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The Referendum
For the last several years, many European countries, but Britain most importantly, has been riven by divergent views regarding membership in the European Union. Britain has always been cautions about the EU project and has indeed not joined the common currency, the Euro. To set at rest this controversy, Prime Minister Cameron, called for a referendum, on the question of whether Britain should stay in the EU or leave it. The referendum is purely advisory in nature and is not binding on the government. However, Prime Minster Cameron said that if the public votes in favour of Leave, then, "There is no turning back if we leave," he wrote in a Sunday Telegraph article . "If we choose to go out of the EU, we will go out - with all of the consequences that will have for everyone in Britain." (Al Jazeera, June 21, 2016)
Origins of the European Union
The origins of the European Union may be traced to the aftermath of the Second World War. With the continent pretty much devastated, the idea of a United States of Europe took shape in the fertile imagination of a Frenchman, Jean Monnet. Monnet had earlier moved to Britain during the war and had worked to co-ordinate the French and British war industries in the days before France surrendered to Hitler's Blitzkrieg.
Monnet started the European Coal and Steel Community, ECSC, in 1946 and his efforts to integrate Europe received a fillip in 1948 from the American initiated Marshall Plan,designed to put Europe economically back on its feet. By 1957, the ECSC had morphed into the European Economic Community, basically a customs union. The first members were France, West Germany, the Netherlands, Belgium, Luxembourg and Italy. Britain joined in 1975, and after the end of the Cold War and the fall of the Berlin wall, the union expanded, to include East European countries as well as countries like Spain and Portugal. Today, this union boasts a GDP of $17 trillion and a population of about 500 million.
Getting Closer
In 1979, the European Currency Unit or ECU was introduced to push integration. A decade later this became the Exchange Rate Mechanism,ERM, by which member states maintained a certain floating band within which the individual currencies could move up or down. Needless to say the Deutschemark held the pole position. Britain had joined the ERM in 1990. Two years later, sensing the weakness of the pound, markets hit hard and the pound suffered a headlong fall, known as Black Wednesday, prompting the British government to pull out of the ERM.
The same year European countries signed the Maastricht Treaty that laid the foundation for closer union and co-operation. In 1998, the EU promoted the European Central Bank which would henceforth act as central bank to all member states, in the place of the nationally supervised central banks. The Euro was brought into being on January 1, 2002. Britain did not participate in either move.
The thinking behind this call for ever closer union was that it would make Europe economically powerful.
However, European leaders failed to see that the interests of the various countries were not really in harmony. This basic mistake would lead to a lot of friction within the EU in the years to come. The classic example is between prudent and frugal Germany and the 'profligate' countries of southern Europe, be it Greece, Italy or Spain. Ultimately, for many in the EU, the euro has been a disaster. They have not been able to use a home currency capable of being devalued to counter adverse economic circumstances.
Case for Exit
National Sovereignty
In Britain, a key argument for exiting the EU is that the EU 'imposes' many standard, one-size-fits-all, laws on Britons. These laws are not passed by Westminster and which has no power to change them. Thus EU membership has become a question of national sovereignty. Edward Chancellor, who favoured Brexit, writes in CNBC, "The ideals of the Enlightenment - a preference for reason over tradition, for economic individualism over state control, for tolerance over bigotry, and a belief that relationships between nations should be governed by the rule of law - remain close to my heart. The same notions guided the founding fathers of the post-war European project. However the EU has strayed from these ideals."
He goes on to quote Immanuel Kant one of leading lights of the 18th Century European Enlightenment. Kant defined a republican government as one that gained the "consent of citizens as members of the state". "A state "like the stem of a tree has its own root... to incorporate it as a graft on another state, is to destroy its existence as a moral person. The consequence of bundling states together, even when done peacefully through dynastic alliances, would be that the "subjects of the state are used and abused as things that may be managed at will". (CNBC, 17 Jun 2016)
Economic Consequences
People who support leaving the EU are scornful of dire predictions of the economic consequences of leaving the EU. They point out that economists were not able to predict the 2008 Financial Crisis. Even assessing the size of the GDP and forecasting the next year's growth poses considerable problems and so far nobody has got it right. Even if the sterling indeed drops by 20% as predicted by some economists, it would not be the end of the world for the UK. Its economy would gain dramatic competitive advantage, and after a brief interval could do better than if there had been no Brexit and devaluation of the sterling.
