked with promoting peace, trade, and economic growth has been a shock to the world and a slap to Europe’s face. Like in the rest of the developed world, the primary culprit responsible for the recent backlash against the political and economic status quo has been the rise of populism.

The “Leave” group ran a campaign criticizing the stringent regulations imposed by EU governance and immigration from Europe, deeming both a threat to UK growth and employment. However, that doesn’t mean that “Leave” voters are the displaced, blue collar workers who have been the victims of regulations and free trade and are voting based on rational self-interest. Economist Anatole Kaletsky wrote in an op-ed, “Most populist voters are neither poor nor unemployed; they are not victims of globalization, immigration, and free trade. The main demographic groups behind the anti-establishment upsurge have been people outside the workforce: pensioners, middle-aged homemakers, and men with low educational qualifications receiving disability payments.”[4] Detailed statistics reveal important trends among the demographics of British voters, showing that voters in the “Leave” camp weren’t the people   most invested in the UK’s economic future. 73% of voters under 24 voted “Remain,” while 60% of voters over 65 voted “Leave.”[5]

Economic pain fails to serve as a sufficient explanation for the UK’s anti-EU sentiment. Rather, a cultural ideological shift appears to be the best explanation. 71% of voters who view multiculturalism positively voted to remain in the EU, while 81% of voters who viewed it negatively voted to leave. Views on globalism, capitalism, feminism, or social liberalism did not see nearly the level of political divide as did views on multiculturalism or immigration, exemplifying what the vote was really about. Immigration from low-income regions, such as Eastern Europe and, recently, the Middle East and North Africa, has not sat well with older conservative Brits, who the polls have shown to bear negative feelings about migrants entering the UK.[6] The rise of populism isn’t due to the economic suffering of the middle class caused by free trade, but rather is an ideological backlash that has transcended economic self-interest. Ironically, this zealous UK nationalism will likely do more harm than good to the welfare of the UK.

Several studies have predicted a grim future for the post-Brexit UK economy. The International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) predicted a fall in global growth as a result of Brexit.[7][8] However, these studies should be viewed with caution, as the severe economic downturn predicted by many after the vote failed to materialize. The OECD and the IMF have had to backtrack on their previous forecasts due to better than expected growth data after Brexit; however, they are still predicting weaker future growth.[9][10][11] But nothing can be analyzed for certain until the UK and the EU can come to a formal trade agreement outlining their new political and economic relationship.

While negotiations to formally leave the EU won’t begin until at least next year — and will take at least another two years to finalize — the UK will likely try to retain its membership in the European single market, where it can freely exchange goods and services across European borders. If the UK were to lose membership to the single market, British businesses would likely have a harder time selling their goods and services to European consumers, which would harm UK employment and investment. EU nations consume nearly half of UK exports, and trade barriers can put a heavy strain on UK businesses. British consumers would also be negatively affected by having to pay higher prices for European imports. The Institute for Fiscal Studies predicts that maintaining membership in the single market would boost UK GDP by 4%, something that will likely be kept in mind during the trade negotiations.[12] Non-EU members Switzerland, Norway, Iceland, and Liechtenstein are members of the single market through free trade agreements with the EU, and the UK will likely try to join this club. The benefit of these agreements is that they can be more tailored to fit the preferences of each nation. However, like the nations listed, if the UK wishes to retain its single market membership, it will likely have to abide by EU regulations and continue to accept refugees — exactly what the “Leave” camp has been fighting against.[13]

A new trade agreement would have the potential to benefit the UK economy, despite the forecasts, but it would all depend on what kind of deal is made. And while no specific plan has been laid out yet, there are several models that the UK could emulate. One is the Norway Model, where the UK leaves the EU but stays in the EEA (European Economic Agreement), meaning that it retains its single market membership. However, the UK would lose its political representation in the EU while still having to pay EU membership fees and follow partial EU regulations. The UK would likely have to continue accepting refugees, as Norway, Switzerland, and Iceland have been doing, which wouldn’t be popular with the “Leave” camp.  

