To Brexit or Not to Brexit

The word “Brexit”, a portmanteau of the words “Britain” and “Exit”, refers to the possible exit of the United Kingdom (U.K) from the 28-member European Union (EU). The British people will vote on June 23rd in a referendum to decide if Britain should remain in the EU or leave it. The referendum attains special importance because of the current economic problems in the eurozone. To be evaluated by the voters, therefore, before voting, is the impact of Brexit on the U.K, and more broadly the impact of Brexit on the EU and the western bloc of countries in Europe.

Britain always had an uneasy relationship with continental Europe. Not part of the Treaty of Rome in 1957 which formed the European Economic Community (EEC) and after its applications to join the EEC were vetoed by France’s Charles de Gaulle, Britain eventually joined the EEC in 1973. Yet, the U.K has profound reservations about giving up its currency, the pound sterling, which it equates with its sovereignty, and adopt the euro.

Sovereignty has been, in fact, a key negotiating point between Britain and the EU for continued membership of Britain in the bloc: the U.K wanted supersession of a vote in the British parliament over any EU legislation and regulations. The EU agreed to such a special status for Britain where the non-commitment of the U.K to further political integration into the EU (or to ever closer union) will be incorporated into the Treaties governing the Union.

A sticking point for the U.K in Prime Minister David Cameron’s negotiations with the EU has been the in-work benefits for EU migrants to Britain. While Britain wanted a ban on these benefits, what was agreed upon at the end was the idea of an emergency brake where a member state could apply to the European Commission for permission to suspend benefit payments if they were placing too much burden on the social services of a member state. It was agreed that such an emergency brake can last for 7 years. Likewise, on child benefits to children of EU migrants, instead of a total ban as Britain wanted, it was agreed that the payments would be indexed to what the migrants would get in their home countries and that the change will be phased in for existing claimants from 2020.

Even though Mr Cameron has negotiated the above changes in Britain’s relationship with the EU, those who want Britain out of the EU – the Brexiteers – see as benefits the annual net contribution of about $12 billion to the EU budget that the U.K will no longer have to make and flexibility in not having to conform to EU regulations, particularly in product and labor markets and over the free movement of people across borders.

The Brexiteers have a lot of precedence on their side. Over long periods of time, gross domestic product (GDP) per capita has risen steadily and it did not much deviate from this underlying trend even during shocks to the British economy such as joining the EEC in 1973 or leaving the Exchange Rate Mechanism (ERM) in 1992. Only war and the mistake of contractionary monetary policy during the Great Depression have affected this long term trend in the growth of GDP per capita. So, the Brexiteers argue that as in the past, exiting from the EU should not cause a dent in the long term growth of the U.K. It can also be argued, therefore, that staying in the EU will not likewise harm Britain given the underlying trend in Britain’s long term growth rate. So, at a minimum, on balance, staying is no better or worse than leaving. Then why leave but to be politically quixotic?

Looking to the future, however, arguments for staying in the EU are stronger. The much larger U.K trade with the closer EU countries than with the far away countries of the Anglosphere or the emerging markets will most certainly be negatively impacted in the short run until Britain has in place new trade deals to at least compensate for the access it had to the common EU market. The pound sterling could be under severe pressure to depreciate against the currencies of Britain’s biggest trading partners in Europe, that is primarily against the euro. It is unclear at this point how long it will take to make the new trade deals. Moreover, the City of London’s de facto role as Europe’s financial center will also be challenged in the short run.

British voters on June 23rd must ask themselves if the short term risks are worth taking by leaving the EU than by being a part of it and reforming it to make the Union work for the U.K and the rest of Europe.

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