Müberra Dursun

WHAT ARE THE ECONOMIC CONSEQUENCES OF BREXIT AND HOW SHOULD EUROPEAN UNION DEAL WITH THEM?

MÜBERRA DURSUN

YEDITEPE UNIVERSITY

POLITICAL SCIENCE AND INTERNATIONAL RELATIONS

PSIR 332 EUROPEAN UNION

I- Introduction

The unity that the European Union (EU) has maintained for years has witnessed and experienced a historical event. Since the United Kingdom (UK) is the second-largest economy of the Union, the Brexit process started many years ago but delayed a few times. Hence, the UK went through economically and politically challenging stages.

Leaving the Union will negatively affect the UK’s economy in the medium and long term. Although the UK’s managing of the global crisis was more successful than the Eurozone, a large part of the UK’s trade relations was taking place within the Union. The EU, which is about to enter the recovery process after the global crisis, is another formation that will be negatively affected by this process. Even though the UK had to pay 33 billion pounds under the name of the “divorce bill” to fulfill the remaining financial commitments, a period when the EU budget will have difficulties has started (UK Parliament, 2019). Since the future of the EU is also in danger, the EU should act to eliminate the uncertainties that came with Brexit.

The purpose of this paper is to explain the economic consequences of Brexit for the UK and the EU. Within this framework, we will then review the impacts on the EU budget, and lastly, the ways should be followed by the EU to fix the budget after Brexit.

II- Relationship Between the EU and the UK

European Union membership for the United Kingdom started in 1973. According to Mortimore (2016), pro-European and anti-European groups have started to form since 1977 and have been supported at different rates from time to time. As a result of the British European Communities membership referendum, which took place in 1975, the majority of British voters favored the continuation of membership. Besides that, the majority of the population was against the membership in 1980, when the Prime Minister was Margaret Thatcher. It was the highest rejection, at a rate of 65% (Roger, 2016).

The UK was a member of the EU. However, they used their own currencies instead of using the euro and did not comply with the Schengen agreements. There are a few reasons to stay out of the euro for the UK. Pettinger (2015) lists the main reasons as follows: loss of independent monetary policy, different stages of the trade cycle, unique characteristics of UK Housing Market, bond yields, deflationary bias-Eurozone experienced high unemployment. Although Former Prime Minister Tony Blair had a positive attitude towards joining the euro, it failed to prove that the five economic tests were in the national interests, as revealed by Gordon Brown, who was Chancellor of the Exchequer (Briggs, 2015). Staying outside the euro are brought some cons. During the eurozone debt crisis, the leaders of the countries that use single currency held regular meetings, and the UK was excluded from these meetings. This caused concern in the UK. As they started to think like the members of the eurozone would come together to hit the EU single market to their benefit. On monetary issues, the UK wasn’t linked to decisions made by the European Central Bank or the European Central Banks System. In contrast, the UK’s voting rights in the Council of Europe suspended on issues related to the eurozone (Briggs, 2015).

UK’'s not having to join the Schengen system, which means removing internal border controls within the EU, was secured under the Amsterdam Treaty, and the Protocol could not be modified or repealed without the consent of the UK, and British law required another referendum to make this happen (Peers, 2015). Because of the EU rules, EU citizens had the right to travel and free movement to the UK but provided that the person who travels doesn’t pose any danger or problem. To sum up, there was always a distance between the UK and the EU, and the UK wanted to end its membership in the EU with British people.

III- What is Brexit?

Brexit is the word which is a combination of the words “Britain” and “exit”, coined by Peter Wilding (Steed, 2020). There were always people in the UK who were not satisfied with being a EU member and who opposed to EU membership. The 2008 financial crisis led to an increase in the number of people who adopted this idea. Among the voters and the politicians, skepticism increased due to increasing the number of immigrants from EU countries and refugees from the Middle East, Africa, and Syria. For these reasons, the UK decided to withdrawal from the EU in 2016, Brexit Referendum. The process of ending EU membership began in 2017, and it was expected to last two years but took more than two years.