Another possibility, the Switzerland model, would entail leaving both the EU and the EEA, but retaining membership in the single market through a series of bilateral trade agreements, such as the European Free Trade Association.[14] While Switzerland has had to accept immigrants as per the EU “Dublin Regulation,” the Swiss, to the annoyance of the EU, passed a referendum in 2014 placing limits and quotas on incoming immigrants.[15][16] The UK could follow this model, allowing for free trade but with tighter regulations over its borders. Yet that is if the EU allows for the UK to maintain its single market membership, which it seems very reluctant to do as shown by its “don’t let the door hit you on the way out” attitude.[17]

President of the European Commission, Jean-Claude Juncker, even stated that the UK will not have “a la carte access” to the single market.[18] In this circumstance, the UK can forget about trade deals altogether and just trade with the EU under standard World Trade Organization rules, where all nations trade under the same international regulations. The UK would lose its single market membership, and its economy would likely take a hit. But the UK wouldn’t have to pay EU membership fees or accept migrants and would only have to abide by limited EU regulations in order to trade with the EU.

However, adopting any of these models doesn’t mean that the UK would be better off than it is today. When analyzing the alternatives to EU membership, the UK Treasury states, “None of the alternatives support trade and provide influence on the world stage in the same way as continued membership of a reformed EU; and all of them come with serious economic costs that would affect businesses, jobs, living standards and our public finances for decades to come. To put it simply, families would be substantially worse off if Britain leaves the EU.”[19] The UK cannot have the best of both worlds. It cannot satisfy the wishes of the populace while promoting free trade and growth. The liberal ideologies of capitalism and democracy appear to be at a crossroads, leaving the new UK government with a difficult choice.

While a clear economic prediction cannot be reached this early after the referendum, the vote does serve as a strong symbolic shift in global ideology. Many citizens of advanced nations have expressed their discontent over the changing culture of the world caused by socially liberal sentiment, the rise of multiculturalism through immigration, and global governance — all of which many perceive to be a threat to national interests. They are also pushing back against the status quo of centrist politics, which have failed to represent them. Donald Trump in the US, Marine Le Pen in France, and Jarosław Kaczyński in Poland serve as a representation of a changing tide fueled by right-wing populism. So is this wave of populism just a new global fad, or is it here to stay? If it’s the former, world governments will likely be able to wait it out. If it’s the latter, it will necessitate serious political reform in order to satisfy the growing group of voices calling for change; ignoring these voices can only serve to intensify the attractiveness of political extremism.

