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Brexit - The UK and the European Union

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On June 23rd 2016 the UK voted in a referendum to leave the European Union. Prime Minister David Cameron resigned the morning after the vote and a few weeks later, Theresa May was elected leader of the Conservative Party and new Prime Minister
The process of Brexit has begun although the timing of the decision to invoke Article 50 of the EU treaty remains uncertain
Once Article 50 is invoked, there is a maximum period of two years before the UK finally leaves the EU. The terms of the UK’s new economic relationship with the EU also remain uncertain.

Veröffentlicht in: Wirtschaft & Finanzen
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Brexit - The UK and the European Union

  1. 1. European Union and Brexit Topic 4.1.5
  2. 2. The European Union (Single Market) • As of July 2016, there are twenty-eight member nations of the EU – collectively known as EU28. • The EU28 includes Belgium (BE), Bulgaria (BG), Croatia, Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK). • In June 2016, the UK voted in a binary referendum to leave the European Union. This process is known as Brexit and the UK is expected to leave by early 2019.
  3. 3. Key Statistics on the European Union • These figures are prior to the Brexit vote (June 2016) • The EU accounts for around 30 per cent of the total value of global GDP • Total population 506m • Live births each year 5.23m • Largest population - Germany 81 million, Smallest – Malta 0.4 million • The EU, with 503 million inhabitants, accounts for 7% of the world population • Gross domestic product of the EU €13.08tn • Per capita GDP in the EU €25,500 • Average unemployment rate in the Euro area 12% • Youth unemployment rate in the Euro area 23.9%
  4. 4. Stages of Economic Integration between Nations • Integration can take different forms: there is deeper integration as we go down the following list 1. Preferential Trading Area (PTA) e.g. trade agreements between EU and LDCs 2. Free Trade Area (FTA) – breaking down trade barriers within group of countries 3. Customs Union (CU) – free trade plus a common external tariff (CET) 4. Single Market (SM) – built around the four freedoms 5. Monetary Union (MU) – a common currency, one policy rate and central bank
  5. 5. Main Characteristics of the EU Single Market • The EU single market is built upon four key freedoms: 1. Free Trade in Goods: Businesses can sell their products anywhere in the EU’s member states and consumers can buy where they want with no penalty 2. Mobility of Labour: Citizens of EU member states can live study and work in any other country. The aim is to improve the mobility of labour. 3. Free Movement of Capital: Currencies and capital can flow freely between member states and EU citizens can use financial services in any member state. 4. Free Trade in Services: Professional services such as pensions, architecture, telecoms and advertising can be offered in any member state.
  6. 6. 28 European Union Member Nations (in 2015) Joined EU Euro Zone Member? Joined EU Euro Zone Member? Austria 1995 Yes Italy 1957 Yes Belgium 1957 Yes Latvia 2004 Yes Bulgaria 2007 No Lithuania 2004 Yes Croatia 2013 No Luxembourg 1957 Yes Cyprus 2004 Yes Malta 2004 Yes Czech Republic 2004 No Netherlands 1957 Yes Denmark 1973 No (ERMII) Poland 2004 No Estonia 2004 Yes Portugal 1986 Yes Finland 1995 Yes Romania 2007 No France 1957 Yes Slovakia 2004 Yes Germany 1957 Yes Slovenia 2004 Yes Greece 1981 Yes Spain 1986 Yes Hungary 2004 No Sweden 1995 No Ireland 1973 Yes United Kingdom 1973 No
  7. 7. Enlargement of the European Union • The expansion of the EU to embrace more countries has been perhaps the most important development in Europe in many years. Since 1957 then there have been six main waves of enlargement. • 1973 (UK, Ireland and Denmark) • 1981 (Greece) • 1986 (Portugal and Spain) • 1995 (Austria, Finland and Sweden) • 2004 (Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia, Estonia, Hungary, Czech Republic, Poland) • 2007 (Bulgaria and Romania) • 2013: (Croatia) • In June 2016 the UK became the first member nation to vote to leave the European Union
  8. 8. Potential Advantages for new members of the EU • Tariff free access to a single market of nearly 500 million people Opportunity to exploit economies of scale – lower long run unit costs • Easier to access foreign direct investment from inside/outside EU Inward FDI can lift trend growth and raise factor productivity • Access to EU structural funds Investment to improve infrastructure • Better access to EU capital markets EU companies can raise investment funds from bond and capital markets • Discipline of competition from being inside the EU single market Intra-EU trade already high for many new EU countries
  9. 9. Enlargement of the EU – Rising Per Capita Incomes All of the new countries joining the European Union have a per capita national income (PPP adjusted) lower than the EU average But many have achieved some convergence in average living standards despite the effects of the recession in 2008-2010 Bulgaria and Romania are outliers with per capita incomes less than ½ of the EU average.
