To begin the story for the uninitiated, some basic facts. What is Brexit? It is the abbreviation of “British Exit” from the European Union (EU) that mirrors the term Grexit — a term which was coined and used by two Citigroup’s economists in February 2012 to refer to the possible exit of Greece from the EU. What is the European Union? The EU consists of 28 countries (out of the 51 countries, including Russia, considered politically a part of Europe) that have signed a treaty to become a political trade and economic union. The EU treaty provided for a (common) European Parliament and European Council which consisted of representatives of the member-states. This does not exhaust the idea of the EU. The Euro Area (EA) is a subset of the EU, which is a monetary union of 19 of the 28 countries which use the common currency, Euro. That is, not all EU members use the Euro. Britain is a EU member, it is not part of the EA. It does not use the Euro and has retained its own currency, the Pound Sterling. EU members account for 16 per cent of world imports and exports. It is the largest trading bloc in the world surpassing the US. In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace, reconciliation, democracy and human rights in Europe. The EU evolved over decades and reached its present model in 1992.
Two Referendums: 1975, 2016
Britain, under Conservative Party rule, joined the EU in 1973. But, in the 1974 elections to British Parliament, the Labour Party promised a referendum on whether Britain should continue in the EU. In the referendum held in 1975, more than two-thirds (67 per cent) of the British voted to continue in the EU. When the British had already overwhelmingly voted to continue in the EU in 1975, why a fresh referendum now in 2016? This time around, the Conservative Party, which had first put Britain in the EU in 1973, promised a referendum on whether Britain should continue in EU or not. In 2013, David Cameron, the Conservative Party Prime Minister, supported a referendum on the issue and said if the party was elected in the 2015 general elections, the country would hold the vote before 2017, if renegotiations for a better deal for Britain, did not work. Why did the Conservatives U-turn on the issue after four decades? The UK Independent Party (UKIP) was originally founded under a different name in 1993 to oppose Britain’s EU membership. The UKIP, which began surging in popularity in 2013, appealed to the Conservative vote base and emerged as a challenger to the Conservative Party in the run-up to the 2015 general elections. Following renegotiations between Britain and the EU, prominent conservatives, including some ministers in the Conservative government, began supporting the referendum. This was the background to the referendum which was held day on Thursday (June 23, 2016). The referendum had just two questions — whether to be IN or OUT of the EU. The opposing ‘Remain in EU’ and ‘Leave EU campaigns’ drew support across parties. Save the UKIP, all parties — the Conservative, Labour and Green parties — were divided on the issue, while Prime Minister David Cameron staked himself to support the Remain campaign.
Brexit and Britain
British voters dealt a body blow to the British government, business, EU and world markets by voting and opting to leave the EU. The vote share of Leave EU was 51.9 per cent and the share of Remain in EU was 48.1 per cent. The naysayers to the EU secured 1.3 million more votes over the yea-sayers out of the 33.5 million votes polled. The first outcome of the referendum is the spectacle of the vertically divided Britain — a direct contrast to the 1975 referendum when 67 per cent of the British voted to remain in the EU. While, in 2016, 53 per cent of England voted to Leave, only 31.5 per cent of England voted for Leaving in 1975. And while 52 per cent of Wales voted to Leave EU, only 35 per cent voted earlier for Leaving. England and Wales have massively shifted from Remaining in EU to Leaving EU in 40 years. More than vertical division, the geographical division of Britain is disturbing. While England and Wales have shifted from Yes to EU to No to EU, Scotland and Ireland have opted for Yes to EU — Scotland had 62 per cent Yes votes and Ireland 56 per cent. Other than the two, of the rest of Britain, only London voted 60 per cent Yes to EU. Of the 12 regions of Britain nine opted to say No to EU, with voting margins ranging from 52 per cent to 60 per cent. It is a massive ‘no’ from England and Wales. The geographical division of Britain may eventually risk political division.
Why ‘No’ won?
