BREXIT in simple terms refers to Britain holding a referendum to decide whether it wants to continue membership under the EU or not. The referendum was held on 23rd June 2016 and 52% voted for BREXIT whereas 48% voted for remaining within the EU. Although the referendum is not binding on Britain’s parliament, the PM has announced that he has to respect the will of the people.
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“We are in the midst of an age of competitive devaluation and beggar-thy-neighbor policy. When elephants fight, the grass suffers.”-Mr. Raghuram Rajan
- Post the Second World War, two countries Germany and France came together and decided that they wanted to establish trade relations as it would prevent their countries waging war against each other in the future.
- The result was the 6 members (France, Germany, Italy, Belgium, Luxemburg, and the Netherlands) signed a deal covering resources like coal and steel.
- In 1957 a treaty was signed in Rome (Europe)-European Economic Community (EEC) or Common Market
- This has expanded and now has 28 member states.
- There are four key institutions in the EU
- European Commission- based at Brussels (Belgium), it consists of 28 commissioners (1 each from the member states, it administers the money spent and also formulates new laws
- European Parliament– based at Brussels (Belgium), there are 751 members in the parliament, their function is to discuss and vote all the laws that have been proposed by EC
- Council of European Union– based at Brussels (Belgium), It is where the government of each member country will have their say and hold discussions as to in what political direction should the EU be moving. Usually, the deals are signed at the end of the discussions
- European Court of Justice- based at Luxembourg. The function is to make sure that all the member states abide by the rules and regulations; will also come into picture if there are any frictions between the above three institutions.
- It became a member country in 1973 and held the first referendum in regards to the EU in 1975 (when they voted to stay in the EU)
- Today the arguments in favor of BREXIT have increased because the representatives of BRITAIN are of the opinion that the EU over the decades has undergone a lot of transformation and has taken away the powers of Britain to decide on various matters
- Some of the reasons for Britain to seek BREXIT are
- Sovereignty- Although the British Government influences some form in selecting the members to the European Commission, the members are neither under the influence nor accountable to the British Parliament and some of the policy decisions such as competition policy, agriculture, copyright, and patent law go against the interests of Britain (these laws override the domestic laws)
- Regulations are becoming Burden- some of the regulations such as –limits on the power of vacuum cleaners, non-recycling of tea bags, etc have often been seen as a burden on some of the conservatives in Britain. As per Michel Gove these regulations have cost Britain to the tune of £3 billion per year.
- Euro the Disaster – although the Euro is the common currency for the EU, Britain still uses the pound as its currency. Now if the euro had to be successful then it would have required greater fiscal and monetary integration and this cannot be achieved unless all the member states have the same currency. The problem with the euro as a common currency has also been exposed wherein on one side countries such as Greece and Spain are suffering from high debt, high unemployment, whereas other countries such as Germany are enjoying higher growth. Now in this situation, the ECB (European Central Bank) is in a dilemma whether to go for fiscal stimulus or prudence.
- Immigration- Britain is not a signatory of the Schengen Border free zone (allows easy travel across Europe), over the last ten years there has been a quite an opposition towards migration into the country from within the EU and its effects on wages and public services especially post 2008 recession wherein the workers from Lithuania, Poland, Italy, Romania, etc have moved to Britain
The “leave” proponents show the example of Canada and Australia which follow a point-based immigration system and say Britain could adopt such measure rather than being forced to follow the laws laid down by the EU
- Finance- although the EU doesn’t have the powers to collect the taxes from the people directly, it mandates member countries to make payments. In the case of Britain, it comes around $19 bn per year or $300/person. Although the funds are again used on Britain, the BREXIT supporters say, the money could be used more efficiently if Britain is out of the EU
- EU Pro or Anti Corporate?- there has been a mixed response to this question. The far left in Britain argues that the EU is too pro-corporate and the far-right argues the vice versa
Any Measures Taken to Prevent Call for BREXIT- At the beginning of 2016, David Cameroon (Britain’s former PM) sought an agreement to change the terms of Britain’s membership, the deal was conditioned on BREXIT outcome to remain within EU.
