Over the last few weeks, the world has felt the economic effects of Brexit. The Dow Jones industrial index dropped six hundred points, the British Pound Sterling is the lowest it has been since 1985, and the vote caused the prime minister of Britain, David Cameron, to resign. While most experts are concerned with the immediate economic impacts of Brexit, the fact is that the vote was merely intended to give notice of departure to the European Union, and now the United Kingdom is faced with the dilemma of figuring out how to structure their political and economic relationship with the European Union and the world.
On June 23, the people of Britain voted for a British exit from the European Union (EU). Britain posed the vote through a referendum that gained notoriety across the globe. The short hand tag line, Brexit, is the term given to the United Kingdom’s act of leaving the European Union. Brexit has dominated the media from news to late night comedy and it recently broke the record for the “most searched text” in Google last month, unseating the previous record holder, the word “porn.”
While Britain has been a part of the European Union since 1973, the country has threatened to the leave union before.
The EU is a hybrid political-economic union between twenty-eight different nation states. EU law was incorporated into British law pursuant to the enacting of the European Communities Act (ECA) of 1972. The EU was originally created in 1992 pursuant to the signing of the Maastricht Treaty. The Treaty diagrams the three-pillar structure, which depicts how the union operates and incentivizes the implementation of sound economic policies by the member states.
So the question now becomes, “Why did Britain vote to leave the European Union?” Although Britain joined the European Economic Community in 1973, there has always been a segment of the nation that has been suspicious of complete assimilation into the European Community. While Britain has been a part of the European Union since 1973, the country has threatened to the leave union before. After the financial fall-out from 2008, British politicians considered leaving the union because they did not want Britain to be impacted as badly as the rest of continental Europe; it also did not want to be left footing the bill to bail out other European economies that were not as stable as Britain. Since 2008, the public’s skepticism regarding the actual benefits of the union has increased. A significant portion of the public felt that the European Union robbed individual countries of their decision-making power by delegating this process to the unelected bureaucrats of the European Union.
The topic of immigration has become a hot button issue in Britain. Nigel Farage and Boris Johnson have opined that the influx of migrants from poorer countries in Europe has led to a depression in wages for the working class native citizens.
Other Advocates of the Brexit have suggested that leaving the EU will help reduce the nation’s budget since the country will no longer have to make contributions into the EU budget. This hypothesis is still disputed by many. Open Europe, a think tank that specializes in European economics, estimates that even if the United Kingdom departs from the EU, implementing the necessary regulations and substitute framework will only cost six percent less than what they currently spend with the EU.
Another reason for the British public’s desire to break from the EU is immigration. The topic of immigration has become a hot button issue in Britain. Nigel Farage and Boris Johnson have opined that the influx of migrants from poorer countries in Europe has led to a depression in wages for the working class native citizens. Citizens feel that they cannot curtail this influx through law since the EU bureaucrats regulate issues of immigration within the EU. Therefore, many in the U.K. believe that meaningful changes can only be made through leaving the EU altogether.
…the vote to leave the EU was merely declaratory and there will not be any immediate consequences as a result of the vote
Within the EU’s Treaty is an exit clause under Article 50. The clause states that any state may withdraw from the Union “in accordance with its own constitutional requirements.” The article requires that the withdrawing nations give notice to the EU council so that the council and withdrawing state may negotiate another agreement setting out the arrangements for withdrawal as well as the framework for its anticipated relationship. After an agreement is put in place, Britain may then formally split with the EU. In the interim, EU law will still govern until a new agreement is put in place. That agreement has to be completed within two years once Article 50 is triggered.
In light of Article 50, the vote to leave the EU was merely declaratory and there will not be any immediate consequences as a result of the vote. Over the next two years, the UK will have to take additional actions in order to complete the split and avoid economic disaster.
First, Britain will have to figure out how they will interact with the EU and achieve a deal that offers the most benefits to the British people. Britain could create a custom deal with the EU, but it is likely that they will make a deal that is similar to other nations in Europe that are not formally in the EU.
The most popular model that many are suggesting is for Britain to emulate the Norway model. Norway experiences some benefits from membership such as permission to participate in the EU’s common market. Norway is able to access the EU market because of the EEA agreement of 1994. The EEA agreement ensures the free movement of goods, services, capital, and people across the 28 states of the EU plus Norway, Iceland, and Liechtenstein. However, Norway has to accept the right of EU citizens to live and work within its borders without restriction. Given that a large sect of the UK wanted to break away from the EU in order to limit the amount of incoming migrants, it seems that entering into an agreement like the one in Norway may not gain support from the voters.
Another detriment of the Norway model is that the country does not have the ability to vote or alter rules and laws within the EU. Norway has representatives but their participation is only meant to influence the entities who actually have the power to vote and affect change.
Alternatively, Britain could implement a Swiss framework. Switzerland has an agreement with the EU that is composed of 120 different bilateral agreements. The benefits of the Swiss model consist of access to the EU marketplace, participation in research and education programs, and association with EU policies on borders and asylum. Switzerland’s ability to access the EU market is selective and permitted only in specific industries.
Adopting a framework for trade and law with the EU is the first step to help stabilize economics between the two entities, but Britain will need to take additional action in order to trade with non-members of the EU.
Time is the biggest enemy to incorporating an agreement like the one in Switzerland. The 120 bilateral agreements were the product of negotiations that lasted six years. Accomplishing what Switzerland did within a two-year time frame will be incredibly difficult.
Adopting a framework for trade and law with the EU is the first step to help stabilize economics between the two entities, but Britain will need to take additional action in order to trade with non-members of the EU. As a member of the EU, Britain benefited from trade deals conducted by the EU with other non-EU nations. When Britain’s departure from the EU is finalized, Britain will have to re-negotiate trade deals with the non-members of the EU as well. Britain has conducted trade with non-EU countries through the agreements established by the EU since 1972. In order to engage in commerce with those entities again, the Britain will have to re-draft and pass new agreements in regards to every individual non-EU member.
The people of Britain have spoken and they want to break away from the European Union. A lot of work has to be done in the coming two years and there is no anticipated result, as there appears to be issues with all of the plans.
To make matters worse, the people of the UK will have to undertake forming a new relationship with the EU without the two politicians, Johnson and Farage, who advocated and persuaded the nation to break from the EU in the first place. Johnson has announced that he will not seek the office of Prime Minister and Farage has resigned as chairman of the UKIP party, the party who has championed the Brexit. Whatever the model or agreement between the EU and the United Kingdom, both entities need to accommodate the other’s needs. Both entities reciprocally benefit from each other and an agreement that does not promote free trade and flow of people across the borders will have a negative impact on their respective economies.