  10. 10. Intra-Regional Trade within the EU • The EU is a customs union and also a single market • This means that the EU levies duties on imported goods and services. But there is free trade within the market. This causes a rise in intra-EU trade. • A recent EU report found that Intra-European trade currently accounts for 17% and 28% of world trade in goods and services respectively • Taking services as a separate case, over 30% of intra-European trade in services is in the travel industry, followed by transport (around 20%) and insurance and finance (10%). • Health care remains largely within national borders. There has been some increase in the demand for and willingness to pay for “health tourism” services (especially treatments that are cheap in Eastern Europe) but little investment by multinational health care businesses in different EU countries.
  11. 11. Index of Relative Per Capita Incomes in the EU 0 50 100 150 200 250 300 Luxembourg Ireland Netherlands Austria Denmark Germany Sweden Belgium Finland UnitedKingdom France EU(28countries) Italy Spain CzechRepublic Malta Slovenia Cyprus Portugal Slovakia Estonia Lithuania Greece Hungary Poland Latvia Croatia Romania Bulgaria 2004 2014
  12. 12. The June 2016 Brexit Result
  13. 13. Aspects of Brexit High levels of Intra- EU Trade Extent of UK dependency on EU Investment and Jobs Intra-EU Labour Migration EU Rules & Regulations Environmental Policies including carbon trading Real Wages / Living Standards inside & out of the EU
  14. 14. UK and the EU – Three Recent Research Reports Report Source Key Findings Useful evaluation argument Open Europe Report (2015) • Between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030 • Economic impact of Brexit not clear cut in either direction • Norwegian’ and ‘Swiss’ models of EU association are not suitable for the UK post-Brexit Centre for Economic Performance (LSE) (2014) • Leaving the EU would be likely to impose substantial costs on UK economy and would be a risky gamble • Negative effect on growth greater than benefit of reduced EU fiscal contribution • Much depends on the scale of non- tariff barriers if UK leaves EU Confederation of British Industry (2013) • Net benefit arising from EU membership is somewhere in the region of 4-5% of UK GDP • Britain does not face an ’either/or’ choice – it needs to maximise trade with existing large markets at the same time as building links to new markets
  15. 15. UK Trade Balances in Goods and Services with the EU The UK runs a trade surplus with countries such as Ireland but very large trade deficits with countries such as Germany and Spain. Can you explain why? Source: Office for National Statistics -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 UK trade in goods and services balance with selected EU countries, 2003 to 2014, annual balance, £ billion France Germany Ireland Netherlands Spain Rest of EU
  16. 16. Brexit – The UK’s decision to leave the European Union • On June 23rd 2016 the UK voted in a referendum to leave the European Union. • Prime Minister David Cameron resigned the morning after the vote and a few weeks later, Theresa May was elected leader of the Conservative Party and new Prime Minister • The process of Brexit has begun although the timing of the decision to invoke Article 50 of the EU treaty remains uncertain • Once Article 50 is invoked, there is a maximum period of two years before the UK finally leaves the EU • The terms of the UK’s new economic relationship with the EU also remain uncertain
  17. 17. Brexit – EU v EEA, Customs Unions and Free Trade Areas
  18. 18. Angus Armstrong on UK Trade Policy in a Brexit World • “Trade policy is no longer just about reducing import tariffs and subsidies to unprofitable industries; it is common standards and regulation, property rights and investment protection, infrastructure and communications, and the free movement of ideas and human capital.” • The UK faces three key tasks following the referendum: 1. On leaving the EU the UK must renegotiate its WTO membership agreement 2. UK has to enter into a new governance arrangement with the EU 3. UK has the opportunity to strike new trade agreements beyond EU • Angus Armstrong, (July 2016)
  19. 19. A Future Outside of the EU – the Norway Option • The so-called Norway option allows for the free movement of goods, services, capital, and people • But Norway has no formal input into shaping the rules of the single market although all new rules must be adopted • An annual fee is paid by Norway for access to the EU single market • Under the Norway option, all UK banking and financial service regulation would be ‘mutually recognised’ as good enough, and thus all EU members would have to automatically grant full access to UK-based firms • Norway option does not include free trade in food, or participation in EU agriculture subsidies (CAP) or in the EU’s regional policy, and nor does it require Norway to adopt EU trade policies with respect to non-EU nations.
