Brexit: Long, arduous road ahead

Sunday, April 02, 2017

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Last week, British Prime Minister Theresa May formally informed the European Union (EU) that the United Kingdom (UK) was leaving the union but not Europe, after 40 years, in keeping with the razor-thin 51.9 per cent majority decision made in the June 2016 referendum.


The objective of the UK as stated in Mrs May’s letter is "to agree with the European Union a deep and special partnership that takes in both economic and security cooperation".


"To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU," the prime minister wrote. Note that she concedes that there could be no deal, but exhorts both sides to "work hard to avoid that outcome".


Brexit involves risks of serious economic damage, but those advocating leaving Europe are convinced that the gains outweigh the risks. The problem of any cost-benefit analysis of the implications for the UK of leaving are known and the so-called gains are speculative. The gains seem to be those which constitute intangible objectives of national pride and the losses are tangible quantifiable losses.


The first risk is that Article 50 provides exactly two years before withdrawal, during which the two sides can negotiate a new arrangement. The two-year period can only be extended by an absolute consensus of the remaining 26 member states. But two years is not enough time to complete a negotiation which is so enormous in scope and extremely complex.


The most probable situation is that the UK will leave before the negotiations are completed and the talks go on for several more years. There is also the possibility that the two sides may not be able to reach agreement.


The second risk is the fragmentation of the UK into two or three smaller countries. England voted for Brexit by 53.4 per cent to 46.6 per cent; Wales voted for Brexit 52.5 per cent to 47.5 per cent; while Scotland wanted to stay by 62 per cent to 38 per cent; and Northern Ireland by 55.4 per cent to 44.2 per cent. The Scottish National Party, which holds power in Scotland, has voted to have a second referendum on whether to leave the UK.


The third risk is that the objectives are not compatible from the point of view of the EU. The objectives are: (1) control of immigration, which means the number of Europeans entering Britain; (2) no longer under the jurisdiction of the European Court of Justice; (3) out of the single market and custom union, but wants some form of customs agreement; (4) "a new, comprehensive, bold and ambitious free trade agreement"; and (5) phased transition to avoid the disruption of a sharp break. The EU will not allow free trade without free movement of labour.


The fourth risk is that the uncertainty has already taken a toll on the economy. Many banks and financial institutions in the world’s premier financial centre, London, are already making plans to scale down operations and even to relocate to Frankfurt, Paris and Ireland. Job losses are estimated to be as high as 30,000. Meanwhile, there has been a significant depreciation of sterling, thus increasing the cost of living.


Hopefully, in time Britain will recover and achieve the hopes borne by those who voted to exit. Whatever happens, the road ahead is long and arduous.

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