Since the UK Independence Party (UKIP) is an anti-immigration party, it has used this issue in its own favor by imposing the idea that immigrants had taken British citizens’ jobs away. According to Green’s (2017) statement, support for the UKIP has decreased in the regions receiving immigrations. Financial issues are another important factor affecting the Brexit process. The great contribution of the UK to the EU budget was going to Brussels. The UK was very uncomfortable with this situation and wanted this money to be spent on its own priorities. Then Prime Minister Theresa May, and her government were determined about Brexit. May said in June that “Brexit means Brexit” (Calamur, 2017). May immediately announced her 12 strategies, as Brussels had serious warnings about the rapid process. These substances were as follows:

Transparency
Control over the British laws
Strengthening the unity of the UK
Maintaining a common travel area with Ireland
Control the immigration
Protecting the rights of EU citizens’ right in the UK and UK citizens’ right in the EU
Protecting the rights of employees
Joint trade with European markets
New trade agreements with other countries
The goal of being the best place for science and invention
Joint fight against crime and terrorism
A soft and regular Brexit

The first round of UK-EU exit negotiations began in June 2017. Although the withdrawal was delayed, Parliament approved the UK’s withdrawal, and the UK’s membership in the EU ended in January 2020. The transition process, which will continue until December 31, had started. However, when the transition period is over, the UK will be completely out of the EU in every sense.

IV- Negotiation Process and Transition Period

On February 3, 2020, the Commission informed the Council of its proposal for a partnership with the UK. The Council approved the negotiation on February 5^th. This negotiation covers all areas which also are covered by the Political Declaration, agreed between the EU and the UK, such as security and defence, judicial cooperation in criminal matters, trade and economic cooperation, foreign policy. As an EU negotiator, the Commission aims to continue working in close coordination with the Council and the European Union.

A transition process has been launched in which EU law still applies to the UK. This process, which will take 11 months, will end on December 31. In this transition process, UK’s activity will continue in the EU Single Market and Customs Union, but her relationship with political institutions will not continue. There won’t be any change in the citizens’ rights, and the European Court of Justice still has jurisdiction (Bennett, 2020). Also, freedom of movement will continue during this process. At the same time, the EU and the UK will have gained time to agree on future relations and a possible partnership. The final decision should come into force on January 1, 2021.

Thanks to the UK’s staying Customs Union with the EU, there will be no tariffs for the trade between the EU and the UK. Also, there will be no customs controls at the borders. However, staying in the customs union also has negative consequences for the UK as customs rules and policies are set and implemented by the EU.

V- Consequences of Brexit for the UK

After the United Kingdom’s leaving the European Union, there is a possibility that Scotland and Northern Ireland may also leave the UK and seek their independence, then they may become an EU member. This possibility is a threat to the UK’s political unity.

The economic growth of the UK was negatively affected by the Brexit result. When the UK Office for National Statistics is taken into account, during the Brexit process, the UK’s economic growth decreased from 2.4% to 1.5% (Hope, 2019). Also, the British pound lost its value on the day of the referendum. The UK’s exporters will be negatively affected due to tariffs. Besides, import prices increased by tariffs will affect inflation. Almost half of Britain's trade was with European countries. Due to the fact that the UK was also an EU member, trade expenses were at low level. Many job opportunities for many young workers have disappeared. On the other hand, the fact that the share given every year to the EU budget will no longer be given is the positive effect it has on the economy. Some successful groups of universities and farmers in the UK will no longer receive grants from the EU. Another loss for the UK is that

To sum up, economic consequences of the Brexit for the UK explained notably by Welfens’s (2017) study, in the short term, the UK’s currency will lose its value, and real estate prices will decrease. In the medium term, job losses and inflation will increase; income and migration will decrease. In the long term, military spending will increase, and consumption will decrease.

VI- Consequences of Brexit for the EU

According to the reports of Labour Market Outlook, anti-immigrant parties strengthened in Europe with Brexit. Thanks to the UK’s leaving the EU, Germany’s influence increased in the EU. Eurozone gained the power to drive economic and financial policy in the EU because the UK withdrew its power from the EU (Blockmans & Emerson, 2016). Also, the EU budget has to deal with the deficit of the UK’s annual contribution. If cooperation with the UK won’t be established, the EU will lose its ability to deal with cross-border organized crime and transnational terrorism due to the Brexit (Blockmans & Emerson, 2016).