CITATIONS

[1] Mason, Rowena, Robert Booth, and Amelia Gentleman. “Nigel Farage Resigns as Ukip Leader after ‘achieving Political Ambition’ of Brexit.” The Guardian. July 04, 2016. https://www.theguardian.com/politics/2016/jul/04/nigel-farage-resigns-as-ukip-leader.
[2] Witte, Griffe. “British Leader Says Brexit Process to Begin by March with Demand for a Clean Break.” Washington Post. October 2, 2016. Accessed November 12, 2016. https://www.washingtonpost.com/world/british-prime-minister-says-brexit-process-to-begin-by-march/2016/10/02/b5f57796-8682-11e6-b57d-dd49277af02f_story.html.
[3] Selyukh, Alina. “After Brexit Vote, Britain Asks Google: ‘What Is The EU?'” NPR. June 24, 2016. Accessed November 05, 2016. http://www.npr.org/sections/alltechconsidered/2016/06/24/480949383/britains-google-searches-for-what-is-the-eu-spike-after-brexit-vote.
[4] Kaletsky, Anatole. 2016. “Pensioners and Populism.” Project Syndicate. October 28. https://www.project-syndicate.org/commentary/voting-data-show-little-economic-link-with-brexit-by-anatole-kaletsky-2016-10.
[5] “EU Referendum ‘How Did You Vote’ Poll.” June 23, 2016. Accessed November 5, 2016. http://lordashcroftpolls.com/wp-content/uploads/2016/06/How-the-UK-voted-Full-tables-1.pdf.
[6] Mason, Rowena, and Alex Duval Smith. “Theresa May Takes Brexit’s Immigration Message to Eastern Europe.” The Guardian. July 28, 2016. Accessed November 05, 2016. https://www.theguardian.com/politics/2016/jul/28/theresa-may-on-brexit-tour-of-eastern-europe.
[7] News, IMF. “IMF NEWS ARTICLE.” IMF Cuts Global Growth Forecasts on Brexit, Warns of Risks to Outlook. July 9, 2016. Accessed November 06, 2016. https://www.imf.org/en/News/Articles/2016/07/18/18/11/NA07192016-IMF-Cuts-Global-Growth-Forecasts-on-Brexit-Warns-of-Risks-to-Outlook.
[8] Kierzenkowski, Rafal, Nigel Pain, Elena Rusticelli, and Sanne Zwart. “THE ECONOMIC CONSEQUENCES OF BREXIT: A TAXING DECISION.” OECD, April 2016. https://www.oecd.org/eco/The-Economic-consequences-of-Brexit-27-april-2016.pdf.
[9] Elliott, Larry. “OECD in Brexit Warning U-turn as It Revises Growth Forecast for UK.” The Guardian. September 21, 2016. Accessed November 06, 2016. https://www.theguardian.com/business/2016/sep/21/oecd-does-a-u-turn-over-brexit-warning-as-it-revises-growth-forecast-for-britain.
[10] Sharma, Gaurav. “IMF Eats Humble Pie over Brexit Claims, Admits UK GDP Will Grow after All.” International Business Times RSS. October 04, 2016. Accessed November 06, 2016. http://www.ibtimes.co.uk/imf-eats-humble-pie-admits-uk-gdp-will-grow-after-all-1584777.
[11] Amaro, Silvia. “UK Economy Beats Expectations; Alleviates Imminent Brexit Fears.” CNBC. October 27, 2016. Accessed November 06, 2016. http://www.cnbc.com/2016/10/27/uk-economy-grows-05-quarter-on-quarter-beating-estimates-of-03.html.
[12] News, BBC. “EU Single Market Membership ‘boosts UK’s GDP'” BBC News. August 10, 2016. Accessed November 06, 2016. http://www.bbc.com/news/business-37023488.
[13] “7 REASONS WHY WE SHOULD LEAVE THE EU – Campaign for an Independent Britain.” Campaign for an Independent Britain RSS. Accessed November 06, 2016. http://campaignforanindependentbritain.org.uk/the-economy/.
[14] “The EFTA States.” European Free Trade Association |. Accessed November 06, 2016. http://www.efta.int/about-efta/the-efta-states.
[15] Foulkes, Imogen. “Swiss Immigration: 50.3% Back Quotas, Final Results Show.” BBC News. February 9, 2014. Accessed November 12, 2016. http://www.bbc.com/news/world-europe-26108597.
[16] Wintour, Patrick. “EU Tells Swiss No Single Market Access If No Free Movement of Citizens.” The Guardian. July 03, 2016. Accessed November 12, 2016. https://www.theguardian.com/world/2016/jul/03/eu-swiss-single-market-access-no-free-movement-citizens.
[17] Rankin, Jennifer, Philip Oltermann, Jon Henley, and Helena Smith. “EU Leaders Call for UK to Leave as Soon as Possible.” The Guardian. June 24, 2016. Accessed November 12, 2016. https://www.theguardian.com/politics/2016/jun/24/europe-plunged-crisis-britain-votes-leave-eu-european-union.
[18] Foster, Peter. “Jean-Claude Juncker, the European Commission President, Suggests UK Will Not Have Access to Single Market after Brexit.” The Telegraph. September 14, 2016. Accessed November 06, 2016. http://www.telegraph.co.uk/news/2016/09/13/eu-facing-an-existential-threat-in-the-wake-of-brexit-jean-claud/.
[19] Osborne, George. “HM Treasury Analysis: The Long-term Economic Impact of EU …” HM Government. April 2016. Accessed November 6, 2016. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517415/treasury_analysis_economic_impact_of_eu_membership_web.pdf.

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