Your Guide to 'Brexit': Five Pressing Questions Answered

A look at the domestic and global impact of the UK leaving the European Union, and whether or not holding a referendum to decide the matter is good idea.

On June 23, the UK will hold a referendum, or a direct vote by the electorate, on whether to leave the European Union. If people do vote for ‘Brexit’, a two-year negotiation process will be launched to resolve extraordinarily complex transitional, regulatory and residential matters, with the final deal being subject to the approval of a supermajority of EU nations.

It will be the first time a full member has ever voted to leave the EU, a 28-nation political and economic union. Citizens of countries within the EU trade and move freely across borders – in an arrangement known as the ‘single market’ – and negotiate international deals as a bloc. Brexit polls have consistently been neck-and-neck, but on June 21 stocks rose and the pound saw its largest gain in eight years as surveys showed that the ‘Remain’ side may win by a small margin.

What is the case to stay, and what is the case to leave?

The Remain camp, with Prime Minister David Cameron at its helm, argues that a small island nation such as the UK needs to be part of a union with other countries with similar values for the sake of its security and in order to wield influence, and that the UK already thrives on the benefits of the single market without fully succumbing to EU control in areas such as the common currency. People who advocate staying also point out that the costs of leaving, both in the the short and long run, would be disastrous. Some of the most influential countries in the world – the US, China, Japan and India, to name a few – have explicitly or implicitly come out against Brexit.

Those in favour of Brexit, most notably Nigel Farage, leader of the United Kingdom Independence Party and Boris Johnson, former mayor of London, claim that the EU is exerting undue bureaucratic, legal and financial control over the UK, threatening the country’s freedom and sovereignty. One of the Leave camp’s key platforms is anti-immigration, hence it is against the free movement of EU nationals into the UK – one of the cornerstones of the single market.

How will leaving affect the UK?

In the short term, there is no ambiguity over whether the British economy will take some very hard hits – it certainly will. While the UK will get to save the 0.5% of its GDP that goes in yearly contributions to the EU, chancellor George Osborne has said that a vote to leave would cause an “immediate and profound” economic shock, wherein the country would enter a recession, 820,000 jobs would be lost over two years and the rate of growth would be down by anywhere between 3-6%. The pound will fall significantly – a member of the Bank of England’s monetary policy committee has predicted a 15-20% depreciation against major trading partners – as will stock markets.

Trade and investment will plummet in the short and long term. Over 50% of the UK’s trade is with the EU, so that may be immediately at risk. At the moment, the UK negotiates with other nations as part of the world’s largest trade bloc, which accounts for nearly 20% of global GDP. Post-Brexit, it will have to renegotiate deals with its trading partners and will find itself at a disadvantage due to regulatory divergence and isolation from the EU and a loss of ability to provide access to the single market, a large factor in why the country has been an alluring investment destination for other non-EU countries. This divergence will also hamper the functioning of UK enterprises in EU nations and the financial services and banking sector will be particularly adversely affected.

UK exports of goods and services to non-EU countries have grown at a faster rate than imports, driven largely by services exports. This has resulted in the UK running an overall trade surplus with non-EU countries (value of exports exceeds imports) over the past three years, which reached £27.8 billion in 2014, as shown by the grey dotted line. Credit: Office for National Statistics via The National Archives.

UK exports of goods and services to non-EU countries have grown at a faster rate than imports. This has resulted in the UK running an overall trade surplus with non-EU countries (value of exports exceeds imports) over the past three years, which reached £27.8 billion in 2014, as shown by the grey dotted line. Credit: Office for National Statistics via The National Archives.

Granted, much of this depends on the post-Brexit arrangements made between the UK and the EU, but to keep its access to the single market the UK must agree to the free mobility of goods, services and labour, which flies in the face of the Leave camp’s fundamental anti-migration policies.

The UK will definitely see massive immigration reform, as the predominantly right-wing Leave camp advocates curbs on the flow of migrants into the country. However, with an ageing baby boomer population and a labour shortage in the face of record-high employment, the UK needs migrant workers to revitalise labour markets without cutting benefits or increasing taxes.

Politically, Brexit is likely to test intra-UK cohesion. The pro-EU Scots, for example, may once again seek to secede from the UK in order to join, or stay in, the European Union. The 2014 referendum on Scottish independence was defeated, albeit narrowly, in large part due to the obvious economic merits of staying in the UK and thus the EU. If the UK were to leave the EU, fence-sitters in Scotland may vote in favour of independence the next time around.

Brexit will also significantly reduce the UK’s diplomatic clout and damage its ‘special relationship’ with the US. Richard Haass, president of the Council on Foreign Relations, writes: “Britain is important not just as a bilateral partner, but because more often than not it can be counted on to argue for and support positions in Brussels consistent with, or at least not far from, those of the US.” The UK is already being seen as a less dependable ally in Washington, with the British parliament refusing to support military action in Syria till December, and this perception will crystallise were it to do anything to diminish its influence in Europe.

How will Brexit impact the rest of the EU?