Some of the Points Under the Agreement are
a) Migrant workers will still be able to send child benefit payments back to their home country ( Mr. Cameron had wanted this abolished), but the payments will be set at a level reflecting the cost of living in their home country rather than the full UK rate
b) New migrant arrivals will not be able to claim tax credits and other welfare payments straight away – but will gradually gain the right to more benefits. (he had promised a blanket ban)
c) Britain will retain the pound also an assurance from the EU that it will not be discriminated against as it has a different currency and any money of Britain used to bail out the nations in crisis (in Euro Zone) will be reimbursed.
d) Britain’s large financial service industry will be protected from the imposition of eurozone regulations
e) It will be incorporated in an EU treaty change that Britain will not be a part of “ever closer union” (one of the core principles of EU).
f) Red Card System- If 55% of national EU parliaments object to a piece of legislation then the legislation has to be rethought (the critics say it is not clear if this would ever be used in practice).
The critics pointed out that what was proposed under the agreements made no change and fell short of what he had promised when he had announced his plan for a referendum.
Why Scotland Voted in Favor of Staying
As per the numbers, it was found that 62% of the voters in Scotland chose to remain within the EU. The reasons for their decision are given below.
a) EU is a common market which not only allows the movement of four freedoms (finance, goods, services, and labour) but also provides a huge market for Scotland to export
b) With Scotland being a part of the EU, the trade barriers will be eliminated to a great extent (both for exports from and imports into Scotland)
c) Scotland has been attracting foreign investments as a result of which there has been employment creation, contribution to growth, etc (in 2013, 40% of the companies in Scotland were foreign-owned which employed more than 3 lakh workers)
d) When the EU negotiates a deal with other countries (has trade deals with more than 50 countries), it is automatically applicable to Scotland but with BREXIT, Scotland may be forced to sign all the deals again with the trade partners (the advantages may be lost)
e) As a member of the EU, it will get access to various development funds (Regional Social Funding, Rural Development Programme, etc)
f) With BREXIT, the citizens of Scotland may lose the freedom of movement i.e. to move freely in Europe
g) In a nutshell, Scotland is much safer than remaining within rather than moving out of the EU. (on moving out it will face security/terrorist threats, climate change, trade barriers, etc all alone)
Global Impact of BREXIT
a) Globalization has increased the correlation between countries. If there is a disturbance in one country then there will be an impact on other countries
b) The BREXIT would affect the global growth
c) It is a big blow when more countries are moving towards multilateral trade arrangements
d) It will further alienate the investors and the capital will move from risky markets to safer havens
e) The major exporting countries such as China and India would get affected as the EU is one of the major export markets
f) As per one of the estimates, BREXIT would lead to a 25% reduction in imports by Britain
g) BREXIT was a referendum which rode on much components-anti immigration, increasing protectionism, etc. with this these sentiments are going to increase in other parts as well
h) Britain was one of the major financial and military contributors to the EU but with BREXIT, the financial of the EU will suffer.
i) With BREXIT there are calls for NEXIT(Netherlands exit), Italeave (Italy leaving) and FREXIT (France Exit), etc
j) With BREXIT there have been demands for Scotland exiting from the UK.
Impact of BREXIT on India
a) India is the third-largest source of FDI for the UK. There are more than 800 Indian companies in Britain. With BREXIT, the business of these companies will be affected. With the fluctuation in exchange rates, the bottom line of these companies will suffer.
b) Although the pro exit supporters have claimed that Britain can sign bilateral agreements free of restrictions any restrictions imposed by the EU now, but the experience has shown that it takes a long period to negotiate and sign a new trade agreement (eg- India and Japan took around 5 years to discuss and conclude CEPA)
c) India considers Britain as a gateway to the EU, now with Britain opting out, India loses the advantage. Hence there is a need to get border-free access
d) The FTA that India was negotiating with the EU will not have the same impact (negotiations are going on since 2007). Now since Britain is out, India needs to work on an agreement separately with Britain.