  20. 20. A Future Outside of the EU – the Canada Option • The Canada option means free trade in most industrial goods and some liberalisation of services and investment flows, but no automatic right for Brits to work in the EU or for EU citizens to work in Britain.
  21. 21. A Future Outside of the EU – Joining EFTA • EFTA is the European Free Trade Area • EFTA membership provides the UK with less access to the Single Market beyond goods trade • Switzerland is the most prominent EFTA member and is required to strike bilateral treaties with the EU to secure access to the Single Market for specific services only. • In 2014 the Swiss voted in favour of restricting migration. The EU has made it clear that this is incompatible with access to the Single Market. • Switzerland makes a smaller per capita contribution to the EU budget than Norway in the EEA, to reflect the lower level of market access.
  22. 22. A Future Outside of the EU – Joining EEA • EEA is the European Economic Area • As a member of the EEA, the UK would remain part of the European Single Market • This would mean there would be no import tariffs or other new border measures on UK-EU trade • With EEA, the UK would continue to adopt all the EU’s economic regulations, keeping non-tariff barriers between the UK and the EU at a lower level than if the UK leaves the Single Market • After joining the EEA the UK would no longer be part of the EU Customs Union, meaning it would face some new non-tariff barriers on its trade with the EU, such as rules of origin and the threat of anti-dumping duties. • The UK would also be free to seek its own trade deals with the rest of the world.
  23. 23. A Future Outside of the EU – The WTO Option • WTO is the World Trade Organisation • UK would not need to follow EU standards and regulation, but it will be completely out of the EU single market. • It would face the EU’s common external tariff on goods and services • Gains in having more control over migration policy and freedom to trade with rest of the world including establishing free trade agreements with major economic powers and emerging / developing countries
  24. 24. A Future Outside of the EU – Unilateral Free Trade • Unilateral free trade is the option favoured by a group called “Economists for Brexit” • This involves leaving the EU Single Market • Elimination of EU trade barriers on imports – pressing for global free trade • Control of borders to support migration control • Democratic control of UK laws and regulations
  25. 25. A Future Outside of the EU – Likely EU Tariffs • If the UK leaves the EU without negotiating a fresh trade deal with the remaining 27 member nations, then the most likely scenario is that the EU’s most-favoured nation (MFN) tariffs would be applied • If the 44% of UK trade in goods that go to the EU were carried out on an MFN basis, around 16% of UK exports to the EU27 would face tariffs exceeding 7%, of which half would be motor cars, which would face a tariff of 10%. • The average MFN tariff levied by the EU is 5.3% • The EU has preferential trade agreements with countries such as South Korea and Israel. These countries have less liberalized MFN policies are less liberal than the EU. The average MFN tariffs that they would face vary from under 5% (Israel) to 17% in South Korea.
