Backgrounder: Brexit

On June 23, people of Britain voted in a referendum to leave European Union (EU). The referendum turnout was 71.8% (30 million) with 52% voting to leave the EU while 48% voting to remain. This is the second referendum on UK’s relationship with the EU. In 1975, in a referendum on whether the UK should stay or leave the EU, the country voted for staying with 67.2% votes.

Brexit is the word coined by merging the words Britain and exit. It is the shorthand way of saying that Britain is leaving the EU.

Debate

During the entire pre-referendum vote period Britain experienced an atmosphere of confusion and chaos. The Conservative Party of UK remained officially neutral in the debate, although it had split opinions on the issue. The Labour Party, Scottish National Party, the Green Party was all in favour of staying with the EU. On the other hand, the UK independence Party had been campaigning for many years to leave EU. Even some MPs from the Conservative Party, Labour Party were in favour of Brexit.

After results were declared UK Prime Minister David Cameron, the architect of the referendum and a passionate supporter of UK within the EU, announced stepping down as Prime Minister in October 2016. Former Home Secretary of Britain, Theresa May has become the new Prime Minister of Britain upon his resignation.

What is EU?

European Union is as an economic and political partnership consisting of 28 member countries. A law made in European Parliament is applicable and binding on all Member States directly. It is a single market allowing the free movement of goods and people. The union has its own currency, the Euro, which is being used by 19 member countries. The capital of European Union is located in Brussels, Belgium

Why Britain voted to leave EU?

Migration

Migration of people from both within and outside EU, particularly from the West Asia and East European nations heightened the fear of losing jobs, social welfare benefits among the Britons. Repeated request of Germany to share the migrants across Europe and particularly asking UK to accept a number of them has been disliked by the Britons.

Contributions to EU Budget

UK is one among the 10 nations which contribute more to the EU Budget. According to some estimates, its contribution is not commensurate to the benefits it gets back. In 2014-15, Poland, Hungary and Greece were the largest beneficiaries even though UK, France and Germany were the major contributors.

Failure of EU in many fronts

The European Economic Community (EEC) had six members, four languages and 177 million population. But now EU has 28 members, 24 languages and 505 million population. The EU failed on many fronts in building one community and one identity while working out the differences among its members, including Britain. People feel that jobs, living standards were better offered during the heydays of nation states than now.

Sovereignty

Some of the Britons feel that they are bound by the diktats of Brussels bureaucracy. Eurosceptics view the institutions of EU as undemocratic and do not want bureaucrats in Brussels to decide what laws UK should follow.

Dominance of Germany

With the coming of Angela Markel, Germany has started playing an influential and leading role in both the global and regional affairs. The increasing influence of Germany has indirectly made Britain to feel marginalised both within EU and the region. Given their imperial past, Britons are in no way ready to tolerate an EU dominated by a German leadership.

Economic model

Some Britons are not happy with the way EU central bank responded to the 2008 financial crisis which effectively led to recession. They were not satisfied with the economic model that is in place for three decades and its failure to serve the interests of various sections of the Britons. The youth especially are concerned over the career opportunities and the affordable homes that were never built by the State. It is estimated that the unemployment across eurozone is more than 10%. According to some other estimates, the economy of Britain is losing 600 million euros every week due to the burdensome regulations of EU.

What are the reasons for wanting the Britain to stay with EU?

Insult

For the critics of Brexit including former PM David Cameron, the referendum was an utter insult to the entire nation as it has shown the great divide between Britain and EU. They also argue that Britain’s image would get damaged by leaving EU.

Immigrants

The immigrants most of whom are young would fuel economic growth and will help pay for the public services.

Trade

For UK, trade gets boost from EU membership. Selling things to other EU countries becomes easier with EU membership. Europhiles have also expressed their worry that foreign companies may not be willing to invest in UK if it is not part of EU. In addition, they may also move their bases out of UK as it will not be a part of single market. It would then face problems with different regulations of EU.

Security

According to Europhiles, exit from the EU may compromise the ability to fight cross-border crime and terrorism. They feel UK would be more secured as part of the 28 nation club.

What will be the implications of Brexit to different stakeholders?

