Topic: The Brexit question: Britain on the edge
Topic in Syllabus: GS Paper 2: International Affairs
Over the past week, a 2015 tweet by former British Prime Minister David Cameron has been widely reshared online. “Britain faces a simple and inescapable choice — stability and strong Government with me, or chaos with Ed Miliband,” he wrote on May 4, before the general election. Mr. Cameron won that election decisively, but the rest of his prediction has been looking darkly comic as Britain continues to stumble from one political crisis to another.
Definition of ‘Brexit’
- It is an abbreviation for the term “British exit”, similar to “Grexit” that was used for many years to refer to the possibility of Greece leaving the Eurozone.
- Brexit refers to the possibility of Britain withdrawing from the European Union (EU).
- The country will hold a referendum on its EU membership on June 23.
- It is a word that is used as a shorthand way of saying the UK leaving the EU – merging the words Britain and exit to get Brexit, in the same way as a possible Greek exit from the euro was dubbed Grexit in the past.
The Brexit timeline:
What is the EU?
- The European Union is a unified trade and monetary body of 28 member countries.
- It eliminates all border controls between members.
- That allows the free flow of goods and people, except for random spot checks for crime and drugs.
- The EU transmits state-of-the-art technologies to its members.
- The areas that benefit are environmental protection, research and development, and energy.
- Its purpose is to be more competitive in the global marketplace. At the same time, it must balance the needs of its independent fiscal and political members.
- The EU’s 28 member countries are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. That will drop to 27 when Brexit causes the United Kingdom to leave the EU in 2019.
- The euro is the common currency for the EU area. It is the second most commonly held currency in the world, after the U.S. dollar.
Key points from the Brexit draft deal:
- Britain will formally exit the EU on Friday, March 29, 2019, at which point it will cease to be involved at any level in EU decision-making.
- However, under the draft agreement, the UK will stay inside the bloc’s single market and remain subject to EU laws and regulations until the end of December 2020 while the two sides attempt to iron out a new trade relationship.
- During this period, all existing EU “regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures” will continue to apply within the UK, including rulings made in the Court of Justice of the EU.
- In effect, the transition period provides the two parties with additional time in which to continue negotiations. If the extra 21 months prove insufficient — and critics suggest they almost certainly will — the transition period can be extended, by joint agreement before July 1, 2020, for an unspecified period of time.
Irish border and customs union:
- There will be no hard border between Northern Ireland, which is part of the UK, and EU member the Republic of Ireland, at least in the short term.
- In the event of the transition period being extended beyond 2020, the draft deal commits both parties to a “backstop” solution, consisting of a “single customs territory between the (European) Union and the United Kingdom.”
- That customs union would remove all tariffs, checks on rules of origin and quotas, and would cover all goods except fishery products. “To this end, the United Kingdom will harmonize the commercial policy applicable to its customs territory with the common commercial policy of the Union,” the agreement says.
- During this period, the UK will adopt what the document terms “level playing field” conditions, ensuring that UK businesses are unable to undercut EU competitors, effectively removing the possibility of the UK transforming into a Singapore-style low-tax business haven, as envisioned by some pro-Brexit supporters.
- Under these conditions, the UK will be required to agree to a number of “non-regression clauses,” preventing it from introducing new, lower standards on key environmental, labor and social regulations, including such things as health and safety policy and working hours.
- The City of London has played an outsize role throughout Brexit negotiations, with both the pro- and anti-Brexit camps attempting to leverage the capital’s status as the world’s leading financial center.
- That status could now be at risk. While many of London’s financial institutions have been preparing for a no-deal Brexit, the new agreement is by no means advantageous.
- Throughout the entire 580-page document, a mere three paragraphs totaling fewer than 300 words are devoted to the UK’s financial sector.
- Under the draft agreement, “entities established in the United Kingdom shall be treated as entities located outside the Union.” In practice, this is likely to result in London’s financial center being granted a level of EU market access similar to that granted to US and Japanese firms, under an arrangement known as “equivalence,” potentially jeopardizing London’s attractiveness to international financial companies.
Freedom of movement:
- The draft document provides protections for the more than three million EU citizens in the UK, and over one million UK nationals in EU countries to continue to live, work or study as they currently do.
- Crucially, “no exit visa, entry visa or equivalent formality shall be required of holders of a valid document issued” for EU and UK nationals when crossing national boarders within the bloc.
- Freedom of movement will be maintained until a final agreement is reached, and EU citizens and UK nationals arriving in the host state during the transition period will enjoy the same rights as those who arrived in the host state before March 30, 2019.
UK divorce bill
- According to an EU summary document, the “agreement is not about the amount of the UK’s financial obligation, but about the methodology for calculating it.”
- Under this rationale, the UK will honor all existing joint commitments to EU programs as outlined in the EU budget until 2020, “including outstanding commitments at the end of 2020 and liabilities which are not matched by assets.”
- Previously this has been estimated at about 50 billion pounds ($64.8 billion).
Why is Britain leaving the European Union?
- A referendum – a vote in which everyone (or nearly everyone) of voting age can take part – was held on Thursday 23 June, 2016, to decide whether the UK should leave or remain in the European Union. Leave won by 51.9% to 48.1%. The referendum turnout was 71.8%, with more than 30 million people voting.
- The Leave Campaign argues that Britain is losing out a big deal by staying in the EU.
- It has to pay millions of pounds each week as a contribution to the European budget.
