· VIEWS & OPINION

Posted : 03 Jul, 2016 00:00:00

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Brexit Yes - what will happen now?

A.K. Enamul Haque

On June 23, 2016 the United Kingdom (UK) voted for YES to exit from the European Union (EU).  The news was a surprise for many. No one, including the Prime Minister David Cameron, expected this to happen but it has happened overwhelmingly with 72 per cent voters casting their vote in the referendum and 52 per cent saying yes to say goodbye to EU.  After the event, the political current in UK is quite shocking.  David Cameron has tendered his resignation.  In the opposition camp, the majority of Labour MPs have revolted against Jeremy Corbyn and called on him to resign as the Leader of the Opposition in the House.  The EU has tightened its belt with passive threats to UK saying that no informal talks will take place unless UK invokes Article 50 of the EU constitution, which means UK needs to serve a formal notice to leave EU first. For UK, they are in no mood to hurry the process. It appears that until September,  when  the Conservatives elect a leader to succeed Cameron as prime minister, there is nothing in the card.  Meanwhile, the EU held its first meeting without UK - first time since its inclusion into the union in 1973.  

In the aftermath of the referendum, several developments in the economic front have shaken the world. British Pound is the first to react.  It fell in value by nearly 10 per cent in a week's time.  Investors around the world have expressed their worry over the situation.  The US and Chinese economies are on guard and watching the unfolding events in Europe.

Against this background, there are worries in some quarters in Bangladesh.  What will happen to us if Europe fell apart?

THE BEGINNING OF EU: In 1951, six countries in Europe, including France and Germany (West), formed the European Coal and Steel Community (ECSC) in order to avoid a trade war in Europe.  Steel and Coal was needed for their reconstruction.  This was the beginning.  The objective was clearly trade.  In 1957, there was another set of agreements reached in Rome which created two institutions - European Economic Community (EEC) and European Atomic Energy Community (Euratom).  The first one was to expand economic cooperation between a few European countries and the second one for expansion of safe nuclear energy.

In a separate development, Norway, Sweden, Switzerland and UK formed EFTA or the European Free Trade Area in 1959. The objective was also to create a free trade area within Europe.

Clearly there were two currents - the first one led by Germany, France, Spain and Italy and the second one led by Nordic countries and UK.  

In 1961, however, UK applied for its membership of the EEC but its entry was blocked by France's president de Gaulle. In 1965, there was further consolidation when many other European countries joined the EU with its headquarters in Brussels. EU officially began in 1967.  At that time, UK was not a member.  UK's membership was finally accepted in 1973 when 63 per cent of voters in a referendum in the country opted to join the EU.   Meanwhile, while many of the Nordic countries also joined EU, Norway's voters voted against joining the Union in 1972. Till now Norway remains outside EU.  Norway, Iceland and Switzerland are still members in the European Free Trade Area.  

In the world of global trade the history of expansion is very rugged. In early years it was done using piracy in the sea in which many European countries were involved.  After this, in the sixteenth century trade expanded through colonisation.  As a result, many peace-loving and prosperous countries like India and China fell into the hands of colonial rulers from Europe, including UK, and they lost their economic and political freedom.  Clearly, the driver was trade and it was an uncivilised way to European prosperity.  After the defeat of the Germany in the Second World War at the hands of the allied forces led by the USA and UK in 1945, a new route to political supremacy of the USA began to appear.  This was countered by France and Germany through the creation of European fraternity.  European fraternity was always fragile since the history of the continent is full of conflicts and killings/genocides.  While UK remained out of the European bloc fashioned by France and  Germany (because of its renewed friendship with the USA) it decided to develop a counter current in Europe and joined the EFTA as an alternative to EEC in 1959. But the UK eventually decided to join EU.  

The political turmoil within Europe is evident even today in every major global events such as in cases of conflicts in Egypt, Libya, Iraq, Syria, Ukraine and Kuwait.  However, economic solidarity within Europe began to gel over time since 1967 and in 1984 EU revised its constitution again to make it more of a political confederation with the establishment of the European Commission. This was all going well until Ukrainian, Syrian and Georgian conflicts erupted which exposed the political cracks within Europe. The final blow came from the flow of Syrian refugees into EU. Europe was not ready for this.  The result of the UK referendum shows how much the British mainstream political parties lost sight of their voters.

THE MOOT QUESTION: It is only economic factors which originally bound Europe together and are now threatening to unravel the EU.  The moot question now is: how will it affect the world - and Bangladesh in particular?

The primary goal of forming the EU was to launch a Free Economic Zone within Europe where countries will see freedom of goods, movement, services and capital.  It always begins with free trade area (FTA) whereby countries agree on the first freedom.  Overtime, trade theorists have found that without the freedom of the other three FTA often leads to unbalanced advantages in favour of bigger economies.  Therefore, there is a natural process of integration towards economic union and this was the tenet of Professor Ernst Haas, a German-born political science professor in UC Berkeley.  There were some counter-points to his theory but overall it ran against the flow.  Now that the UK is poised to break away from this route, what does it mean for them - and for others?

First, UK will now be like any other countries in the world who are not an insider in EU.  EU rules and regulations will no longer be binding on UK but they can, if they like, mimic EU rules to ensure that EU will not create any reverse discrimination against them in the future. Second, UK will now face some tariff barriers while exporting to EU similar to that faced by Norway, Switzerland, Iceland, USA, and Canada.  In some cases, it will mean countries like Bangladesh, which enjoy the benefit of everything but arms (EBD) with Europe, will have an edge over UK exporters (although it will not mean much in practical sense).  Third, on trade of services and capital investment, the UK will need to renegotiate its terms and conditions with the EU.  

How will these developments affect the world? It will depend on the strategy played by the UK and the EU in the two years of negotiations once the UK formally applies to withdraw from the EU.

First, in the short run it will reduce jobs in London which will lose its status as a financial hub of Europe.   We have already seen it in the money market where British Pound has lost its value significantly overnight.  Second, UK, being a very creative nation, will now begin to take refuge under other global economic hubs.  Its natural choice will be to join EFTA again where it will find many other countries. It will need to reorient its trade relations with the countries within EFTA.  Third, UK will play WTO (World Trade Organisation) card against EU's strategy of retaliation, if any.  Fourth, in the services sector trading, UK has some natural advantages because of its education standard, accounting standard, legal standard, and also insurance and audit standards. This will protect UK firms and institutions engaged in these sectors to continue their businesses without much adverse consequences both within and outside EU.  EU will find it hard to substitute them overnight. Therefore, it is unlikely that these services sectors will suffer any significant adverse effects.  Fifth, UK will probably play the Commonwealth card more frequently now.  This means, as a strategy of realignment, UK will become closer to its former colonies and will develop a much closer economic cooperation with them.  Given this, while UK will have a rough ride temporarily, but there will possibly be no dreadful end to its divorce from the EU.  

For the EU, the situation might bring them closer to each other.  With UK gone, USA's influence in the political game within Europe will gradually diminish. Europe will become a more peaceful zone.   However, in the short run it will suffer too.  UK is 17 per cent of the economy of EU and when  it departs, any action of retaliation will hurt Europe too.  On the other hand, shifting of global financial hub inside mainland Europe (Frankfort or Paris) will benefit them in terms of jobs and economic growth.  Their best strategy will be to find an end to the stalemate with Russia.  This will allow them to recuperate the loss.  A closer tie with China will also benefit Europe as Chinese and Indians will be the global hub of future consumers.

Dr. A. K. Enamul Haque is Professor of Economics at East West University and Director, Asian Center for Development.

akehaque@gmail.com