Brexit 101

29.06.2016 • Politics and War

From Vivek Kaul’s Diary (India)-

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again.

On June 23rd 2016, the United Kingdom of Great Britain voted to leave the European Union. In the era of Twitter tags, this event has come to be known as Brexit. David Cameron, the prime minister of Great Britain, resigned very soon after the result was announced.

The financial markets have been freaking out since then. The question is what is Brexit all about and why are people worried about it. Before answering this, it is important to go back into history and understand the context that led to the formation of the European Union.

What led to the formation of the European Union?

The origins of the European Union can be traced to the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries (which were France, West Germany, Italy and the three Benelux countries i.e. Belgium, Netherlands and Luxemburg) in 1958.

The goal of ECSC was to create a common market for coal and steel in Europe. The EEC on the other hand worked towards advancing economic integration in Europe. The economic integration of Europe was deemed to be necessary by many experts to create some sort of bond between different countries in a continent destroyed by extreme forms of nationalism during the Second World War.

The Second World War had lasted from 1939 to 1945 and had more or less destroyed the European countries. Hence, the idea was that if economic integration happened, peace would automatically prevail.

When was the European Union formed?

These organizations (i.e. ECSC and EEC) gradually evolved into the European Union (EU) which was established by the Maastricht Treaty signed on December 9 and 10, 1991. The creation of a single European currency became an objective of the EEC in 1969, but nothing happened for the next two decades. It was only in the 1993, after the formation of the European Union by the passage of the Maastricht Treaty, that the members became bound to start a monetary union by January 1, 1999.

Currently, there are 28 countries which form the European Union. Further, there are 19 countries which use the euro as their currency (i.e. monetary union). The United Kingdom of Great Britain is not a part of the monetary union within the European Union. It has its own currency (i.e. the pound).

What were the advantages of the European Union?

The basic idea behind European Union was economic integration that led to peace. Let’s take the case of a company which makes cars in the United Kingdom. Before the European Union came into place, if the company wanted to sell its cars in Spain, it would have had to pay a tariff in Spain. (Not surprisingly, the British car companies were against the country leaving the European Union).

Or let’s consider someone British who wanted to work and enjoy the literary scene in Paris. Before the European Union came into place, he would have had to go through a long immigration process.

The European Union essentially did away with these problems and made the movement of both goods and people across the countries which became members, much easier than it was in the past.

So what happened in Great Britain?

On June 23, 2016, the citizens of the United Kingdom of Great Britain voted 52:48 to leave the European Union. This wasn’t expected. Both opinion polls as well as experts had been predicting that Britain would vote to stay in the European Union. But as is the case more often than not, experts and opinion polls turned out be wrong.

Around half of Great Britain’s exports currently go to the European Union. At the same time around half of Great Britain’s imports come from the European Unioni. Around one-third of Great Britain’s financial services exports are to the European Union. At the same time, more than half of the cross border lending that the banks of Great Britain carry out is to the European Union. Further, Great Britain receives half of its foreign direct investment from the European Union.

In the days to come all this will have to be renegotiated with the European Union. It is estimated that negotiations will have to be carried out with 60 non Euro Union countries where trade as of now is governed by European Union rules.

So why did Britain leave the European Union?

Given such strong trade as well as financial linkages, why did Britain leave the European Union? The major reason being now offered is that immigration is now a major issue in Britain. Given that, English is the second language of many Europeans, and the main language in Britain, it was easy for the continent based Europeans to move to work to Britain than vice versa.

The other reason being offered is that many of the people who voted for Britain leaving the European Union, did not understand that voting for Britain leaving the European Union, actually meant that Britain would have to leave the union. As dumb as it sounds, there are several news reports which have offered this theory along with examples.

The thing with reasons is that they can also be offered after the event has happened. Hindsight bias plays a huge role here. Hence, I don’t think it is very important to understand why Britain has left the European Union. It is more important to understand how this will play out from here.

 

-Read more at equitymaster.com (English)-

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