Bracing for Brexit

By Victoria Hines

Brexit, a reference to the possibility of Great Britain leaving the European Union (EU) upon a referendum, has recently been at the forefront of the news cycle.  The passage of the European Union Referendum Act of 2015, allowing for a referendum on whether the UK should remain in the EU, has ignited a debate on the desirability of continued EU membership. UK Prime Minister David Cameron conducted negotiations in Brussels last week to try to encourage European leaders to support his EU reforms before the projected June 23 referendum. These objectives, which Cameron outlined last November, included: acquiring insurance that the Eurozone countries are not able to manipulate financial regulations for non-euro nations, reducing red tape on European businesses, enhancing national parliament power by exempting Britain from an “ever closer union,” and controlling migration. This deal, which gives Britain “special status” in the EU, is now being used by Cameron to assemble support for the UK to remain in the EU.   

Although, the concerns of individual states regarding Brexit should not be ignored, the macro implications are perhaps even more striking. How does Brexit reflect the movement from multilateral dealings to minilateralism? The EU is unique in its tendency to push for the formulation of treaties to address pressing issues. The UK’s desire to leave the European Union derives, in part, from the binding nature of the EU agreements.  In fact, the UK Parliament labeled the reduction of binding EU regulations as one of its main priorities of 2015. Parliament members argued that the amount of “political will” necessary to create binding agreements has become increasingly difficult to obtain and that recommendations coupled with soft commitments should be prioritized in the EU. Perhaps the UK has recognized the evolution of international relations from a multilateral to a minilateral system; a successful Brexit would reinforce this idea.

Many countries, including Germany and the United States, also stress the importance of the UK’s EU membership for various economic reasons. For Germany, the change in the EU’s power dynamic is reason enough to be concerned about Brexit. The UK is often viewed as a Germany ally and a loss of UK power in the EU could damage the balance of power to the detriment of Germany. Meanwhile, U.S. Secretary of State John Kerry urged the UK to stay in the EU for a more specific reason. Kerry, who was attending a security conference, invoked the refugee crisis to support his contention that a unified EU was more necessary than ever. The migrant issue is another substantial part of Cameron’s reforms. In response, the European Council’s president, Donald Tusk, announced that he planned to reduce the welfare of the EU migrants.

In addition to the potential power dynamic change and migrant reforms, there is bound to be salient impacts on trade and business if the UK were to leave the EU. The U.S. has expressed apprehension about pursuing a trade deal, separate from TTIP, with the UK. U.S. trade representative, Michael Froman, clarified the U.S. was “[n]ot particularly in the market for FTAs with individual countries.” This could be devastating for the UK’s economy because, in addition to the U.S. being the biggest export market for the UK after the EU, the UK would likely be subjected to the same tariff rates and barriers as other countries that are not members to FTAs involving the U.S. For example, the Guardian suggests Britain would likely face a 2.5% tariff on its cars and thus would suffer an export disadvantage to the U.S. in contrast to its German and Italian competitors. In addition, critics of Brexit have also cited the potential adverse impact on the insurance market.  Lately, London has been losing market share to areas such as Asia and Latin America where customers prefer local business transactions. By leaving the EU, and thus its trade agreements, British insurance companies may not be able to win business overseas, exacerbating their loss in market share. As the referendum nears, the level of uncertainty is bound to affect investment, and, if Brexit succeeds, the UK’s appeal as a financial hub and gateway to the EU may disintegrate.