  26. 26. The Importance of Passport Rights in Financial Services • Passport for banks and financial firms allows firms authorized by any EU Member State (MS) to establish branches or provide cross-border financial services in other MS • If a post-Brexit world means the UK loses passport rights: 1. Financial service businesses in UK would need to establish subsidiaries in EU increasing funding costs 2. Exports of financial services from the UK to the EU might fall 3. There would also be an indirect effect associated with lower exports, e.g. reduction in legal advice services 4. Migration of financial firms away from the UK – leading to lower inward FDI and a loss of financial services jobs
  27. 27. Will London retain competitive advantage in services? • Pre-referendum, many argued that London’s pre- eminence as a global / EU centre for financial and related business services could be threatened by Brexit • Impact depends crucially on the Brexit deal that is eventually negotiated • London retains many strengths: 1. Large pool of highly skilled labour including critical mass of knowledge on financial services, accounting and law (comparative advantage based on strong human capital) 2. Language, strengths of the UK legal system and a highly convenient time-zone
  28. 28. A Future Outside of the EU – Overview of some Options EEA (Norway) EFTA (Switzerland) Customs Union (Turkey) World Trade Organisation Option Migration controls ❎ ❓ ✅ ✅ EU budget contribution ❎ ❎ ✅ ✅ Compliance with EU rules ❎ ❓ ❓ ✅ Free to negotiate with third countries ❎ ✅ ❎ ✅ Passporting rights ✅ ❎ ❎ ❎ Direct access to Single Market ✅ ❎ ❎ ❎ Import tariffs? ✅ ✅ ✅ ❎
  29. 29. EU Countries likely to be most affected by Brexit Country Trade with UK measured as % of GDP % of investment from the UK Comment Netherlands 7.6% 27.6% Closely aligned in many EU policy debates; favours liberalisation of EU Ireland 11.8% 7.5% Most deeply integrated with the UK, only country with land border Germany 2.8% 2.4% High total value of trade, UK leaving increases political power of French Spain 2.5% 6.0% Around 800,000 UK expats living in Spain, big tourism trade linkages
  30. 30. Brexit – UK’s Net Contribution to the EU Budget Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m) 9,054 8,385 10,178 8,049 8,908 9,374 0 2000 4000 6000 8000 10000 12000 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 NetcontributionsinmillionGBP
  31. 31. Possible Short-Term Impact of Brexit on the UK Economy Impact Comment Weaker exchange rate (depreciation) Sterling fell sharply against US dollar and Euro in wake of Brexit vote Higher prices for imports Over 50% of UK imports come from EU, about half of which are intermediate goods such as component parts High current account deficit External deficit of more than 5% of GDP requires strong net inflows of capital on the financial account – perhaps harder post-referendum because of macroeconomic uncertainty Short run real GDP growth Expected to take possibly two years to negotiate EU exit terms Steep fall in business and consumer confidence Weak demand in supply chains suggest businesses are being cautious Housing market Fall in confidence may dent mortgage demand Possibility of decline in overseas demand although weaker pound increases real purchasing power of US dollars in UK property market Unemployment Unemployment tends to be a lagging indicator of the economic cycle – a month after Brexit, the UK unemployment rate fell below 5%
  32. 32. Impact of Brexit on Developing Countries Trade Foreign investment Economic growth Aid Migration and remittances Global collaboration Brexit is likely to have some significant effects on developing countries over time. Much depends on the nature of the Brexit deals that the UK makes with the EU and other nations + the impact of Brexit on UK growth and government finances. “The UK’s vote to leave the EU comes at a time when many developing economies are already facing multiple shocks: lower oil and commodity prices, a stronger US dollar and a slowing Chinese economy.” Source: UK ODI Report, July 2016
  33. 33. Aspects of the Impact of Brexit on Developing Countries Slower UK growth & weaker £ Contraction in exports to UK from developing nations Countries such as Bangladesh & Kenya most affected Migration flows are uncertain - possible short term rise Fall in external value of £ reduces value of remittances South Africa, Uganda, Nigeria especially affected UK aid was $18.7 billion in 2015 - falling £ cuts the real value 10% of UK aid flows through the EU Key is whether the UK maintains their 0.7% of GNI aid target after Brexit
  34. 34. Changing Relative Per Capita GDP for EU - 2003-2013 Index (EU28 = 100) GDP (PPP) 2003 GDP (PPP) 2013 Index (EU28 = 100) GDP (PPP) 2003 GDP (PPP) 2013 Austria 127 128 Italy 112 99 Belgium 123 119 Latvia 45 64 Bulgaria 33 45 Lithuania 48 73 Croatia 56 61 Luxembourg 240 257 Cyprus 94 89 Malta 82 86 Czech Republic 77 82 Netherlands 133 131 Denmark 124 124 Poland 48 67 Estonia 52 73 Portugal 78 79 Finland 115 113 Romania 29 55 France 111 107 Slovakia 53 75 Germany 116 122 Slovenia 82 82 Greece 93 73 Spain 100 94 Hungary 62 66 Sweden 127 127 Ireland 141 130 United Kingdom 123 109

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