Britain’s proposed exit from European Union brings with it questions about that country’s capability to stand on its own
After the Greek referendum, the next challenge facing the European Union is the possible exit of UK from membership of the bloc. Prime Minister David Cameron has promised a referendum on the subject to mollify far right-leaning members of the Conservative Party and sections of the electorate. The British will vote June 23 to decide whether the country should stick with the 28-nation bloc or break free.
The vote can have far-reaching geopolitical implications that can affect Europe’s relations with the rest of the world. Heated campaigns are on both for and against the referendum and opinion polls predict a neck and neck fight. While Britain’s exit could put Europe in great uncertainty, it could open opportunities for other countries to build relations.
UK is not part of the eurozone but of the economic and political union that EU represents. The country’s exit from the EU, referred to as “Brexit”, has polarised business leaders.
The proponents of “Leave EU” campaign include former mayor of London Boris Johnson, former Conservative Party leader Iain Duncan Smith, former Secretary of State for Education Michael Gove, some former Tory cabinet ministers and, of course, the right-wing UK Independence Party leader Nigel Farage.
They describe Brexit as an orderly process that would avoid short-term turmoil and brings greater prosperity to British people in the medium term. Some support freeing Britain from the influence of the EU on the plea of taking full advantage of a surging global economy and capitalising on its unrivalled influence over the rest of the world.
A key point favouring Brexit is the benefits City of London’s global financial businesses and small businesses of the country would derive in the absence of EU regulations. Britain would save its bulky subscription to EU funds and will be able to close its borders to European immigrants.
As for Britain’s trade, half of which is with the EU, those in favour of Brexit believe they can renegotiate individual trade deals with other nations within Europe and with the US and Commonwealth countries.
Patrick Minford of Cardiff Business School said: “In the long term, Brexit will herald a major growth-boosting period, as the UK breaks free of the over-mighty EU with its protectionist mindset and establishes free trade and intelligent regulation aimed at UK economic interests.”
Brexit could also allow UK to negotiate bilateral trade agreements as the country looks to attract FDI from emerging markets.
However, in reality, all this may have been possible long before 2008 when the country had a booming economy. Now Britain just does not have the economic muscle to go it alone.
Chancellor of the Exchequer George Osborne’s austerity policies are biting him back, as Britain’s economy hasn’t revived. Last week, the IMF downgraded its forecast for British economic growth by 0.3 percentage points to 1.9 per cent for 2016.
Supporters of “Stay in EU” campaign include Prime Minister David Cameron, Osborne, and the bulk of Britain’s big businesses. According to Osborne, leaving the EU would be “the most unexpected self-inflicted wound” for Britain’s economy and for families. Britain would be permanently poorer and would have a “less open and interconnected economy”.
Bank of England governor Mark Carney cautioned of recession if Britain left the EU. According to a Treasury report, Brexit could see Britain’s economy shrink by 6 per cent by 2030 and cause “permanent” economic damage. For once, most economists believe the exit may gravely damage Britain’s economic and political power. Rating agencies have warned they would have to rethink ratings.
Other nations have also reacted to Brexit. Scotland’s First Minister Nicola Sturgeon presaged that Scotland might call for another independence referendum if Britain left the EU. US President Barack Obama underlined the importance of Britain sticking with the EU. The economies of G20 nations have warned that “the shock of a potential UK exit from the European Union” was a risk looming over the global economy. International Monetary Fund (IMF) chief Christine Lagarde has called on Britain and the EU to save a “long marriage”.
European Commission head Jean-Claude Juncker, in an interview with German media, said Brexit would have “unforeseeable consequences” for cooperation in Europe. A study by Morgan Stanley shows that in the worst-case scenario, Europe could take a 1.5 per cent hit to its gross domestic product and the UK’s rate of growth could slip to 1 per cent from the current estimate of 2.2 per cent for fiscal 2016.
The euro had suffered swings after “Grexit” and unpegging of Swiss Franc from the currency. The Indian rupee pared losses against the euro from 81.56 to 69.99 over the last year. Indian investors are looking to repatriate profits if euro depreciates further owing to Brexit.
Indian industry believes foreign businesses cannot remain isolated from such decisions. Britain has always been India’s port to Europe and its treasured economic partner. Most Indian companies have their European offices in London and the city is also a favoured destination of very wealthy Indians.
India is now the third-largest source of FDI in the UK, after France and the US, and creates thousands of jobs and safeguards more, according to a report released last year by the British Department of Trade and Industry.
According to some estimates, Britain has more than 800 Indian-owned businesses employing more than 1,10,000 workers. The top 10-15 of these companies contribute $4 billion to the economy of UK. The best known of the lot is Tata Motors, which owns carmaker Jaguar Land Rover.
Brexit could harm investment by Indian businesses in the UK. It could endanger the flow of investment by diminishing Britain’s role in providing access to Europe. Indian information technology companies, many of which are based in UK, too, will be hit.
The author is an Orissa based financial columnist.