Brexiteers, further argue that leaving the EU would actually boost the economy. They say that staying in the EU costs the UK 20 billion pounds annually. According to them this amount could be better spent on social welfare. Gove, a government minister and a leading votary of Brexit says, "There are economic risks if we leave, economic risks if we remain. I don't think there will be a recession as a result of a vote to leave," he told The Daily Telegraph. But at some point in the future, it may be the case that global economic factors cause problems. An independent Britain will be better able to cope with those strains." (Al Jazeera, June, 21, 2016) Brexiteers also discount fears of mass unemployment if the UK leaves the EU. Britain can indeed add thousands of jobs since it would be free to fashion its own economic policiesand negotiate new trade deals with the world's leading economies; without reference to pan European policies and standards. They project that 3,00,000 news jobs would be created.
Actually the one real threat is that other EU states might retaliate against Britain by taking harsh measures against trade with Britain. Yet, since Britain runs a trade deficit with the EU even this scenario is not likely to materialize. On should never forget the UK is the world's fifth largest economy.
Immigration
The greatest worry amongst many Britons is over immigration. They feel that the government has lost control of the borders. They fear a large immigration of people from Eastern Europe and the Middle East in search of jobs or as political refugees. They say that a points based system of immigration, as in Australia, would be more suitable for the UK. "The EU does not have the legal structure needed to cope with the current migrant crisis. If we Vote Leave, we will take back control," they say.
Britain in the world
Brexiteers are optimistic about the UK's place in the world. Shorn of the one size fits all rules of the EU, they claim that the UK would be able to play a significant role at the international level. Most importantly Britain would be able to gain admission to various international bodies independently, where it is now represented by the EU. As such a Brexit would enhance the stature of Britain in the eyes of the world. (Al Jazeera, June, 21, 2016)
The Case to Remain
Economic Consequences
The Remain in Europe campaign has painted a dire picture of the UK economy if Britain opts out of the EU on 23rd June. The Treasury (Finance Ministry) says that each Briton would be poorer by 4,300 pounds. There is also a fear that it would cause big job losses. Further, the Remain group says that Europe, a market of about 500 million citizens is the best bet for a strong trade relationship and economy, and also one that is at the UK's doorstep. Further, they argue that European trade would still be critical, even if the UK opts out. It is pointed out that 30% of British jobs or three million is dependent on the European trade. By 2030, staying in would create 9, 50,000 more jobs while leaving would create only 7, 90,000 new jobs.
Immigration
On immigration, the Remain camp finds that Brexiteers teeter on the edge of racism. They say that the country has full control of the borders and in any case immigrants are net contributors to the economy. "At the moment we have control of our borders as we are out of the Schengen. Most of our immigration is from outside the EU, this is not linked to our membership of the EU," they say.
Britain in the world
As far as Britain's place in the world goes, the Remain campaign says that it would be better off to stay inside. The Remain campaign accuses people who are in favor of Brexit as being too narrowly nationalistic and parochial. They point to the support for staying in, from the German Chancellor, the French President, the US President, the secretary general of NATO and the IMF. They argue that Britain's standing would be enhanced by remaining a part of the larger European project. (Al Jazeera, June 21, 2016)
Financial Implications
What makes the rest of the world so nervous about Brexit is the fact that London is a key international financial centre, with a financial services industry consisting of mutual funds, pension funds and the insurance industry. It hosted $6.2 trillion worth of assets under management in 2013. This is 8.4% of the global total. All these firms would face uncertainty regarding taxation and regulatory controlswhile uncertainty over new rules might provoke firms to avoid investments in the interim period. However FPI inflows into India might not be that affected, since most of the assets are held by US and Mauritius investors. UK origin investors hold just 5% of FPI assets in India. Further the Reserve Bank of India has announced that it is ready to deal with any eventuality arising from a Brexit. The chief worry is that if global markets are roiled, that would be bound to affect Indian markets. (Hindu Businessline, June 19, 2016)
Indian stock markets too would face volatility while the rupee may fall to uncharted depths. Hence the RBI is on its toes to counter volatility in the currency markets.The bright side is that a Brexit vote would slow global economic recovery and thus commodity prices are likely to remain low. This would certainly be a plus for India.
