International Academy of Case Studies analysis on “BREXIT”

Brexit: An Overview

In general, ‘Brexit’ is a term that is now widely used as a shorthand way of expressing the UK leaving the EU-a portmanteau of the words “Britain” and “Exit”. In fact, it is in the same way as Greek’s exit from the euro which is dubbed as Grexit in the past. So, Brexit is shorthand for Britain’s split from the EU, changing its relationship to the bloc on trade, security and migration. It is, prima facie, evident that Brexit resembles a simple word, but the effect of that word is not so simple in the current global economy. Its effect could be huge and long-lasting. Hence it is important to review and critically evaluate about what, when & why of Brexit is going to be taken place. As of now, Britain has been debating the pros and cons of membership in a European community of nations almost from the moment the idea is raised. It held its first referendum on membership in what was then called the European Economic Community in 1975, less than three years after it joined, when 67 percent of voters supported staying in the bloc. Later on, in 2013, the Prime Minister David Cameron promised a national referendum on European Union membership with the idea of settling the question once and for all. Consequently, the options it offered are broad and vague- ‘Remain or Leave’. At that time, Mr. Cameron was convinced that the remain would win handily. In this respect, British voted on June 23, 2016, as a refugee crisis made migration a subject of political rage across Europe and amid allegations that the Leave campaign had relied on lies and broken election laws. Overall, an ill-defined Brexit won approximately 52 percent of the vote. However, it not only resolve the debate, but also saved for another day the tangled question of what should come next (Zaidi et al., 2017). After nearly three years of debate and negotiation, it still remains unanswered and quite puzzle. Hence Brexit has become the most recent debatable financial issue that could be a paradigm shift particularly in UK’s economy.

European Union: An Overview

We know that EU is a group of a European country that participates as one unit in the global economy. Hence, we state that EU is a political and economic union of 28 member states that are located primarily in Europe. It consists of a group of countries that acts as single economic unit in the world economy. In particular, it has an area of 4,475,757 km2 (1,728,099 sq. mi) and an estimated population of about 513 million. Its approved currency is the Euro, 19 of its 28 members now-a-days adopt the currency. Fundamentally, the EU has been inaugurated as the European Coal & Steel Community, initially founded in 1952 by the countries of – Italy; France; Luxembourg; West Germany and Belgium (refer to appendix- 1). The European Coal & Steel Community had named European Economic Community after the Treaty of Rome; and afterward, became the European Community (EC). Later on, in 1973, UK became a member of EC. The EC fundamentally is expanded, and Denmark Ireland, Greece and Spain became the new members. The Maastricht Treaty2 took effect on 11th November, 1993 and thereby the EU replaced by the European Community. In summary, as of now, the EU countries are: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK. We find that the EU maintains a comparative value against the US Dollar and the EU becomes one of the top producers in the globe. Therefore, we conclude that EU is one of the largest sources and destination for foreign direct investment as well.

Historical Time-frame Of Brexit

As stated earlier, Britain had the membership of EU in 1973. Afterwards, in 1975- the 1st referendum raised if UK should be a member of European Community. Almost 65% responded positively. In 2016-the 2nd referendum is taken place to decide whether the UK should leave or remain in the EU. That time leave won by 52%. In particular, this corresponded to 17,410,742 votes to leave and 16,141,241 to remain, a margin of 1,269,501 votes (The Independent, November 30, 2017). Then on 29th March, 2019- UK has been due to leave, two years after it started the exit process. But the withdrawal agreement between the EU & UK has been rejected for three times by UK MP’s. Finally, on 12th April, 2019- having granted an initial extension, EU leaders are now backed by six months extension until 31 October, 2019 (refer to appendix-2). However, analysts suggest that the UK might leave before this date if the withdrawal agreement is ratified by the UK and the EU before then. The new UK Prime Minister Boris Johnson opines that he plans to renegotiate the Brexit deal agreed with the EU by his predecessor Theresa May. The PM has recently warned that UK MPs are damaging his chances of getting a deal with the EU by trying to block a no-deal Brexit in the name of Hard Brexit (Hunt et al., 2017) (BBC News, August 30, 2019). So, as things stand now, the UK is scheduled to leave the EU at 23:00 GMT on 31 October 2019. If the UK and EU approve the withdrawal agreement before then, the UK might leave on the first day of the following month.

