One of the great social experiments of the 20th century is being put to the test. The European Union, a political and economic organization of 28 European member nations is experiencing increasing dissension among its members. As decaying economic conditions like high unemployment and stagnant growth persist on the continent, calls to leave ‘the union’ grow louder. The global financial landscape has had its share of challenges over the last decade or so, but nothing like the prospect of a breakup of the European Union, at least in part. This is because, if viewed as the economy of a single country, the EU could arguably be the largest economy in the world.1
A European confederation has roots in World War II’s aftermath, when the need for cohesion among European nations was paramount. Today, the EU allows for the free movement of goods, services, capital and people between member states.2
By many measures it has been a success, culminating in the ‘EU’ winning the Nobel Peace Prize in 2012.3
While the EU member countries are still independent, the collective economic benefit the individual countries enjoy is a major selling point for membership. But there are cases to be made on both sides of the argument.
Maintaining a union of this size and scope certainly isn’t easy. The culture clash between member nations is glaring, especially between Northern and Southern members. There are also centuries of military conflict between members to consider. As more member countries experience their own economic hardships (i.e. Italy, Portugal, Spain) there is increasing fraying of the union’s fabric. Last year it was Greece and this year, Britain.
What is a Brexit?
With the British economy deteriorating over the last few years, nationalist rhetoric is growing louder. Some British place the blame on EU membership and there is a growing movement to exit (i.e. ‘Brexit’) the EU and return to economic independence. One of the largest members of the EU, Britain has questioned its relationship and has scheduled a vote in June to leave or remain the European Union. This is stunning because no country has ever left the EU so the repercussions are difficult to gauge. Some fear a domino effect if a major member, like Britain, leaves.
The Case FOR a Brexit
Donning yellow ‘Believe in Britain’ shirts, an increasing number of Britons are rallying for a ‘Brexit’ from the EU. Most small and medium size British businesses don’t actually trade outside Britain so the EU membership’s free trade program doesn’t really benefit them. In fact, they argue that EU regulations and red tape are hampering their businesses and hurting growth.
Britain also believes it lacks substantial influence inside the EU, arguably dominated by Germany. Many Britons don’t want to have to deal with (or help pay for) a solution to the refugee crisis in mainland Europe. Britain sends the EU $350 million pounds every week for membership (equivalent to half of England’s annual school budget).4 Brexiters contend this money would be much better spent modernizing Britain’s economy through scientific research and new industries. In short, they believe the EU needs Britain more than Britain needs the EU. They also believe they could follow leave the EU but still retain strong trading links with EU countries, like Norway and Switzerland have.5
The current EU framework is based on free trade and the free flow of resources between countries (including people). The downside, Brexiters accuse, is an influx of migrants that compete for British jobs. Further, these same migrants are claiming benefits under the British state, draining their resources some contend. Another fear of this free flow of people is the rising risk of terrorism. One only has to look at France to be reminded of the risks. Britons want to be proactive in tightening up security. The protectionist attitude underscoring a Brexit isn’t that surprising considering the spread of xenophobia throughout Europe, especially in countries like Hungary, Germany, Greece and Sweden over the last few years.6,7
The Case AGAINST a Brexit
Many experts think a Brexit wouldn’t be a smooth transition and fear ripple effects across economies and world markets. The London-based newspaper, The Economist has been especially critical of a Brexit and argues for Britain remaining within the EU. They posted a chart showing that Britain pays the EU 340 pounds per year per Briton household but each household receives an estimated 3,000 pounds in benefits.8 They predict there would be a hit to Britain’s economy, at least in the short-term. Citing IMF data, The Economist point outs that 51.4% of British exported goods currently go to the EU.9 With such dependence on trade with EU members a Brexit could cause serious harm to Britain’s economy. A London think tank estimates that this level of trade is 55% higher than it would be with a Brexit.10
Leaving the EU wouldn’t prohibit Britain from engaging in trade with the rest of the EU but it would cause be hampered by regulations and more costly. One of the major perks of being an EU member is enjoying free trade with member countries. U.S. investment banks Goldman Sachs and Citigroup forecast further weakness to overall growth and the British pound if a Brexit commences. There are short-term risks to the economy leading up to the referendum, where businesses are unlikely to commit to any large projects or investment without knowing how laws and policies may change.
The EU is also currently negotiating trade deals with the U.S. as well as China, India and South Korea. According to the Economist, these countries have made it clear they are more interested in deals with the EU than with Britain alone.11 Britain could face a future competitive disadvantage.
The ramifications of a Brexit could extend beyond economics and into geopolitics. The Economist posits that a Brexit could destabilize the United Kingdom. Scottish nationals, who narrowly missed winning a “Yes” vote of independence from Britain last year, have warned that a BREXIT would trigger another Vote on Scottish independence.12 The fact that they remained in the U.K. could be largely contributed to a fear of economic uncertainty of not being back-stopped by EU membership. Ireland is also a strong supporter of Britain remaining in the EU. There are also concerns in Northern Ireland, where a peace process has largely depended on Britain staying in the EU.
There are also ramifications outside of the United Kingdom. The European Union wields significant political clout with geopolitical issues. Its collective economic strength serves as a deterrent to misdeeds around the world and in its own back yard. Nowhere was this more evident than Russia’s invasion of Ukraine where economic sanctions have proven quite punitive. This can also be seen when brokering nuclear deals with nations such as Iran or in rallying support to deal with terrorist organizations like ISIS. The loss of Britain’s military power, once the world’s most powerful, diminishes the EU’s influence in this capacity. Some argue a Brexit would weaken the EU and the West.
So Will a Brexit Happen?
A year ago, a Brexit seemed a very slim possibility. But there is increasing concern that this actually happens. Responding to internal political pressures, U.K. Prime Minister David Cameron has called for a referendum (vote) on this issue on June 23rd where the British people will get to directly have their say on the matter. The latest ‘poll of polls’ shows a 55%-45% edge for the “Remain” (in the EU) camp.13 But financial markets are showing concern, relegating the British pound to its lowest level against the dollar since 2009. Like the Scottish independence vote, the decision will likely keep onlookers in suspense to the end.