- The extremely bureaucratic nature of the European parliament is hurting British exporters
- Migration from the European Union into Britain (mainly PIGS economies) is creating an imbalance in the welfare schemes of the UK government.
- But, those who oppose the campaign say that Britain is a net gainer if She stays in EU.
What is the ‘transition’ period?
- It refers to a period of time after 29 March, 2019, to 31 December, 2020, to get everything in place and allow businesses and others to prepare for the moment when the new post-Brexit rules between the UK and the EU begin.
- It also allows more time for the details of the new relationship to be fully hammered out.
- Free movement will continue during the transition period, as the EU wanted.
- The UK will be able to strike its own trade deals – although they won’t be able to come into force until 1 January 2021.
- This transition period is currently only due to happen if the UK and the EU agree a Brexit deal.
What is the Chequers Plan?
- Theresa May’s cabinet had a wide variety of views on Brexit – from those who opposed Brexit, to those who led the Leave campaign during the referendum.
- Getting them all to agree on a vision for the future has been quite a challenge. To do so, Mrs May invited her cabinet ministers to Chequers, her official country house in Buckinghamshire, in July to thrash out their differences and agree a plan.
- The plan includes proposals for the UK to mirror EU rules on goods, plus the UK and EU being treated as a “combined customs territory” which would mean the UK would apply domestic tariffs and trade policies for goods intended for the UK, but charge EU tariffs and their equivalents for goods which will end up heading into the EU.
- The idea is that this would avoid the need for a visible border with the Republic of Ireland.
- The plan suggests that the UK would also be free to strike its own trade deals with countries around the world, something it is currently unable to do as a member of the EU customs union.
What is Article 50?
- Article 50 is a plan for any country that wishes to exit the EU to do so.
- It was created as part of the Treaty of Lisbon – an agreement signed up to by all EU states which became law in 2009.
- Before that treaty, there was no formal mechanism for a country to leave the EU.
- Which spell out that any EU member state may decide to quit the EU, that it must notify the European Council and negotiate its withdrawal with the EU, that there are two years to reach an agreement – unless everyone agrees to extend it – and that the exiting state cannot take part in EU internal discussions about its departure.
Concerns surrounding the Brexit deal:
- The Brexit Referendum, which happened in 2016, narrowly went in favour of pro-leave camp.
- The Conservative government under PM Teresa May has categorically stated that it would fulfil the mandate in favour of leave.
- Under this, a draft EU-UK Brexit deal was proposed by the Britain government recently.
- However, the ruling government is facing a possible vote of no confidence over the modalities of the deal and its future relationship with the EU.
- The heart of this bitter dispute is the withdrawal deal with the other 27 nations in the bloc, which would leave the country largely bound to current regulations, with diminished influence over policy formulation.
- With just months left for the U.K.’s withdrawal from the European Union, there is little clarity on the terms of its exit or indeed whether the verdict of the 2016 referendum can be honoured at all.
- Hence, the government faces an uphill task to secure parliamentary approval for the deal.
- This was also followed by of a spate of resignations by senior Cabinet ministers in the last few days.
Impacts of the Brexit referendum to India
- There are many who think a weakening British currency might be good news.
- India being more of an importing country than an exporting nation, the overall effect may turn out positive for India (if the dollar doesn’t appreciate much against rupee).
- With lower pound value, Indian companies may be able to acquire many hi-tech assets.
- As investors look around the world for safe havens in these turbulent times, India stands out both in terms of stability and of growth.
- Brexit might give a boost to trade ties between India and the UK.
- Britain will now be free to discuss a bilateral trade pact with India.
- Due to fall in the value of Pound sterling, those who import from the UK will gain. Indian export companies operating in the UK may also gain.
- More Indian tourists can afford to visit Britain in coming days as the currency value has fallen.
- More Indian students can afford to study in Britain (for higher education) as the fees may seem cheaper.
- Britain will need a steady inflow of talented labour, and India fits the bill perfectly due to its English-speaking population.
- The fall in the prices of commodities like crude, which will help India save a lot on its import bill (every $1 drop in crude prices leads to roughly $1 billion savings in India’s oil import bill), reducing its trade and current account deficits (CAD).
- Brexit would weaken global growth and lead to a meaningful decline in commodity prices. This is only going to enhance both the relative and absolute appeal of India.
- Lower commodity prices will help the macro fundamentals: be it fiscal deficit, current account deficit or inflation, which will give the government more levers to pump up the investment cycle.
- India will have to adjust to a changing world order.
- There may be foreign fund outflow and dollar rise.
- Rupee may depreciate because of the double effect of foreign fund outflow and dollar rise.
- This may increase petrol and diesel prices to an extent.
- The government then may want to reduce additional excise duty imposed on fuel when it was on a downward trajectory. This may increase fiscal deficit unless revenue increased.
- Prices of gold, electronic goods, among others may also increase.
- Sensex and Nifty may tumble in the short-run.
- Falling value of the pound could render several existing contracts loss making.
- The vote is also bad news for Indian outsourcers.
- Foreign funds are likely to move out of the if the world outside thinks that investment in India is risky.
- India’s Forex (currently a record 363 billion dollars) may diminish, particular if the currency is stored in Euros or Pound (this comes around 20% of total forex).
- Brexit will have a negative impact on the $108 billion Indian IT sector in the short term.
Whichever direction Britain takes from here, society will remain deeply divided. To even begin to move forward, Britain needs a good dose of reality and an honest conversation.
Critically examine the positive and negative impacts of Brexit on Indian economy.