Insights into Issues: BREXIT and Its Impact
- August 17, 2016
- Posted by: INSIGHTS
- Category: Insights into Issues
Insights into Issues: BREXIT and Its Impact
Brexit is a term used to define United Kingdom coming out of EU. Recently in a referendum conducted in United Kingdom, UK voted by a narrow margin in favour of Brexit. Negotiations are undergoing currently between United Kingdom and European Parliament to negotiate the terms of the exit deal.
European Union or EU is an experiment to transform the relations between nations based on functionalist ideology. It envisages to transform the relations between nations by enmeshing them in economic, social, cultural, political partnership. EU is currently a block of 28 countries and 19 countries have formed Eurozone.
Formation of European Union is an outcome of Single European Act, 1991.
Mashtricht Treaty converted the EU into a monetary union.
Lisbon Treaty strengthened political, foreign affairs and security integration of policies of countries of European Union
Constitutional Provision of Brexit:
Lisbon Treaty (Article 50) provides for exit of member countries from European Union. For any country to come out of European Union, it has to negotiate a deal with EU. The deal will provide for a settlement between EU and UK
Opinion of Political Groups
- UK Independence Party, under the leadership of Nigel Farrage led the “Leave” campaign of UK
- Labour Party, under the leadership of Jeremy Corbyn led the “Stay”’ campaign of UK
- David Cameron, ex PM of UK agreed to hold a referendum on Unikted Kingdom’s future in EU. Conservatives were in favour of staying in EU
Why the clamour for Brexit
- Economic reasons – The primary contention was that economically, Britain loses more than what it gains.
- The first issue being that of membership fees paid – about 340 pounds per year per household
- Secondly, it was said that EU’s policies were too protectionist and did not favour competitiveness to the extent that would be beneficial for the British economy
- Post the Sovereign Debt Crisis, EU introduced Fiscal Compact and tighter control on national budgets. Britain was not comfortable with these ideas
- Germany’s proposal to impose taxes on financial transactions (Tobin Tax) also did not find favour with London, which is an important financial hub
- Immigration issues
- Half of British legal migrants come from EU. There is this feeling that they have a negative impact on UK born workers. Adding credence to local fears was the fact that since 1997, 3/4th of jobs created are taken up by EU immigrants
- EU’s obligation on its members to accommodate more refugees also did not find favour with UK. Especially at a time when the refugee influx in Europe is at an all time high in light of multiple crisis in Middle East and Africa
- There is also this perception that immigrants pose a threat to national security
- Sovereignty Issue
- EU is a transformative idea in many senses. One of the things that it leads to is the weakening of national sovereignty. EU has been pushing for creation of an Ever Closer Union which would accord greater decision making powers to European Parliament, while, limiting the authority of British Parliament.
Impact of Brexit:
- EU is a large market. 45% of British exports are directed towards EU. EU is the largest market for UK’s exports and one of the major sources of UK’s imports. Except Germany and Sweden, UK has a positive Balance of Trade with all other countries of EU. Post Brexit, access to EU markets would suffer for UK
- Britain has emerged as a major financial hub. Post Brexit, the financial/services sector in UK would take a hit. We have already seen the London Exchange soaring down post Brexit
- Immigrants to EU are better educated and skilled and offset the demograpaphic disadvantage. That advantage will be lost for UK
- It raises questions over the future of Scotland and Northern Ireland. Their desire to stay in Uk was preconditioned on UK remaining a part of EU. The Scots have already started demanding for a referendum on Scotland’s futute in UK. Even in Northen Ireland violence erupted post the Brexit vote
- In an interconnected world, being a part of multilateral organizations is key to influence policy matters. No country can do it alone in a rapidly changing international environment. Similarly UK would lose some of its leverage now that it has voted for Brexit. Pursuit of sovereignty in purist terms in an interconnected world is a utopian idea
- The idea of EU stands challenged. EU whose origin lied in the centuries of war that ravaged Europe was a transformative idea in international relations, enmeshing countries in cooperation. With the exit of UK, there is a possibility of other countries such as Greece etc to follow suit. Thus the idea of EU stands challenged
- EU is currently under multiple crisis emanating from financial slowdown, Russian challenge, security concerns. EU and Britain separately would not be able to handle a resurgent Russia. Similarly to deal with the security threats in Europe requires countries to act in concert and not independently
- The immediate impact of Brexit is an increase in risk aversion when it comes to investing, especially in light of the possibility of other countries following suit. This will affect the FPI outflows from foreign portfolio investors.
- Rupee may depreciate because of the double effect of foreign fund outflow and dollar rise
- IANS report says that Britain ranks 12th in terms of India’s bilateral trade with individual countries. It is also among 7 in top 25 countries with which India enjoys a trade surplus. India invests more in UK than the rest of Europe combined, emerging as the 3rd largest FDI investor. Access to European markets, therefore, is a key driver for Indian companies setting shop in UK. Britain coming out of EU is likely to affect the business prospects of these companies.
- Nasscom in a recent report held that IT and ITeS industry of India will have a negative impact of close to $108bn. The impact can be seen in medium term (2-3 years)
- While on the positive side, Brexit has driven away fears of a US Fed rate hike and could lead to lower commodity prices
- Brexit has become a new worry for commodity producers, coming on top of concerns about China’s slowing economic growth. If news flows from both these sources continue to cloud the outlook for commodities, then prices may turn weak. Brexit’s impact will then be a fateful one for commodity producers and producing nations
- Devaluation of rupee might enhance India’s export competitiveness