Statistics Of Brexit Vote: A Summary

Figure 1 shows the summary of Brexit vote which is the principal determinant for the future existence of Brexit. We find that England voted for Brexit, by 53.4% to 46.6%. Wales also voted for Brexit, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2%.European Debt CrisisSince the end of 2009, a multi-year debt crisis has been taking place in the EU. In particular, we find that Greece, Portugal, Ireland, Spain & Cyprus were unable to repay their government debt. They started taking loans from the European Central Bank or the International Monetary Fund. France, Germany, United Kingdom having financially stable economy use to send funds to European Central Bank which then redistributed to various other members states. In this respect, the UK’s thought was “Why should we have to pay for that”?Great Recession EffectsThe effects of great recession in 2008 are still there in the world. The UK wanted to grow by 3% per year. But they could not do that even the economists from UK predict that on an average a person from UK will borrow 55% of his total expenditure from bank.European Refugee Crisis and Security ConcernThe refugee arriving in EU from across the different part from the world can move anywhere in the EU countries. As they can arrive to UK also, UK feels much concern about the security and privacy.Legal QuandaryOne focal point for alleged European control over UK laws is the influence of the European Court of Human Rights, which in certain high-profile cases has made it harder to deport foreign-born criminals. If UK moves away from the ECHR’s influence, it would be in company with isolated Belarus. We find that Belarus is the only European countries not to comply with ECHR.Membership FeeBrexiteers argued that leaving the EU would result in an immediate cost saving, as the country would no longer contribute to the EU budget. To note that in 2016, Britain paid in £13.1bn, but it also received £4.5bn worth of spending. Hence in a simple understanding the UK’s net contribution was £8.5bn.TradeThe EU is a single market in which imports and exports between member states are exempt from tariffs and other barriers. Services, including financial services, can also be offered without restriction across the continent. The consequences of Brexit for businesses that took advantage of these freedoms was always a matter of debate and conjecture.ImmigrationUnder EU law, Britain could not prevent a citizen of another member state from coming to live in the UK. The result is a huge increase in immigration into Britain, particularly from eastern and southern Europe.SovereigntyAnother important issue for Brexit is the rise of nationalism across the world. There’s a growing distrust of multinational financial, trade, and defense organizations created after World War II., EU, IMF, and NATO, among others.Political ElitismFinally, the political leadership of Britain faced a profound loss. The “leave” voters rejected both the Conservative and Labor parties. Both parties had endorsed remaining with the EU and notice that many of their members go into opposition on the issue (Petrescu & Bhatli, 2017). Hence, we notice that it turned into a sensible financial issue and part of recent global political landscape.Medium & Long-term EffectThere is overwhelming or near-unanimous agreement among economists that leaving the EU might adversely affect the British economy in the medium- and long-term. Surveys of economists in 2016 showed overwhelming agreement that Brexit would likely to reduce the UK’s real per-capita income level. In addition, 2018 and 2017 surveys of existing academic research found that the credible estimates ranged between GDP losses of 1.2–4.5% for the UK, and a cost of between 1–10% of the UK’s income per capita. These estimates differ depending on whether the UK exits the EU with a hard or soft Brexit (The Independent, 25 March 2019). In January 2018, the UK government’s own Brexit analysis was leaked, which showed that UK economic growth would be stunted by 2–8% for at least 15 years following Brexit, depending on the leave scenario. According to most economists, EU membership has a strong positive effect on trade and as a result the UK’s trade would be worse off if it leaves the EU (Zaidi et al. 2017). According to a study conducted by University of Cambridge economists, under a “hard Brexit” whereby the UK reverts to WTO rules, one-third of UK exports to the EU would be tariff-free, one-quarter would face high trade barriers and other exports risk tariffs in the range of 1–10%. A 2017 study found that almost all UK regions are systematically more vulnerable to Brexit than regions in any other country. In addition, the same study examining the economic impact of Brexit-induced reductions in migration recommended that there would likely be a significant negative impact on UK GDP per capita, with marginal positive impacts on wages in the low-skill service sector (Baldwin 2016 & Krasaesuk 2017). Nonetheless, it is unclear how changes in trade and foreign investment might interact with immigration, but these changes are likely to be important for global economy. Further, with Brexit, the EU would lose its second-largest economy in terms of financial capital of the world, the country with the third-largest population (German Münchner Merkur, 12th September. 2018). We estimate that the EU would lose its second-largest net contributor to the EU budget 2015 (Germany €14.3 billion, UK €11.5 billion, France €5.5 billion). Thus, the departure of Britain would result in an additional financial burden for the remaining net contributors, unless the budget is reduced accordingly. Germany, for example, would have to pay an additional €4.5 billion for 2019. Again for 2020, UK would no longer be a shareholder in the European Investment Bank, in which only EU members can participate. Britain’s share amounts to 16%, €39.2 billion (2013), which Britain would withdraw unless there is an EU treaty change (The Institute for Fiscal Studies, 2015). All the remaining EU members (as well as Switzerland, Norway and Iceland) might also likely experience adverse effects (albeit smaller effects than the UK), in particular Ireland, the Netherlands and Belgium. Let us now discuss in detail about the issue:

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