“You can go your own way…”
As the UK begins sorting out the details of its breakup with the EU, “Brexit” is certain to cause repercussions for many years to come.
The European Union as the world knows it will soon be gone after one of the largest players plans to leave by April 2019. Theresa May, Prime Minister of the United Kingdom, signed an Article 50 proclamation on March 29, 2017, effectively delivering a “Dear John letter” to the remaining 27 member states. Although a narrow majority of voters in the UK elected to leave the EU, this choice is certain to have substantial – and far-reaching – effects worldwide.
[A]ll actions must be based on treaties which are voluntarily and democratically agreed to by all participating nations.
In order to understand exactly what an Article 50 proclamation is, one must first understand what the European Union is and how it functions. Formed in the wake of World War II, the European Union is (currently) a collective body of 28 member states comprising most of Europe. Economic cooperation was the original purpose of the union. The theory is that countries engaged in commerce with one another become interdependent, and are more likely to avoid conflict. Before it became the European Union proper, the body was called the European Economic Community. Initially, there were only six nations involved: Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. Over time, other nations joined until the Community officially became the European Union in 1993.
Governance of the Union is straightforward: all actions must be based on treaties which are voluntarily and democratically agreed to by all participating nations. Representation is also key, with citizens of each nation represented in the European Parliament (the lawmaking body of the EU, akin to our Congress) while the nations as a whole are represented in the European Council (promoting political cooperation) and the Council of the EU (where policies are made). The main canons of the EU are freedom of movement of people and workers, freedom of movement of goods and currency, promoting human rights, and maintaining transparent and democratic governments.
Until about ten years ago, there was no way under the treaties of the European Union for a nation to leave once it joined.
Until about ten years ago, there was no way under the treaties of the European Union for a nation to leave once it joined. That changed when the Treaty of Lisbon was ratified in 2007. At this point in the European Union’s history, the number of member nations had expanded to 28, and the provisions of the previous treaties governing the European Union needed to be tweaked to meet the demands and requirements of modern times.
At this point, the Euro was still strong, Bulgaria and Romania had just joined the Union, and everything was on track for success. Little attention was paid to the provisions of Article 50, which outlined how a nation could leave the Union. Yet by the time Brexit – the term coined for the UK’s exit from the Union – was announced in 2016, the Greek economy had tanked and austerity measures to save it had failed, Russia had forcibly annexed the Ukrainian Republic of Crimea, wars were ravaging Syria and several other African and Middle Eastern nations, refugees were fleeing into the Union by the millions, and many began to question the stability and practicality of the European Union going forward.
“I don’t think it would be right for me to try to be the captain that steers our country to its next destination.”
The biggest proponent of Brexit – former London Mayor and current Secretary of State for Foreign Affairs Boris Johnson – pushed for a referendum in the UK to leave the European Union. David Cameron, then-Prime Minister of the UK fought zealously against Brexit and urged his country to stick with the Union. When the referendum to leave passed, Mr. Cameron immediately gave notice of his resignation, telling his country, “I don’t think it would be right for me to try to be the captain that steers our country to its next destination.” Once Mr. Cameron abdicated his position, a special election was held in Parliament and Theresa May was elected.
True to her word during her campaign, Prime Minister May forged ahead with invoking Article 50 of the Treaty of Lisbon. Her ambitions suffered a temporary setback when the British High Court ruled that she did not have the unilateral power as Prime Minister to invoke Article 50 without the blessing of Parliament. Prime Minister May was given the green light by Parliament on March 13, 2017, and delivered the letter invoking Article 50 to Donald Tusk, President of the European Council, just over two weeks later.
Article 50 of the Treaty of Lisbon allows any member nation to leave the Union whenever and if ever it wishes. The Article describes the procedure for leaving and gives the member nation two years to cut ties with the Union, unless the European Council unanimously decides to extend that period. The two-year countdown begins as soon as the Article is officially invoked.
