On June 24, 2016, Britain voted in a referendum to decide whether or not they wanted to continue membership in the European Union (EU). The question has come to be known as “Brexit.” In a shocking outcome, the British populace voted to leave the EU, i.e., in favor of Brexit. The event has reverberated around the world, shocking political elites everywhere, and generating upheaval unprecedented in its existence. Britain’s “shot heard around the world.”
The “leavers,” Brexit supporters to withdraw from the EU, focused on all the negatives of membership, and there is certainly no lack of them. Yet since the result of the vote was announced early Friday morning, domino after domino has seemed to fall not just across the pond, but in international markets. How the EU affects Britain was the center of debate during the referendum, but the vote has now caused political and economic chaos.
To generalize, current news coming out of Britain is overwhelmingly negative. It’s no surprise considering the country is so sharply divided, with 48.11% of voters against Brexit and 51.89% for independence. So I beg the question: Is all this tumult worth the benefit?
Shortly after the vote was announced, Prime Minister David Cameron resigned after being a major proponent of the “Remain,” anti-Brexit group, urging Britain’s continued existence as part of the EU. It must be noted that the Brexit sides, question of continued EU membership, split the incumbent Conservative Party. Many members of Cameron’s cabinet openly campaigned Brexit.
Former London Mayor Boris Johnson led the opposition, the Leave group, despite the dissent of many members of his own Conservative Party. Just a year ago, Johnson was a weapon for the Conservatives in the general election that donned Cameron a second term as Prime Minister.
Northern Ireland and Scotland voted to Remain, while England and Wales voted to Leave. Cities in England, particularly London, voted to Remain while rural and suburban towns voted to Leave; a significant majority of young people across the UK voted to Remain while older voters generally voted to Leave.
Since the results, individuals have rallied in London to sign a petition that seeks to override the original vote. In Scotland, First Minister Nicola Sturgeon spoke out that the Scottish people see their future as part of the EU. She also emphasized that it would be undemocratic for the region to be “dragged” out of the EU, and that a second vote must pass through Scotland’s semiautonomous Parliament before the overall vote becomes realized. Rumor has also spread that perhaps a second referendum declaring Scotland free from Britain might resurface, though Johnson, in an opinion article for the conservative Telegraph, argued that he does “not detect any real appetite to have another one soon.”
On June 27, Standard & Poor’s slashed Britain’s credit rating two grades from AAA to AA. Though the cut is alarming, AA ratings are more common than AAA assets in this post-2008 era. With Japan and the US similarly facing recent credit downgrades, critics claim that creditworthiness comes more from factors regarding willingness to pay, not necessarily a country’s ability to pay. But it’s still a downgrade that directly followed the passing of this referendum.
Yet it’s worth noting that the negative aftermath has detracted from the positivity that this referendum ensures, the positives that explain why so many voted Leave.
If any country were likely to declare withdrawal from the EU, Britain would be the one.
Since Britain first entered the union, then known as the European Economic Community, in 1973, the country has half-heartedly embraced their membership. They opted out of monetary unity; they receive rebates on their contributions; and they’ve opted out of treaties. Some have described their time in the EU thus far as a trial period. It’s at this current moment that they realized that it wasn’t working out for many of them, and they voted to Leave.
In 1975, Prime Minister Harold Wilson of the Labour Party issued a referendum that, even then, questioned Britain’s membership. 67% voted in favor of staying, a slim margin that seems to mimic the sentiment of the referendum of today, though the majority now leans the other way.
Prime Minister Margaret Thatcher in 1990 clearly articulated the sentiment of Britain. At this time, the EEC was renamed the EU and the Maastrict Treaty, establishing a single, union-wide currency, became part of the agreement. Archives reveal that Thatcher spoke about the topic in a sarcastic tone—too unbelievable.
Britain was by far the most recalcitrant member in the negotiating process. Thatcher postulated, “What does a political union mean?” She cautioned that the political initiative was only a vague outline of a goal to be obtained rather than a concrete plan worth considering, which would take into account the continent’s historical diversity and the security role already played by the North Atlantic Treaty Organization.
