Brexit; the Day After

A Delicate Balance is to be struck while formulating a new model of relationship Britain could have with the EU if the Brexit takes place

Investors struggling to navigate the foreign exchange waters have a new concern: the possible exit of Britain from the European Union, also known as “Brexit”.

This year, June 23rd, there will be a referendum on whether Britain should remain in the European Union, or leave it. The British public’s decision on whether the UK should remain within the political and economic bloc of 28 European countries isn’t an easy one, charged with emotion and nostalgia, alongside the will for cold-and-calculated solutions which will be healthy for the British economy and political status.

Since the wording of the referendum question has been formulated and approved by the MPs, “Should the United Kingdom remain a member of the European Union or leave the European Union?“, the British public and officials have essentially polarized themselves, with the words “remain” and “leave” echoing across the UK. According to recent polls, the public is quite evenly split.

Those voting “remain” believe that it is in the UK’s best interest to stay within the bloc; making trade easier. The controversial issue of immigrants is seen by many within this camp as fueling economic growth by adding young and motivated employees to the workforce. Those not in support of the Brexit also fear that Britain’s image could be harmed upon leaving the bloc, thus leaving it vulnerable to an unknown chain of events.

Those voting “leave” feel that Britain needs to be set free, and that being part of the bloc is hampering its development and growth. The rules and regulations of the bloc are too limiting in their view, not to mention the billions of pounds in membership fees which are paid every year which could be of better use. Another strong argument for Britain to leave the EU is to stop the inflow of immigrants; taking back control of its borders, and keeping more jobs for nationals.

In the economic arena, one thing that everyone seems to agree on is that Britain’s exit would cause waves of uncertainty and hence volatility in the markets, which would (at least initially) weaken the euro and the pound against the US dollar. Proponents of the exit believe that despite these initial shockwaves, it would be a move for the better, both politically and economically. Those who are against the move, obviously see the volatility as just another one of the damages.

A strong interest for all, in any scenario which may unravel, will be to keep uncertainty and hence unhealthy volatility, at bay.

Based on this, proponents are facing a challenge. They will have to reassure voters that leaving the EU won’t create economic turmoil beyond the initial shockwaves. If they wish to shift the scales in their direction, they would have to give the British public a clear image in their minds with regards to how the future relationship between UK and the bloc; which accounted to close to 45% of its exports in 2014.

This is in fact, the heart of the matter in the economic sense.

No member state has ever left the EU, and therefore the vast majority of the public and politicians are not sure what to expect. However, there are some existing models which could be explored, and perhaps serve as a basis for a possible future model for the UK-EU relationship, if it were to leave.

Being part of the EEA (for example Norway)

Norway is a member of the European Economic Area. It enjoys access to the single market, though pays fees and complies with bloc customs procedures. This model doesn’t seem to be one that would suit the UK relations with the EU post-Brexit. This is for the simple reason that an exit would be decided based on principles of sovereignty, and this layout with all its rules and regulations, simply would not justify the move.  Moreover, Norway is part of the Schengen Agreement which would not make sense for the UK; with the immigration issue being another one of the top reasons to opt for the Brexit in the first place.

Customs union with EU (for example Turkey)

Since the mid-90s, Turkey has been in a customs union with the EU. It shares the bloc’s common external tariff, and of course complies with all of EU’s product regulations and rules on competition and state aid. An arrangement of this sort would knock the UK backwards, as it is based on the country having no say or negotiation power with other countries. Turkey is a candidate to join the EU, and this is evident in the arrangement. Britain wouldn’t wish to have its hands tied with regards to trade with other countries, and overall this arrangement would be a demotion of sorts from the current situation.

A relationship governed by the WTO rules and regulations (for example the US).

In this arrangement, U.S. manufacturers face tariffs of 10% and farmers tariffs of up to 20% or more to get their goods into the EU. For the UK, this does not seem to be a viable option. British industries which depend on international supply chains wouldn’t be able to fit in to this model, and British prices of goods would be too high in the EU market. It would also put up prices of imports in the UK from the EU.

These models, among others, are ones being toyed with in the minds of those who picture the day after a possible Brexit. However, due to Britain’s unique position and history, there is no one model that seems to capture what a healthy situation would be for the UK.

It is widely understood and agreed that a delicate balance has to be struck the day after the possible exit of the UK from the bloc. The closer the UK can get to the EU’s internal market, the more economic gain it will enjoy, and most importantly at this time: it will benefit from a smoother transition from the current situation. Yet access to that internal market comes with strings attached; obligations which may seem as a threat to sovereignty by those who support the exit. The further the UK is from the internal market, the freer it will be to make its own rules—but there will be a greater risk of economic damage.

This is the equation which the public and policy-makers will be dealing with in the run up to June. One thing is for sure; there has been no parallel case and probably will not be one in the future. This means that if the Brexit takes place, we will probably witness a new arrangement which hasn’t been seen before, and needless to say – the way the story will unfold for the two economies as a result will be even more fascinating.