UK

• Weakening of pound: The value of pound weakened to a 30 year low after the Brexit vote. It will have implications on the country’s imports and exports.
• Trade agreements: Britain has to separately enter into trade agreements with the rest of the world. It will also not be a part of Transatlantic Trade and Investment partnership (TTIP), which is under negotiation between EU and the United States.
• IMF prediction: According to IMF, economy of UK would be more than 5% smaller by 2019.
• Break up of EU: Scotland had voted to stay in EU by 62% to 38%. Scotland’s First Minister has warned that the demand for a second referendum would be unstoppable if Britain is going to leave EU. In 2014, 44% Scottish people had already voted to make Scotland an independent country.

EU

• Britain is an important nation of EU. Without, Britain, the EU may lose much of its influence as a global power bloc.
• It may lead to the resurgence of the nation-States that once ruled Europe. With Brexit, right-wing political groups in Italy, France, Sweden, Belgium, Poland, Germany, Spain and Hungary have started demanding the exit of their own countries from EU.

India

Trade

India-UK trade will get a boost. The rigorous regulations of EU which was the biggest obstacle can be done away with. For instance, EU had banned Alphonso mangoes from India after it reportedly found fruit flies in the consignments. Weakening of Pound will also be advantageous for Indian imports. It will also benefit the tourists and Indian students studying in the UK.

Indian Businesses

• Indian Businesses in UK may find it difficult to access to the single market as their products may get uncompetitive if they are asked to pay import duties upon entering EU. Indian businesses will not be able to use UK as the gateway to the European Union.
• Indian IT companies which has significant exposure to the European markets especially the UK are expected to face the heat as there is a risk of further moderation in growth in EU and UK .

Tourism

With weakening of pound, there will be less British tourists to India.

Restrictions on immigration

Post Brexit, it is anticipated that more restrictions would be placed on immigration in the United Kingdom. While restrictions placed on EU citizens will be sober due to political reasons, the Indian immigrants may have to face some difficulties.

FDI

UK’s exit from the EU will affect the flow of FDI (Foreign Direct Investment) in India over the short-medium term and the long term periods. In short-medium term period FDI may decrease temporarily and potentially led to financial instability and a legal regime overhaul. In the long-term FDI may fall.

Indian students

• As the number of applicants from the EU countries to the universities in UK is likely to fall, Indian students stand to get benefitted.
• Weakening of pound may lower down the total cost of education for Indian students. In addition, there may be a decrease in international student fee as the low fee structure for EU candidates may be withdrawn. The Eu students were availing fee concessions as they were cross subsidised by higher international student fee.

IMF’s warning

The International Monetary Fund (IMF) has stated that United Kingdom’s decision to leave the European Union (EU) has created significant uncertainty. The uncertainty is likely to dampen growth in the near term, particularly in the UK, but with repercussions for Europe and the global economy. The key facts are:

• IMF predicts that macroeconomic and financial market impacts in the UK and EU due to Brexit will radiate outward across the globe.
• The impacts of Brexit will lead to a rising level of uncertainty, both financial and possibly political in EU and UK.
• IMF has urged policy makers to remain prepared to act to counter financial market turbulence and higher uncertainty to materially weaken the global outlook. As prolonged periods of uncertainty and associated declines in business and consumer confidence due to Brexit would lead to lower growth, IMF has urged policymakers in EU and UK to play key role in helping to reduce the uncertainty during this period.
• It also has encouraged UK and EU to work together with a sense of collaboration in an effort to effect a predictable and smooth transition.

When will Brexit happen?

UK has to invoke an agreement called Article 50 of the Lisbon Treaty. The treaty gives two years time for EU and UK to agree the terms of the split. UK has said that it will take steps to invoke the article by the end of March 2017. So, UK is expected to leave EU in the mid of 2019. Article 50 which was created in 2009 will be put to use for the first time. In the meantime, EU laws will be applicable in the UK. UK will abstain from any decision making while abiding to the laws and treaties of EU until it ceases being a member of EU.

Conclusion

Uncertainty looms large on the future of Brexit. The implications of Brexit for India and the rest of the world largely depends on the type of terms EU and UK will accept in terms of trade relations, cross-border regulation, immigration and so on. Experts feel that signing a comprehensive FTA with UK will help to ward off the negative impacts of Brexit on India.