Though the political nature of the union was by far the most buzzing and advertised topic, a closer look reveals how the main objective was actually monetary integration, also the objective unrealized in Britain. Italian Prime Minister Ciriaco de Mita said Italy’s decision to enter the union was not an economic one, but in her own words, “This was a political decision.” Yet Thatcher seemed to be the only one who understood the true motives of the union: economic motives. “I don’t think there’s any need for a single currency,” she explained.
Thatcher specifically wanted the economic benefits of free trade without the baggage of political and monetary unity. Her opinion was not an isolated one among the British populace. All three of her potential successors at the time of the next election similarly expressed a degree of reluctance towards European economic and political unity. The following Prime Minister, John Major, said that he could not imagine a single currency for the 12 nations of the EEC for at least 15 years. He also said that proposals for a single European currency and monetary policy hold massive economic risks.
That was then, but even in more recent times, membership has also been confronted with negativity. The EU project has become one of expansion in countries and in oversight of increasing amounts of political and economic control.
As of today, the British live different lives than most of their EU counterparts. Their attitudes towards markets, both product and labor, embrace free market definitions. Their currency, the Pound, is also different than that of most of the other countries in the EU who use the Euro. In addition to opting out of the Euro, Britain has opted out of other EU policies, such as the Schengen Treaty which relaxes border controls.
For Britain, membership in the EU is costly. Out of the 28 total members, Britain contributed 12.57% of the EU budget for 2015, or about £8.5 billion. While Britain ranks third in largest contributed amount to the EU budget—behind Germany and France—unlike the other countries, Britain does not receive as much money back from the EU as the other big two. Each country in the union receives rebates, or money back, on their contributions for development, but most subsidies are provided as agricultural subsidies, a market less developed in Britain. Thus, Britain secured membership as a net contributor to the EU.
While it is Britain’s largest trading partner, the EU’s recent turn in attention from the trading bloc to the environment, human rights, education, and research has taken a toll on Britain. A BBC guide to the EU explains how critics of the bureaucracy say that the EU has robbed the country of much of its power and autonomy, its regulations are costly, and, without the EU, Britain would be able to sign trade deals with more developed nations such as China and India. In other words, membership has become a rabbit hole of British pounds for taxpayers.
The massive amount of immigration into the UK has also caused discontent, specifically among the older generations living in the country, disrupting their way of life. Under EU law, Britain has to allow all EU citizens unfettered access to their country and even pay them welfare benefits if they qualify. This system is unacceptable to the Brexiters. On the other side sits the younger populace who, instead of embracing a national identity of being “British,” embrace being “European,” and love the ability to move about the EU unrestricted.
Even proponents to Remain are not blind to the innumerable shortcomings of the EU. Cameron, part of the Remain campaign, proposed continued membership contingent on amendments to the rules, including lower benefits paid to migrants and greater protection for states not in the Eurozone.
In Johnson’s opinion piece for the Telegraph, he explains that, for the 17 million people who voted to leave in the referendum, the dominant issue among them was control: “a sense that British democracy was being undermined by the EU system, and we should restore to the people that vital power.” The vote resounds with a sense of nationalism, fueled by belief of the sheer greatness of Britain. “By leaving the EU, we can rightly so take back our country,” said Johnson. The same mentality resounds from Nigel Farage, leader of the UK populist right-wing Independence party explained, “The real opportunity from Brexit is that we have left a falling political union in Europe and we can now start to reengage with the world.”
Johnson and those on his side note the economic strength of Britain at this current time, making Brexit is an appropriate move. The Pound to Euro exchange rate is higher than it was in 2013 and 2014, and, even more recently, last fall. Johnson cites this information in his analysis that the British economy is strong—even donning credit to reforms implemented by Cameron, his long-time friend, but now referendum-divided foe.
