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Monday, June 20, 2016

Basic Economics – Brexit

Financial Review

Basic Economics – Brexit

Time now for another edition of What You Need to Know About Basic Economics – In today’s edition we will tell you what you need to know about the Brexit.

Brexit is the smash-up term for British and exit. It refers to a referendum which will be held this Thursday, asking voters: “Should the United Kingdom remain a member of the European Union or leave the European Union?”

The European Union – often known as the EU – is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country.

It has its own parliament and it now sets rules in a wide range of areas – including on the environment, transport, consumer rights and even things like mobile phone charges. It has its own currency, the euro, which is used by 19 of the member countries; the United Kingdom still uses its own currency, the pound sterling.

The single market is seen by its advocates as the EU’s biggest achievement and one of the main reasons it was set up in the first place. Britain was a member of a free trade area in Europe before it joined what was then known as the common market. In a free trade area, countries can trade with each other without paying tariffs – but it is not a single market because the member states do not have to merge their economies together.

The European Union single market, which was completed in 1992, allows the free movement of goods, services, money and people within the European Union, as if it was a single country. It is possible to set up a business or take a job anywhere within it. The idea was to boost trade, create jobs and lower prices. But it requires common law-making to ensure products are made to the same technical standards and imposes other rules to ensure a “level playing field”.

Supporters of the “Leave” campaign say they want to protect the country’s identity: its culture, independence and place in the world.  “Leave” supporters argue that Britain is being held back by the EU, which they say imposes too many rules on business and charges billions of pounds a year in membership fees for little in return. The UK is one of 10 member states who pay more into the EU budget than they get out, only France and Germany contribute more. In 2014/15, Poland was the largest beneficiary, followed by Hungary and Greece.

They also want Britain to take back full control of its borders and reduce the number of people coming into Britain to live and/or work. One of the main principles of EU membership is “free movement”, which means you don’t need to get a visa to go and live in another EU country. They also object to the idea of “ever closer union” and what they see as moves towards the creation of a “United States of Europe”. There is a sense that Britain has lost some of its sovereignty and ability to control its borders and economy. This argument is often expressed by opposition to immigration.

“Remain” supporters typically argue that staying in the union is better for the British economy and that concerns about migration and other issues are not important enough to outweigh the economic consequences of leaving. Those campaigning for Britain to stay in the EU say it gets a big boost from membership – it makes selling things to other EU countries easier and, they argue, the flow of immigrants, most of whom are young and eager to work, fuels economic growth and helps pay for public services.

They also believe Britain’s status in the world would be damaged by leaving and that they are more secure as part of the 28 nation club, rather than going it alone. Big business – with a few exceptions – tends to be in favor of Britain staying in the EU because it makes it easier for them to move money, people and products around the world.

The Leave camp counters that an EU exit would allow the UK to negotiate trade deals as one country “rather than being one of 28 nations”. Many small and medium-sized firms would welcome a cut in red tape and regulations. Although much of the Leave argument seems to center around a cultural nostalgia promoted by nationalist parties frustrated with the complexities of a changing world.

Europe is Britain’s most important export market and EU membership has allowed London to become a financial hub for the continent and a source of foreign direct investment. The Remain Camp argues that a Brexit could result in massive financial market volatility; a big drop in the pound, a huge sell-off in stocks, and a major hit to already sluggish economic growth.

Right now, the vote is too close to call. Last week the Leave Camp seemed to be pulling ahead, then a Member of Parliament, Jo Cox, a Remain supporter was shot and killed. The campaigns were suspended for a couple of days, and today the Remain Camp seems to have a slight advantage.

Both sides seem to admit that the EU and the European Central Bank have done a poor job in growing the economy. The EU made a mess handling the Greek debt and refugee crises; it is bureaucratic. The EU is dysfunctional, it has structural flaws, and shows few signs of reforming. Still, the EU has been a unifying force in the aftermath of one of the bloodiest wars ever waged.

The idea of a unified and peaceful Europe is still important. And Brexit is a threat to the unity of both the EU and the UK.  The question is whether a vote to leave would make anything better or worse. It would certainly be a shock to the system. We will know more by the end of the week.

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