e) UK accounts for 17% of India’s IT exports. With BREXIT the overhead costs are going to increase. Nasscom in a report has said that the Indian IT industry is going to experience a negative influence in the short term. The depreciation of the pound also will have an effect on the returns of these companies.
f) One argument is that BREXIT could lead to the movement of skilled labour from India to Britain but this might be a misplaced argument as immigration into Britain from other EU countries was one of the reasons for BREXIT.
g) UK and EU both account for 23.7% of the rupee’s effective exchange rate. BREXIT would lead to the outflow of foreign portfolio investments and this may further weaken the rupee. (on the positive side, the central bank will try to maintain the liquidity in the market so the fear of fed hike of interest rate could be brought down)
h) Brexit is a blow to commodity prices. As such because of lower global demand, the slowdown in China and many European countries had led to a drop in the prices of commodities and this will be further accentuated because of BREXIT.
i) The sectors that would get affected are-auto and auto components; IT sector, metals, oil, aviation, pharmaceuticals, etc
j) The central bank has to recalibrate the monetary policy to reduce the market volatility
List of some of the companies that export to Europe and the drop in the share prices
|Company||Share of revenues from EU||Note|
|Tata motors||31%||Almost half of this revenue comes from the UK|
|TCS||11%||Almost 15% revenue from the UK|
|Tata steel||52%||Share prices dropped by 6.37% (on 24th June 2016)|
|Infosys||23%||Share prices dropped by 1.41% (on 24th June 2016)|
|TechM||28.5%||Share prices dropped by 4.7% (on 24th June 2016)|
What Could be Done in India
a) The central bank has to recalibrate its monetary policy to account for the volatility that will be created in the market
b) SEBI and the stock markets will have to be very watchful in not allowing any manipulators from taking undue advantage. Brokers, portfolio managers, and other market intermediaries have to be prevented from any attempts to lure small retail investors into promises of hefty gains from the futures and options trading, especially in banking stocks and indices, the official added.
c) Since Brexit makes the revival of global growth more difficult, there is a need for India to focus more on the domestic demand so that the impact is minimized
d) The strong forex reserves position has to be maintained so that any fluctuations in the exchange rate of the rupee can be limited
e) The companies that have a business in Europe (especially in the UK and it pertains more to the IT industry) have to rework their strategy.
What most of the experts agree upon is the effect of BREXIT on the global economy coupled with weakening/depreciating currencies of various countries will make it harder for recovery and in the case of India, thanks to the stability in the fundamentals of domestic economy and huge forex reserves position, the effect of BREXIT can be minimized, but the effect is going to be felt in short term. Approach to UPSC GS 3- International economics, trade relations Questions
- The BREXIT makes the global economic recovery more difficult-Discuss.
- In the light of recent BREXIT what will be the impact on the Indian economy
- When elephants fight, grass suffers-discuss the statement in the light of BREXIT
Multiple Choice Question (MCQ)
Consider the Following Statements
- Britain is a signatory of the Schengen Border free zone (allows easy travel across Europe), over the last few years there has been quite an opposition towards migration into the country from within the EU and its effects on wages and public services especially post 2008 recession.
- Scotland has been able to attract foreign investments as a result of which there has been employment creation, contribution to growth, etc (in 2013, 40% of the companies in Scotland were foreign-owned which employed more than 3 lakh workers)
- European Parliament is based in Brussels (Belgium), there are 751 members in the parliament, their function is to discuss and vote on all the laws that have been proposed by EC.
- The problem with the Euro as a common currency has also been exposed wherein on one side countries such as Greece and Spain are suffering from high debt, high unemployment, whereas other countries such as Germany are enjoying higher growth.
Which of the following options is true?
A) Only 1 is False
B) All the 4 statements are True.
C) Only 1 is true
D) None of the Statements are True.
The above details would help candidates prepare for UPSC 2020.