While the issue in the referendum was only the economic union and economic issues, the real issue that appears to have turned the tables on ‘Yes to EU’ is the immigration issue. If there is any issue which is bothering most people in Europe, it is immigration. It has more than an economic dimension. It has cultural and political pull also. The referendum is not just an economic vote but also, even mostly, immigration vote. According to the well-known digital media house, Vox Media, the referendum involved seven arguments namely that, the EU threatens British sovereignty; it is strangling the UK in burdensome regulations; it entrenches corporate interests and prevents radical reforms; while the EU is a good idea, the Euro is a disaster; the EU allows too many immigrants; and Britain could have a more rational immigration system outside the EU. Vox Media says the ‘Leave’ campaign has often focused on emotional arguments about immigration. While the seven arguments may seem distinct and different, all of them seem intended to appeal to British national sentiments. Immigration had become a huge issue in Britain in the aftermath of the 2008 crisis. Vox Media quotes British journalist Douglas Murray as saying, “In recent years, hundreds of thousands of Eastern Europeans have come to Britain to do a job” which “undercut the native working population”. Vox says that Britain absorbed 333,000 new people net, in 2015 — a significant number for a country of Britain’s size. Vox adds that immigration has become highly politicised in Britain, as it has in the United States and many other places over the past few years. Anti-immigration campaigners like the UKIP have argued that the flood of immigrants from Southern and Eastern Europe has depressed the wages of native-born British workers. Some voters are also concerned about immigrants using scarce public services. Vox quotes Murray again saying that one of the causes for the great public disgruntlement is that Labour governments at the turn of the century “massively understated numbers (of immigrants) to be expected,” creating public distrust of current pledges to keep migration under control. Also, the amount which Britain contributed to the EU bureaucratic set up is $19 billion. The naysayers to EU argued for retaining the money in England. While everyone was worried about Brexit, no one thought it would happen. Most of the yea-sayers for EU pointed to the unforeseeable economic consequences of exit. They could not generate any sentimental attachment to the EU. Their economic arguments were finally rejected. Ultimately, more than economics, national sentiments have carried the referendum.
Consequences
Before the referendum vote, the Bank of England Governor Mark Carney called Brexit “the biggest domestic risk to financial stability”. Immediately after the referendum what Carney feared began happening. The British Pound plunged by 11 per cent to a 30-year low from $1.50 to $1.32 — the biggest one day loss after 4.1 per cent in 1992. The London Stock Exchange fell by 8 per cent. Barclays Bank and the Royal Bank of Scotland stock prices nose dived by 30 per cent. The Pound lost 3.3 per cent against Euro. Financial Times Stock Exchange (FTSE) futures tumbled by 9 per cent. The British government bond values fell. The shock hit all Europe markets. Euro Stoxx50 fell by 11 per cent. S&P Index Futures were down by 5.1 per cent. Frankfurt stocks fell by 8 per cent. The Euro itself slumped 3.2 per cent. If Europe lost, should not someone gain? Obviously, the Dollar gains. Japanese Yen gained 3.7 per cent. And so did gold by 8 per cent. Most of the numbers the are biggest one day losses or gains. Oil prices tumbled to $48 per barrel. Indian stocks always react to what happens anywhere. Brexit hit Indian stocks and also Rupee value, though not as much as was expected. But markets will be volatile for a while and settle over time. But Brexit has long-term consequences for Europe and also the world. Brexit has the potential to break the EU itself. If not break the EU, it can cause huge damage to the EA — and the Euro. The Euro is not a sovereign currency. It is at best a legally binding contractual promissory note. It cannot withstand sovereign currencies with Seignorage power. Both EU and EA are at perpetual risk in the future. Brexit also will have adverse consequences for globalisation which became a movement from the 1990s. There is a serious and secular fall in global trade in the last decade. The annual growth in global trade as a proportion of global GDP was 2:1 for 30 years between 1986 and 2006 — that is trade was growing at twice the growth of GDP. This helped a huge number of people in developing countries move above poverty. This is what made economists commend trade as the solution for poverty. The World Trade Organisation was founded on this formula. But global trade has been declining since 2007, and its growth fell equal to the growth of global GDP between 2007 and 2015. From 2015 the global trade growth is less than global GDP growth. This is now the biggest concern of the world. If trade does not grow and yield the results it had given in the last quarter of the 20th century and in the first few years of the 21st, the global economic order based on trade globalisation will come into serious question. Brexit is the first serious question on globalisation. If Donald Trump is elected in the US, and if Japan passes the Constitution amendment it is proposing to militarise, the world, in which India will play a major role, will be totally different. And that world will challenge the present globalisation philosophy, lifestyle, and structure spearheaded by the US and Europe. And more than trade if anything can hurt globalisation it is the immigration issue. Brexit is the first warning to the world here.
PS: Someone had tweeted that as most who voted for keeping Britain in the EU were youths, the future of globalisation is assured. But it can be the other way too in the future. When the youths who said Yes for Britain in the EU mature, they may vote like their elders and say No! No one thinks at 50 what one does at 25, isn’t it?
S Gurumurthy is a well-known commentator on economic and political affairs
Email: guru@gurumurthy.net