Comments and Voices
"It wouldn't change anything I did," Buffett, chairman of the board and CEO of Berkshire Hathaway told CNBC on April 29. "I wouldn't sell the farm I own. I wouldn't sell the real estate I own. I wouldn't sell my house. I wouldn't buy a different kind of car. And I certainly wouldn't change my investment in businesses. But -- I hope they don't do it." Warren Buffet
"In my opinion, it is a terrible deal for the British economy and jobs," if the majority of Britons in a June 23 in/out referendum supported the country exiting the EU, said J.P. Morgan Chase & Co. J.P. Morgan has about 16,000 people working for it in the U.K. "I don't know if it means a thousand jobs, 2,000 jobs" are at risk of being cut in the event of a Brexit, Dimon said. "It could be as many as 4,000 and there would be jobs…all around the U.K.," that could go.
"We believe that a vote in favor of Brexit on June 23 could lead to a global selloff in risk assets (stocks, corporate bonds, and commodities) and a rally in perceived safe-haven assets (U.S. Treasury securities, Japanese government bonds, and gold) in a manner similar to that of the China-related market concerns at the start of this year," Wells Fargo Global Research Analyst Donisanu wrote in a June 17 note. "We would expect currency markets to experience the most volatility after a Brexit vote as foreign investors sell the pound and exit positions in British assets," Donisanu wrote. "The extent to which the pound may decline vs. the U.S. dollar, euro or yen is hard to predict given a lack of precedent for a country leaving the EU. The close comparison to today's potential Brexit-driven currency market volatility occurred 24 years ago. It was known as Black Wednesday."
"I am praying that the U.K. will leave the EU," Swiss investor Faber told Marketwatch on June 10. "If the U.K. leaves the EU, there will be a movement of other countries that also leave the EU. The breakdown will produce wonders for economic growth. Other countries have the idea that this will destabilize the EU," Faber said. "Nobody can tell me that Europe was worse off before we had the EU and the euro.…The bureaucrats all say it [will be] a disaster; there is no basis that it would be a disaster. Switzerland is not a member of the EU, but is doing fine."
"If Britain leaves, it could unleash a general exodus, and the disintegration of the European Union will become practically unavoidable," billionaire investor Soros said in an email to The Wall Street Journal that was reported June 9. "I'm confident that as we get closer to the Brexit vote, the 'remain' camp is getting stronger. Markets are not always right, but in this case I agree with them." On June 21, Soros wrote a guest column in Britain's Guardian newspaper. "Too many believe that a vote to leave the EU will have no effect on their personal financial position," he wrote. "This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously. It would also have an immediate and dramatic impact on financial markets, investment, prices and jobs."
"Clearly this is a very important decision for the United Kingdom and for Europe," said Yellen. "It is a decision that could have consequences for economic and financial conditions and global financial markets…It could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy." Janet Yellen, Governor of the US Federal Reserve. (Marketwatch, June, 21, 2016).
The Verdict
Leave wins
On 23d June 2016 the British public spoke, and their answer was YES to leave the EU, with 52% of eligible voters in favor of Leave, versus the 48% in favor of Remain. As news of the vote started to trickle in, many bourses around the world tanked and the pound lost 9%, sinking to the lowest value since 1985.
What happens next
While it is difficult to say what exactly will happen, there is a consensus that the will of the people must be respected. Prime Minister Cameron, a staunch advocate of Remain, announced that he would step down in the next few months. The Lisbon Treaty which came into force from December 1, 2009, supersedes earlier treaties affecting the union. This treaty has an exit clause, Article 50, which allows member states to secede after giving due notice. Invoking this article, the British government is likely to initiate the process to start negotiations for leaving the EU.
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