There has been speculation that the UK’s departure will indeed take longer than the statutorily allotted two years. This stems from the fact that the UK will have to negotiate the terms of their exit with the other member nations. The potential crucial holdup is that each of the remaining 27 nations has can veto one, some, or all of the terms. Additionally, whatever terms are accepted must be ratified, not just in the Union’s Parliament, but in the parliaments of each individual member nation. Because the UK is a major economical player in the Union, hammering out the terms of their exit – as well as future trade agreements – will likely take a substantial amount of time.
There may be a ray of light for the UK economy, at least for the foreseeable future.
The gloomy forecast for the foreseeable future seems to already be permeating the UK’s economy. The service sector’s growth fell to a five-month low in early 2017 and the value of the British Pound fell 15%. Currently, £1 equals about $1.25, down roughly $0.29 since July of 2015.
However, there may be a ray of light for the UK economy, at least for the foreseeable future. Trade deficits in the UK have leveled off, the unemployment rate continues to drop, and wages continue to increase faster than the cost of inflation. PricewaterhouseCoopers predicts that the worst of the effects will subside by 2020, and that the UK will only fall from 10th to 9th in global purchasing power rankings. Further, they predict that the UK will fall from 5th to 9th in unadjusted gross domestic product, but that it will become the fastest-growing of the seven major international economies by the middle of the centuries.
When [the UK leaves], this financial void will have to be filled by other nations.
While the UK may be facing sunny skies in the future, the rest of the EU will feel the pinch of their absence. In 2016, the UK contributed €19.4B ($20.7B) to the Union. When they leave, this financial void will have to be filled by other nations. Since Germany is the largest member nation of the Union, it will likely bear the brunt of this burden at an estimated € 2.5B ($2.67B). A loss of liquid funds is not the only gut-punch that the Union will receive: trade will also suffer. The UK exports €20B ($21.3B) more in services than it imports, and so this loss will also be felt by the remaining 27 nations. Additionally, foreign investors send over half of all the Union’s investment funds to the UK, amounting to approximately $56B per year between the years 2010-2014. The UK is highly attractive to foreign investors, and the Union will have to find ways to recover from this loss as well.
Whether Prime Minister May’s signing of Article 50 has a butterfly effect on the U.S….remains to be seen.
As for what effects the United States will feel in the wake of Article 50 finally being triggered, it seems to come down to a coin toss. Economic uncertainty makes investors and consumers nervous, and volatile markets are bad for business. American consumers drive the train of economic activity in the United States, and if they are not putting cash into the registers, the economy stalls. Americans spend more money when they are confident in where the country is going; so the happier they are, they more cars, homes, etc. are being bought (and manufactured). When they get nervous, they pinch pennies.
There is a great deal of instability in global stock markets, and Brexit is playing a key role in causing that. If the markets continue to churn in chaos, American consumers may become much more conservative in their spending which adds to the problem. Job growth in the United States slowed in 2016, but the most recent data shows that February had a steady increase in employment. Whether Prime Minister May’s signing of Article 50 has a butterfly effect on the U.S. employment rate remains to be seen.
There is a double-edged sword effect regarding the U.S. dollar. As previously mentioned, the British pound fell in value following vote to leave the Union. This increased the value of the American dollar, which is good…and bad for the United States. When the dollar is strong, Americans traveling abroad can get much more for their money. This can be a boon for travel agencies, airlines, and international tourism.
The flip side of the coin is that a strong dollar hurts U.S. businesses because it makes products they sell to other countries that much more expensive and harder to move. Thus, sales for major U.S. companies such as Apple, John Deere, Caterpillar, Coca-Cola, and Nike suffer. A strong dollar lessens U.S. exports, which can tempt the economy back towards a recessive state. The U.S. is just beginning to recover from the last recession, so there is a real danger if the dollar continues to rise in value in the wake of Brexit.
One hope to counter this risk is the American consumer. If the dollar is strong, domestically-made and imported items are cheaper, which may entice consumers to keep spending their dollars in-house. However, if fears of global economic uncertainty outweigh the American spirit, there may be troubling times ahead for all as the UK breaks up with its longtime partner, the European Union.
