Published on FCC Express: Jun 30, 2016
On June 23, British citizens voted on “Brexit” – whether Britain should remain a member of the European Union (EU), a bloc of 28 countries or withdraw. The “Leave” vote won, setting in motion a series of events with consequences for the global economy, the Canadian economy and agriculture.
Why did it happen?
Prime Minister David Cameron called the referendum as a way to address growing concerns in Britain about its relationship to the EU. Member countries pay duties and taxes to Brussels, the EU headquarters, and have agreed to abide by a number of rules and regulations about many aspects of political and economic life. This includes rules on open borders among member states allowing the free movement of labour and trade in goods and services. In return, members receive, among other things, access to the largest and wealthiest trading bloc in the world in a single market. Nineteen of the 28 EU members also participate in the Eurozone, where the euro is the common currency. Britain doesn’t use the euro, but the pound sterling.
How will Brexit play out?
The referendum has not changed the status of trade between Canada and the EU or Britain (more to come on CETA tomorrow). All changes to regulations will take effect when the U.K. formally exits the bloc. Trade is likely to be disrupted by market forces at least in the short term as uncertainty slows economic growth around the world. Many EU leaders, including the foreign ministers of the six founding members (France, Luxembourg, Germany, Italy, the Netherlands and Belgium) are calling for a quick exit to limit the uncertainty.
Nobody is sure at this point how the exit will work: No EU member has ever left the union. It will be an historic test of the rules of exit under very stressful conditions. It appears, however, that Brexit will take at least two years, with each EU country involved in the negotiations defining the terms of exit.
What’s at stake?
All sides will lose something of value: for one, the U.K. was the EU’s second largest economy in 2015, with GDP growth of 2.2% and nominal GDP of over US$28 trillion even as several other EU members struggled with growth. It helped Britain buy about 10% of EU exports. Losing that economic clout will hurt in the EU.
The Leave campaign told voters their tax dollars could be better spent on a number of specifically British interests (e.g. health and education) instead of going to Brussels. However, the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF) and the Bank of England have warned Britain will struggle to maintain economic growth, in the face of likely divestment and stock market, currency, trade and employment issues.