Briefly, Welfens (2017) announced the impacts of Brexit for the EU; the interest rate will be a drop in Germany, France, the Netherland, and other countries in the short term. Mid-term results are increasing job losses and migration to some EU countries and decreasing income and inflation. In the long-term, results are decreased consumption rate, high military spending, and increasing real income.

VII- EU-UK Trade Relationship

Given that 12.6% of British GDP is dependent on exports to the EU, only 3.1% of GDP among the 27 other Member States is dependent on exports to the UK (Hope, 2019). Besides, according to the results of the statistical research conducted by Ward (2020), the UK provides 44% of its exports to EU countries. In short, it would not be wrong to say that the EU is a major trading partner for the UK. It should be noted that the UK is the most suitable country among EU countries for Foreign Direct Investment (Miller, 2013). Access to the EU Single Market becomes easier thanks to speaking English. When the UK remains outside the EU, it will not be possible to access the Single Market, and therefore she will lose importance for companies investing in the EU market through the UK (HM Treasury, 2010; Barrell & Pain, 1998).

According to the UK’s optimistic approach, despite the fact that many predictions are not certain, GDP will experience a loss of 2.2% when full access to the Single Market is achieved (Emmerson et al., 2016) Another good scenario says that when the UK leaves the EU, they will achieve a growth of around 1.6% in GDP in 2030. In a potentially bad scenario, the UK’s GDP could lose income between 3.1% and 9.5% (Emmerson et al., 2016). To make comparisons easier, due to the 2007-2008 global financial crisis, the UK’s GDP had fallen 7% (Shelburne, 2010).

VIII- Impacts of Brexit on The Budget of The EU27

It is inevitable that Brexit will have a small but negative effect on the EU economy. OECD predicts that the GDP of the EU will decrease between 0.10% and 0.58 % in 2030 (Velthuijsen et al., 2018). In addition, due to the adversely affected the UK economy, the UK’s desire for EU products and services will decrease (Chen, 2017). Belgium, Germany, Ireland, and Netherlands export to the UK to a large extent. As a result of Brexit, the trade cost of these countries with the UK will increase. Cross-border transactions will take more time, and costs will increase for Ireland. It is the UK best suited to Dutch investors. Likewise, the most preferred country by British investors is the Netherlands. For Belgium, the UK is the most traded country. Lastly, the revenue from the European Single will vary greatly for Germany. However, Germany has the potential to close this gap thanks to its trade with other countries and its export rate.

Since the UK is one of the countries that make the most contribution to the EU budget, member countries have to plan to re-adjust the budget after Brexit. EU member states should reduce spending, increase contribution to the budget, and keep the two in balance. If the UK continued to stay in the EU’s Single Market and Customs Union, Brexit-Gap would be smaller.

IX- Steps to Be Taken for The EU Budget in The New Order

EU leaders hold meetings for the future budget of the EU. One of these critical meetings took place in the last week of February. European Commission and the Parliament think that some countries have a lot of spending and have proposals for that. With the UK’s leaving, the already challenging negotiations have become even more complicated (Walker, 2020). This meeting was to establish an order regarding the spending in which the expenditures will be made and the level of spending in the next seven years. Namely, it was a meeting on the EU’s long-term budget regulation. The Netherlands, Austria, Sweden, and Denmark claim that their contribution to the EU budget is higher than the expenditures within their own countries. Hence, these countries want to have restrictions on spending. However, countries in Central, Eastern, and European countries do not want to cut any spending on agriculture. Germany, which makes the biggest contribution to the budget, also agrees with these four countries, demanding that spending be limited. Although France is one of the countries that make the most contribution to the budget, she has a contradictory stance on spending restriction due to the strong farmer lobbies in France. French President Emmanuel Macron warned that the EU has to set its goals in line with its budget (Zalan, 2020).

Expenditures for agriculture from the budget are decreasing every year. According to the proposal of the European Commission for the next seven-year, expenditures in this area will be reduced to less than 30%, including spending for fishing (European Commission, 2019). The content of this proposal includes environmental issues like climate change, security, exchange students within the scope of the Erasmus program, external borders. The Commission argues that spending in these areas can be increased.

Since the UK will no longer support the EU budget, a 9-billion-pound deficit is expected. If we look at the GDP levels of the 27 member states in 2018, this deficit is less than 0.1% of total GDP level but the amount of deficit does not prevent this from being a problem.

