Brexit: Prospects and Consequences

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by Xueting Zhang 

cameron-and-schulzAs a potential British exit, or “Brexit,” from the EU looms, the future of both Britain and the EU are at stake. The UK is expected to hold a referendum on its now-renegotiated EU membership in June 2016, and the current and projected benefits and costs of membership are key aspects of the Brexit debate. Polls show that “stay vs. leave” opinions are approximately split half-and-half. Even though the UK has always been the EU’s most reluctant member, the Eurozone’s pursuit of deeper integration, the ongoing migrant crisis, and British Prime Minister Cameron’s inability to fully deliver on his agenda to reform Britain’s relationship with the Union have elevated the Brexit question to the point where a withdrawal may actually occur.

Britain and the EU today: A mutually beneficial relationship

While it has not adopted the euro, the UK is the second largest economy in the EU and an integral member of the EU’s Single Market. At the same time, the EU is the UK’s largest trading partner and the high degree of market access facilitated by membership in the Single Market is very important to Britain’s economy. UK-EU cooperation on security challenges such as terrorism and Russian actions in its “near abroad” is indispensable to both sides. As the EU’s most populated city, moreover, London is a political and cultural symbol.

The UK and EU also complement each other at the strategic level. When negotiating free trade agreements with third parties, the size of the European Single Market allows the EU to negotiate deals from a more advantageous position. As one of the five permanent members of the UN Security Council, the UK, like France, still holds a veto over major decisions on international security issues. Further, the UK’s “special relationship” with the U.S. has given it an outsized voice in U.S. foreign policy decisions while providing the EU with similar voice opportunities.

Even as British membership benefits both the UK and the EU in the aforementioned ways, two key issues are fueling the Brexit debate: the integrative direction of the Eurozone and mass migration.

The Eurozone Crisis and deeper integration

Britain’s refusal to adopt the euro may have helped it avoid the worst of the Eurozone Crisis. Nevertheless, the crisis negatively affected the British economy, raising the question of whether or not it will reap benefits from the EU’s Single Market into the future. Critics of the EU and Brexit campaigners have attacked the Union for placing unnecessary regulatory burdens on the UK that undermine the British economy. They further argue that leaving the EU would not harm the British financial industry, and that the UK has plenty of foreign markets to seek outside of Europe. Cameron and “in” campaigners, in contrast, underline the importance of the Single Market for the British economy while recognizing that further Eurozone integration could harm Britain’s financial industry.

Mass migration

Since January 2015, a rapid rise in migration from the Middle East and North Africa has strengthened Britain’s euroskeptics. Cases such as the sexual assaults in Cologne, Germany by migrants on New Year’s Eve prompted calls to further limit their admission to the UK for the sake of security. Unemployment is another major reason for heated disputes over migration in the UK – not only because the stream of migrants adds to the unemployed population, but because nationals have been suffering from a lack of job opportunities since the global financial and Eurozone crises. Increasing employment opportunities is difficult to manage because of current economic conditions and, in some cases, rejection on racial or cultural grounds. British benefits for migrants, which are criticized by Brexit campaigners and generally not discussed by “in” campaigners, are a central issue in this context.

The consequences of a Brexit for Britain and the EU

If Britain exits the EU, it would have to renegotiate its access to the Single Market. Though projections differ, comprehensive studies on the impact of a Brexit without the negotiation a new agreement – which would, in any case, be negotiated on terms less favorable to the UK than the current arrangement – found that national and per capita income would fall in both the UK and EU. It would also leave Britain outside the Transatlantic Trade and Investment Partnership (TTIP) agreement currently under negotiation between the U.S. and EU. For Britain, exclusion from the TTIP would force it to forego gains to economic output and employment.

Beyond the negative effects that a Brexit would have on the British economy, it would also have a damaging strategic impact. A Brexit would reduce UK and EU leverage in negotiating new free trade agreements with third parties. It would heighten insecurity by diminishing the UK and EU in the face of a more aggressive Russia, terrorism, and other threats that they currently address jointly. Continental Europe would be “relegated to second rank status” in economic, defense and overall foreign policy importance. There is also the risk that the U.S. would downgrade the UK and EU as viable partners.

The road ahead

A Brexit may address the concerns of those who fear migration, but it would undermine the British economy, its security, and its political influence. Similarly, the EU would lose a member of significant economic, defense and political weight, diminishing the Union. While Cameron recently renegotiated Britain’s relationship with the EU, the concessions he gained on migrant benefits, which will be cut for seven years, fall short of his call for permanent cuts. On Eurozone integration, Cameron obtained a delaying mechanism rather than a veto over integration that could harm Britain’s financial industry. As Britain heads into a June referendum on its revised relationship with the EU, and “out” campaigners seize on these shortcomings, the outcome remains far from clear.

Xueting Zhang is a Transatlantic Economy and Security Analyst at the Streit Council.  Photo credit: European Parliament

 

 

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