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How Does Brexit Influence Us?

How Does Brexit Influence Us?

No. 1, Sep.-Oct. 2016 » TheFILEstarters

The British referendum on EU membership struck Europe like lightning on dry wood. Britain’s gesture to draw attention to the greatest problems with the tactical toolkit and strategic vision of the central EU institutions became, owing to a lack of political foresight from David Cameron, a concrete political reality which European Union should take very seriously. With the successful “extraction” of Britain from the European arena, the Union will have to rethink its mode of operation and management of current problems and crises. And this rethinking involves not only a rebalancing for the giants of the Union, but should offer ample scope for Romania, if it plays its hand correctly, to gain advantages from the fluid situation in Europe.

Romania has no choice. Even without being in Schengen or the Eurozone, we have nowhere else to move to and are, effectively, “condemned to cooperate”. We must prepare for European changes through further National changes – adapting legislation, improving the elasticity of the economy, the smart absorption of funds, the more effective reduction of corruption etc.

There are some economic, political, and social disadvantages and not so many advantages stemming from the exit of Britain from the EU.

The EU should be restructured drastically by Britain’s exit from the scene, becoming poorer and less skilful in terms of trade. A significant danger will be the cascading of the rebellious tendency, leading to European memberships falling like dominoes throughout the EU.

The UK can face significant disadvantages such as exchange rate volatility, suspended joint projects and revanchist tendencies aimed at discouraging the further fracturing of the EU etc. The disadvantages could be mitigated by the skilful employment of newfound independence to implement the right policies for the UK’s development, possibly even thinking of possible trade bloc combinations with the United States – a matter which President Obama clearly denied in his London address, when effectively campaigning for Bremain, but was walked back into the realm of possibility by Secretary of State John Kerry. But who knows what changes will be wrought in these perspectives by the American elections and the potential for a momentous philosophical shift at the White House?

British frustrations are understandable – especially after having “saved” Greece’s economy and the attendant “morality play” that was performed in public discourse. The empowerment of these tendencies within Britain was natural, as the country’s prior creation of political and economic liberalism highlights a peculiarly British and insular independent streak. However, Britain’s post-war difficulties and their easement through outside intervention and cooperation planted the seeds of its EU history as one of the pioneer countries of the later European community. The British are the ones who also disseminated the idea of ​​globalism, including for people-to-people contacts, grouping people together to play rugby, football, or cricket, doing business or establishing trade network structures everywhere in the world. Why, then, did Brexit become a majority option?

How can the English apply pure liberalism to a world economic situation of such complexity?

How much of this Brexit referendum was populism and politics, and how much of the island’s frustrations are rooted in the illusions of a return to the sovereign glories of the 19th century (with the tacit encouragement of politicians)?

Whatever the answers to these questions, the exit will assuredly not be devoid of effects. Another attempt of the British to leave had occurred in 1975, just two years after joining the European Community. The result of that particular referendum (the second in its history, as the current one was the third) was that nearly 70% of British people answered yes to the question “Should Britain remain in the European Community?”. Now, contrary to that, 51.9% of British vote for “leave” [1], compelling thus UK to announce the exit in 2019.

The upward trend of Euroscepticism since then should not be neglected. The implications are significant:
  • Today, 1 out of 10 Europeans is British. Brexit will diminish the EU’s population by 12.75% and lower by 0.9% its share in the total world population, according to data from Eurostat. This means that the British exit from the EU will lead to a decrease to where it was 10 years ago, the population of Britain being equivalent to the population of the states that joined the EU in 2004, minus the Czech Republic;
  • The surface of the European Union will be reduced by about 250 thousand km², thus over 5%, while it will lose a potential sea route and the second largest of its ports by the amount of goods shipped;
  • The EU will lose the second largest economy after Germany. The UK contributed with 2.6 trillion euro to European GDP in 2015. Therefore, it will suffer a decrease of over 17%,/ While Britain is not going anywhere, and continental exporters are not keen on shunning an importer running a perennial trade deficit of billions of euros (35 billion pounds deficit in goods in the first quarter of 2016, of which two thirds with EU countries like Germany, with the silver lining being a surplus in services, based on finance, worth 21.4 bln, leading to 13.3 bln total deficit), the European Union has failed to recuperate the losses sustained during the 2008 crisis, when European GDP decreased by about 6%. Beyond the risk of destabilizing the economy, the EU will lose its leading economic position;
  • The EU budget will be reduced by over 13%. This must either be compensated or spending will have to be reduced. The UK is the third largest contributor to the EU budget today;
  • Intra-regional trade will be affected. According to Eurostat data, in 2015 the UK ranked 3rd in terms of share of total intra-EU imports, with over 300 billion euro, representing 10% of the total. Also, it had a share of 6% of total intra-EU exports, with 184 billion euro.
  • The EU will lose the leading state for attracting foreign direct investment. According to the World Investment Report in 2015 conducted by UNCTAD, the UK was ranked first in the EU in terms of FDI inflows, amounting to 72.24 billion dollars in 2014.
  • The EU will also lose the biggest stock exchange centre.

Not only will the European Union be diminished, but also the UK. The effects of political uncertainty were felt before the referendum and now they are getting bigger. The British pound sustained losses in the run up to the referendum and long after, though some might see this as a positive development.

As regards Romania, the Brexit means uncertainty and likely more stringent employment conditions for the nearly 180 thousand Romanian workers registered by the British Office for National Statistics, but it also means additional fees for the 5% of total Romanian exports that are currently going to the UK.

The independence which the British displayed is typical of the 19th century. What is more, the only way for Britain to become a world leader has been only within the Union. Even the US, which applied such a strategy and consolidated its leader position in the world, is right now pursuing a strategy of heightened interdependence, by signing or negotiating economic, political, and even military agreements, in order for it to secure its standing in the face of ascendant global competitors.

[1] Great Britain Electoral Commission, EU referendum results, 2016, available at: http://bit.ly/2fpkZgq

 
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OEconomica No. 1, 2016