• Monday, June 24, 2024
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Seismic shifts as Britain ends fractious relations with Europe

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The world has talked about nothing else since Britain voted in a referendum on 23 June to leave the European Union (EU). And understandably so! But the UK’s decision to cut itself adrift from Europe should have come as no surprise. It was the culmination of several decades of tortuous relations.When the Treaty of Rome, which established the European Economic Community (EEC), the precursor of the EU, was created in 1957, Britain refused to join the six founding members (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany). Six years later, in 1963, Britaindecidedto join the organisation, but France vetoed its admission. Charles de Gaulle, the French president, accused Britain of a “deep-seated hostility” towards the European initiative. It wasn’t until 1973, after de Gaulle was out of office, that the UK was allowed into the organisation.

But since joining the EEC 43 years ago, Britain has had a stormy relationship with its European partners. At the heart of the constant tension is the strong desire of other European countries tocreate a political union, based on the principle of “ever closer union”, while Britain is viscerally opposed to mergingits national identity in a wider European one. Yet, the drive towardspolitical integration continued apace.The Maastricht Treaty, signed in 1992, gave significant impetus to the “ever closer union” agenda by establishing the European Union. It also created the Economic and Monetary Union (EMU), which led to the introduction of the single currency, the euro. The UK grudgingly ratified the Maastricht Treaty in 1992 but opted out of the euro. Britain also opted out of the Schengen Agreement, signed in 1985, under which internal border checks were abolished across the EU.

You may then wonder. If the UK is not participating in the euro and the Schengen Agreement, two key symbols of European political integration, why is it still dissatisfied with the EU? Well, the truth is that the political projecthas advanced rapidly in other areas. Indeed, since Maastricht, subsequent treaties, the Amsterdam Treaty (1997) and Lisbon Treaty (2007),have considerably increased the EU’slegislation and powers. Given the supremacy of EU lawover national laws, the centralisation of powers in Brusselseffectively reduces the ability of EU nation-states to govern themselves. This presents great difficulties for self-conscious nations like the UK. Then, there is the Four Freedoms that underpin the EU. To be sure, these freedoms – free movements of goods, services, capital and persons – are critical for the proper functioning of the single market. But, with 28 EU Member States and more countries being considered for membership, the free movement of persons has been extremely problematic for the UK.

Britain’s relative economic prosperity and its pull as a destination of choice have attracted huge immigration from other parts of the EU. There are 3 million Europeans currently living in the UK, compared with 1.3 million British living in all the other European countries. Typically, the locals complain about pressures on jobs, wages, and social services, such as housing, schools and hospitals, and loathe the fact that their elected government can’t control EU immigration due to EU law. To most British, therefore, the EU is nothing but a problem!

But that’s not the whole picture. Set against the UK’s concerns about sovereignty and immigration, are the economic benefits of Britain’s EU membership. The EU is a large market of 500 million consumers. And Britain can access the single market, underpinned by the four freedoms, without any barriers whatsoever. It is estimated that since joining the EEC in 1973, Britain’s per capita GDP has grown by 103 percent. The EU is Britain’s largest export market, with about 60 percent of UK exports going to other EU countries. Even though Britain is not part of the Eurozone, its financial institutions are allowed to access the single market through the so-called “passporting rights”. In all, over 3 million British jobs are tied to UK’s access to the single market.

Usually, economic issues determine the results of elections and referendums in the UK. For instance, the Labour party lost the last two general elections, in 2010 and 2015, because British voters didn’t trust it on the economy, and the Scottish people voted against independence from the UK in 2014 when the economic consequences were laid bare to them. But this time, the majority of the British voters emphatically rejected the counsel of global economic institutions, such as the IMF, the World Bank, the OECD and the WTO, and snubbed the advice of nine out of 10 economists as well as the views of 1,300 business leaders, who warned about the economic perils of leaving the EU.

Now, I voted Remain, swayed by the economic arguments, but the majority, 51.9 percent, did not. Why? Well, as Tim Sullivan and Ray Fisman said in a recent article in the Harvard Business Review, “Appeals to rational economic principles fall flat in the face of intense emotion”. And emotions about uncontrolled immigration are very intense in the UK. As one British politician put it, “British politics is now all about the control of borders”. And this is because of concerns about the effects of uncontrolled immigration on local jobs, public services, etc. It is interesting that, in England, only the affluent London voted Remain. All the other, relatively deprived, English regions, as well as Wales,voted massively to leave the EU.

But referendums, like elections, have consequences. First, the political repercussions were immediate and are still reverberating. Prime Minister David Cameron, who called the referendum, immediately resigned. Boris Johnson, who led the Brexitcampaign, and waswidely thought the most likely to succeed Cameron, fell on his sword. The Labour party is in turmoil. Over two-thirds of the shadow cabinet resignedand 172 of the party’s 214 MPs passed a vote of no confidence in their leader, Jeremy Corbyn, for fighting a lukewarm Remain campaign. Scotland, which voted massively for Remain (over 60 percent), is seriously planning for a second referendum on independence from the UK, and analysts say the chances of Scotland voting to leave the UK are now real, threatening the break-up of the UK. There are also fears that the EU itself may fracture if referendums are held and lost in other Member States, such as France (Frexit) and the Netherlands (Nexit)!

The economic consequences were also instant. The pound immediately dropped by 12 percent, its largest one-day fall in 31 years, and Europe’s stock indices fell by about 10 percent. Two major ratings agencies, Standard & Poor’s and Fitch, have downgraded the UK’s debt, the former from AAA to AA, leaving the rating on “negative”, and the latter from AA+ to AA. Most analysts agree that unless Britain enjoys continued access to the single market, it could face dire economic consequences. But leaving the EU means leaving the single market. And EU leaders, including the powerful German Chancellor, Angela Merkel, have said that Britain will not be allowed to access the single market without accepting the free movement of EU citizens. But this is highly unlikely given that Brexit was largely about controlling EU immigration. And British politicians, including those vying to be the next prime minister, have said that the will of the people must be done. So, Brexit means Brexit!

But, so far, the UK has not notified the EU of its withdrawal. Unless it does so, as required under Article 50 of the Libson Treaty, the referendum means nothing. However, UK politicians are not in a hurry to invoke Article 50, while EU leaders want Britain to do so quickly. Once Article 50 is invoked, negotiations on the terms of UK’s exit will continue. But Britain must then leave the organisation within two years of the notification unless the other 27 EU Member States agree unanimously to extend the period. Even so, negotiations on the nature of Britain’s future economic relations with the EU will continue for several years. It is such lingering uncertainty that is causing businesses the greatest concern, and could hurt the economy. But it’s not a one-way street. Europe, particularly Germany, needs the British market too. So, some deal, no matter how long and how imperfect, would be done! But Britain also has the opportunity to shape its own future, to go truly global!

For me, the general lesson from the EU referendum is simple. When people are poor, when there is widespread inequality, when a political system is unfair and people feel marginalised and not in control of their destinies, appeals to emotion and identity will, as Sullivan and Fisman argue in their HBR article, trump arguments for unity and economic rationality. It is a lesson that Nigeria must learn!

 

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