One of the few aspects of Brexit there is agreement on is that the EU will be far less impacted than the UK will be, since trade with the UK is a far smaller share of EU GDP than EU trade is for the UK’s GDP. Major European leaders have been largely dismissive of the UK’s quest to leave, with the president of the European Parliament saying, “[The British] are demanding. They push hard. They insist. They just don’t let go. Many of my colleagues say behind closed doors: ‘Don’t stop a rolling stone. If the Brits want to leave, let them leave.’”

The most significant change will be the political restructuring within the bloc. While Germany will retain its position as top dog, France is likely to step up and fill the power vacuum created by a hightailing UK. Whether they become closer allies and align their interests or, in the absence of the UK as a counterbalance, move further apart over economic and budgetary policy – a longstanding disagreement exacerbated last year by Greek crisis talks – remains to be seen. Nevertheless, the stage will be set for a marked shift in European power dynamics.

Further, Brexit will set a dangerous precedent for other right-wing groups across the continent who have been carried to office on the shoulders of anti-EU sentiment and promises to isolate their countries from the bloc. This normalisation of referenda will undoubtedly spur similar attempts to leave the EU, which could act as a major destabilising force for Europe. This threat is especially potent in light of recent economic depressions and the current refugee crisis, which has heightened tensions over immigration to a breaking point. While not especially debilitating for the UK, on account of the disproportionately few refugees it has accepted, this crisis is the definer of political tone and agenda in much of the EU, and resentment over the EU’s policies on the matter will make it far easier for copycat referendums to gain traction.

There could be some additional economic effects apart from the loss of UK trade. In order to stop businesses from relocating away from the UK, or to encourage further trade and FDI, the UK may attempt to lower taxes for firms and companies and ease up on mandatory standards of practice. This could possibly push the EU into adopting competitive policies, which could consequently increase trade with a multitude of countries for whom the EU is not a high priority trading partner.

How will leaving affect global markets – India’s in particular?

Despite the UK’s GDP forming only a tiny share (2.4%) of global GDP, the recent behaviour of markets in response to Brexit forecasts shows that the country’s referendum will have an oversized impact on the world economy. Brexit fears and uncertainties are already causing turmoil in global markets and driving down stock prices around the world, leading to mass share sell-offs and pushing investments into safe assets like Treasury bills, German bonds and gold.

For India, which is the third-largest foreign direct investor in and the third-largest investment destination for the UK, a successful leave vote could adversely affect the economy. FDI from India would fall due to uncertainty and possibly relocate to other countries that would provide gateways to the Single Market.

A.D. Singh, secretary general of Federation of Indian Chambers of Commerce & Industry, an association of business organisations in India, said, “…we firmly believe that leaving the EU, would create considerable uncertainty for Indian businesses engaged with UK and would possibly have an adverse impact on investment and movement of professionals to the UK.”

In short, Indian firms in the UK will face regulatory uncertainty, relocation costs, possible job losses and reduced turnover. There may, however, be some benefits in the realm of trade agreement negotiations. India and the EU have been negotiating a free trade agreement since 2007, which has still not been finalised because of the EU’s insistence that India include a Trade and Sustainable Development chapter, which India has refused to do. Brexit would allow the UK to negotiate bilateral trade deals without adhering to strict EU guidelines and attract more investment from emerging markets, especially since India has been gradually expanding its foreign investment.

At a global scale, however, Brexit is also symptomatic of a larger trend of populist distrust in establishment economic experts and politicians and the decisions made by them. Despite detailed reports by the International Monetary Fund and others warning of the pitfalls of leaving, the Leave camp has thumbed its nose at experts in the field. If the UK truly does leave, it will signal the decline of the absolute dominance of so-called ‘big money’ we have seen in the past few decades, and act as a litmus test for the true influence of and consensus behind populist movements seen rising around the globe.

Is holding a referendum a good idea?

In times of distrust of establishment politics, a term which unfortunately often comes to include all elected representatives, politicians are realising that the use of a direct democracy institution to decide the fate of an entire nation can severely undermine the institutions of representative democracies.

Referendums have become tools used by politicians to accomplish certain ends that they could not through the methods of the democratic system. There is a reason direct democracies have given way to representative ones in the modern era; each citizen cannot be expected to be well versed in the economic and political realities of governance or to pore through historical data and treasury reports, and so cannot be expected to make a truly well-informed decision. Despite this, political interest groups have found a way to harness the power of direct democracy by stoking fears – in this case, of immigrants and refugees –, appealing to nationalistic sentiment and so inciting knee-jerk action. Last week, Labour MP Jo Cox, a member of the Remain camp, was killed by a man who gave his name in court as “Death to traitors, freedom for Britain”.

The calls for isolationism and building walls – real or virtual – that accompany these fear-based movements is likely to complicate relations in a globalised world that faces cross-border crises. For the UK to recoil from an integrative arrangement that is seen as a prototype the world needs will sound a death knell for the kind of collaborative liberalism that grew after the second world war and that is integral to peaceful co-existence today.

Tanya Rohatgi is a student of Politics, Philosophy and Economics (PPE) and International Relations at Ashoka University and an intern with The Wire.