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9 Things To Know About The Brexit Vote

9 Things To Know About The Brexit Vote

On June 23rd, Britons will vote on a referendum to “Leave, which the media has coined as “Brexit,” or “Remain” in the Economic and Monetary Union (EMU). The European Union (EU) represents the member countries that have agreed to the EMU. The headquarters of the EU is in Brussels.

The United Kingdom’s (UK) relationship with the EMU, and Europe in general, has long been one of the most divisive and emotional issues in British politics. Maybe it is their long historical view of being an island nation, but many Britons have a perception of being European without actually being “Continental,” and many see themselves as different in many ways, which is what has created the call for a Brexit vote.

There are many EU member nations that are less integrated into the EMU than others. This is typically done by opting-out out of certain policy areas. The most notable opt-out by the UK has been the country’s decision not to adopt the euro as its legal currency. As part of their EU membership, the UK kept the right to retain their independent currency, the British Pound (GBP). The UK also does not participate in the Schengen Agreement, which eliminates internal EU border checks. Everyone who arrives in the UK needs to go through passport control, which is not the case when traveling from France to Germany, for example.

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The UK also has opted-out of police and justice overview, and the country also has opted-out of the Charter of Fundamental Rights, which means many of their legal cases do not end up in the Luxembourg Court of European Justice. In general, the UK got just about everything they negotiated for in their EU membership, and in return the country got tariff-free access to the Eurozone countries, less red tape in everything from banking to shipping, standardized product rules, more foreign direct investment as a gateway to Europe, and a lot more access to its EU trading partners.

But EU membership comes with a cost. It is estimated that it costs the UK about GBP 340 per year per household to be a member, and while the benefits are estimated to be almost 9-times that at GBP 3,000, UK politicians only see the transfer of payment to the EU.

The major downsides as it is being presented today by the “Leave” proponents are that as a member of the EU, the UK has to take a seat at the table and both follow and implement the policy areas they’ve agreed to abide – a loss of independent decision making. More importantly, the euro crisis has made it unlikely that the UK will adopt the single currency any time soon. The perception that UK payments and funds are going toward the bailing out of inefficient EU members such as Greece, Ireland, Spain, and Portugal has created a view by many that wealthy members are providing free handouts to those nations unwilling to carry their own weight. To make matters worse, recent terrorist attacks in the Eurozone, amplified by the Middle East migrant crisis, have reinforced perceptions that refugees will pour into the UK from the EU, creating massive security concerns. All these points, valid or not, have fueled the euro skepticism that now runs strongly through parts of the Conservative Party and the UK public at large.

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While recent polls show the UK is now almost equally divided between the “Leave” or “Remain” referendum vote, it’s hard to understand why approximately 50 percent of Britons want to leave the EU.

1. Leaving the EU will not significantly reduce the payment the UK makes

The average amount paid to the EU is GBP 350 Million, and it will not be significantly reduced – if the UK wants to have the same access to the Eurozone market, the EU payment will still be required.

2. Leaving the EU will not mean reduced immigration

The UK does not participate in the Schengen Agreement, and they have their own border checks and immigration policies that are not tied to the EU. The UK has accepted very few refugees from the war-torn countries of the Middle East, and the country can continue to choose to accept more or fewer refugees from this region. The border issues they have with EU countries – like at the shipping point of Calais, France – will worsen as they reduce their cooperation with EU immigration authorities.

3. The UK will have no say in future EU policy

While the UK will still be paying the EU fee, the country will no longer have a say in how the money is spent – or on any future policy. With a Brexit, the UK will lose all access to those institutions, while still having to follow EU policies. Thousands of UK representatives working for the EU in Brussels and at other EU locations will lose their jobs.

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4. The UK will lose access to the “services” market

With the EMU, Britons can work in the Eurozone without work visa requirements. UK companies with operations in the Eurozone can transfer Britons without immigration issues or delays. The current EMU agreement needs no provision for meetings or non-permanent consulting engagements, which at one time required a visa. UK companies are also able to hire the most qualified resources – at the best cost, in the best location – without restrictions, and move them around the Eurozone at will. With a Brexit, EU citizens will not be able to work in the UK without a visa. Since the UK will not be in a position to negotiate with the EU, a leave means the UK will lose the Eurozone services market – a potentially financially significant event to the UK labor market.

5. The UK will experience financial volatility

No longer will the UK be a gateway to the EU. And since UK stock and bond investing will now be more difficult, foreign direct investment in the UK will decrease. The result will be reduced demand for the GBP, resulting in an initial UK stock market and a GBP bond selloff – a potentially large impact on the capital markets and money markets.

6. The referendum is not legally binding for the UK government

While the referendum, regardless of the outcome, is not legally binding (the UK government can choose not to exit), a Brexit vote will almost certainly lead to the UK exiting the EU.

7. Leaving is not so easy

A complete change in the composition of the UK government will take place with Brexit. Along with the exit, an endless amount of legal changes will need to be made too. What took years to implement, will take years to reverse – and the cost will be significant.

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8. The impact on the average Briton will be significant

If you are a Briton, you can search the “job wanted” ads in the entire Eurozone. With an exit, the job market will suddenly become very small. Britons, now accustomed to buying properties in Spain and elsewhere in the Eurozone for retirement or business, will find themselves with the old issues of the past. The UK travel and tourism industry have publicly stated its preference that the country remain in the EU, as tourism from EU countries is forecasted to decrease as a result of a “Brexit.”

9. A UK exit will be a vote of “no confidence” in the EU

A UK exit will certainly negatively impact the EU as it will be seen as a vote of “no confidence,” forcing the euro into perilous volatility. For several years – and in particular during each major crisis or bailout, with the last being Greece – opponents of the EU have been calling for the dissolution of some or all of the Union’s agreements. At the very minimum, many of these voices have argued for the removal of countries that are not maintaining their agreed economic performance metrics.

The Brexit Questions That Remain

While the EU institutions have been accused of being overly bureaucratic, the results for the average Eurozone member have been phenomenal. As such, questions over the “Brexit” remain:

  • If the UK is not in the EU, will the UK still be competitive?
  • Without the EU, can the UK continue to grow economically?
  • Without the UK will the EU survive, or will this be the beginning of the end?
  • If the UK remains, how will the EU deal with the concerns of the UK?

Dr. Alfred Sanders is a professor of finance at the Jack Welch Management Institute, and a Partner, Capital Markets Consulting at Genpact.

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