But it seems that Leave constituents are citing perhaps the only positive that still holds to their argument. In relation to the US Dollar, the Pound has withered significantly. Stocks have plummeted and become highly volatile. Although proponents of Brexit relay that these falls in value are just the short term consequences, that, though the exchange rate has plummeted, the long term benefits appear fruitful. Freedom from burdensome EU rules and regulations and control of its borders will allow the UK economy to flourish and, at a minimum, restore sovereignty to the UK people. Of course the short term losses will end up being OK in the long term. The world would be on a constant downward trajectory, if otherwise.
The decision to leave the EU has hit equity markets worldwide. British stocks, particularly bank stocks, were hit hard, but so were European and US stocks. Other proponents argue that the market tumble caused by Brexit has proven the strength of the US market. They argue that this sequence of events is, in turn, a positive for the US economy. While the Dow Jones Industrial Average did fall 3.4% on Friday after announcement of the vote, this loss is minimal compared to the 7% fall in the Stoxx Europe 600, its largest fall since the 2008 financial crisis.
Nevertheless, US markets are better off if global markets are also better off. So, is a disruption in the status quo worth proving the vitality of this country?
The disruption in economic confidence has been large. Brexit will force the UK to renegotiate all of its economic and political relationships with not just the EU but the entire world. UK external relations have been driven by the EU for over 40 years. Separating and establishing new relationships will be costly and time consuming, and could end up less advantageous than those negotiated as part of the EU.
According to Farage, a minor recession is soon to come in Britain, regardless of Brexit. “Our growth forecasts are down. Our public-sector borrowing is still not under control at all,” he told the Sunday Telegraph. Yet Farage is ignoring the blaring causation. As soon as voting statistics were released, markets tumbled. A recession might have been in Britain’s forecast, but perhaps one not caused by Brexit. The one now likely to ensue is likely to be much larger than what would have occurred naturally. Both the International Monetary Fund and the Bank of England, the UK’s central bank, have forecasted a sharp economic downturn as a result of Brexit.
Since the fall in markets, distress from investors has indeed diminished and stabilization awaits. The DOW jumped 284.96 points on June 29, five days after the results of the referendum were announced. Yet the index has yet to return to its previous high before the referendum. Strong demand for government bonds (more secure investments compared to stocks), the still rising price of global currencies, namely the Yen, and the price of gold (another safe haven) prove that markets and investor sentiment is still unsettled.
Now, all that Britain awaits is a pro-Brexit prime minister. Johnson once assumed the title of the “odds-on favorite” as the next leader of the Conservative party, but withdrew his name in the lottery on June 30. Home Secretary Theresa May is another expected contender, yet unlike what’s expected, she sided with prime minister Cameron in regard to Britain’s continued EU membership. Farage also cites Michael Gove and Liam Fox as possibilities.5
An only imaginably awkward EU summit meeting was held in Brussels on June 29. A sense of denial seems to emanate from the union and lawmakers. EU leaders and still-prime-minister Cameron have resigned from triggering Article 50 which will officially withdraw Britain from the EU. Thus, the other 27 members are in a state of limbo, deciding what to do with Britain in the meantime.
Brexit, therefore, carries more cons (economic uncertainty, potential damage of new trade relations with the EU, lack of access to the EU single market) than pros (control of the borders, renationalization of laws and regulations, less monetary flow to the EU). Perhaps what weighs the negative side down the most is not just that Britain passed the referendum, but that it was passed at such a slim margin. Neither side is cooperating, bringing only more unrest. The country is now without a supportive leader. Half the country is in denial of the happenings. Politician after politician is resigning. (Or, in the case of Jeremy Corbyn, head of the UK Labour party, is voted out by a no-confidence motion—only to personally ignore it! What chaos.) Economies have faltered and, after a week, are only minimally beginning to see positive turns.
Likewise, the true pejorative tone of this event is the looming uncertainty: uncertainty about Britain’s trade, notably with the rest of Europe, the enemy of a fate just sealed, uncertainty about new leadership, uncertainty about the shape of their economy down the road, among others. The ramifications are profound. Though uncertainty is a facet that will sort itself eventually, there is no ignoring the true disarray this event as caused, a disarray unanticipated. Is a truly uncertain future worth the benefits of so-called freedom from the EU?