According to the writing of Austrian Chancellor Sebastian Kurz (2020) in the Financial Times: “Now that we have a smaller union of 27 member states, we simply have to cut our coat according to our cloth”.

In summary, the suggestions below should be examined, and appropriate action should be taken by the EU;

Increasing Contributions

The remaining 27 Member States must add an additional €10 billion to their current contributions if they decide to keep spending constant and increase money inflows into the budget. Although each member state will increase its payment to the Union, this increase will not be at a fixed rate. This can also create political problems between the member states. Since most affected countries by the process will be those who contribute the most to the budget.

Spending Cuts

Considering the difficulties of the previous scenario, the contribution to the budget can be kept constant and expenditures can be limited. If the expenditures are kept constant, the appropriate restriction corresponds to 10 billion euro per year. Although spending cuts are shared into several programs, it will not be possible to avoid negative consequences as there are very important projects for the EU. (The table below shows the projects corresponding to €10 billion)

(Source: Jörg Haas & Eulalia Rubio, Brexit and the EU Budget: Threat or Opportunity, 2017)

Balancing Contributions and Spending

According to this scenario, a certain amount of budget cuts should be made from each country. As each country will continue to contribute to the budget in order to cover the remaining deficit, the distribution of the remaining burden will result in more inequality, and there will be no fair payment.

X- Issues Covered

For the future relations, some specific issues are included in the draft legal agreement submitted by the EU. EU wants to take action through controlled policies on State aid, taking into account trade and competition issues. It means that the UK maintains EU State aid rules in every commercial area between the EU and the UK. The EU recommends the establishment of an independent body to ensure the UK’s compliance with this State aid policy. This organization will cooperate with the European Commission and will play a role in the implementation of State aid policy. In fact, the UK’s State aid amount per capita is less than its counterparts in the EU (Oxera, 2018). On the other hand, the EU has some concerns about breaking the rules as it provides the UK access to the Single Market.

EU has a similar stance for the competition and tax policy. The EU wants an agreement on behavior that affects trade and abuses competition between the Union and the UK. Labour and social standards are of great importance in many international trade agreements. They had developed in the right proportion with globalization. Unfair advantages can be obtained with competitions arising from some labor practices. EU trade agreements include articles that support basic international labor rights and that do not retract from existing standards. These agreements are legally binding and monitored to resolve any issue in the event of a negative situation (Raess, 2020). The EU does not want a decline in labor and social protection, asks the UK commit to “corresponding high standards over time”. Basic working rights, occupational health and safety standards, fair working conditions and employment standards, information and counseling rights company level, and reconfiguration are the provisions that the EU does not compromise.

XI. Conclusion

Together with Brexit, the European Union is experiencing one of the most critical and weak moments. Until Brexit came true, there was no belief that European integration could easily be affected. But we obviously see that populism is a political and, at the same time, an economic power beyond reason and logic (Chen, 2017).

Polarization took place in the United Kingdom, as there are British citizens who have different thoughts about Brexit. In the opinion of many Eurosceptics, the UK’s leaving from the EU will be a bureaucratic liberation and will lead to the strengthening of the UK’s economy. On the other hand, the UK will harm its own economy cannot be ignored.

Although the long-term results of Brexit for both the EU and the UK are currently based on estimates, there are two different perspectives on this process. From an approach, Brexit is a part of the European disintegration process. There will be different EU member states who want to follow the same path after the UK. Besides, a different perspective evaluates this disintegration process positively. By taking advantage of the UK’s absence, which became the troubled child of the Union, the European integration process can be deepened and accelerated (Leruth et al., 2019). However, with the expected slowdown in the global economy, the second possibility seems quite difficult to realize.

To sum up, negotiations in the transition process will guide the relations between the EU and the UK for the future. It should not be assumed that Britain’s separation from the EU has only commercial and economic consequences. It is likely that the EU and the UK can cooperate in many areas, such as education, religion, culture, security, technology, and foreign policy (Felbermayr et al., 2017). It is the first responsibility of both sides to being in harmony in negotiations and reduce the economic losses caused by Brexit as much as possible. It may be nice to end this paper with a famous saying. Jean Monnet, one of the founder fathers of the European Union, once said before his death that “There is no future for the people of Europe other than in union.”

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