Brexcitement

Crises normally throw up a bunch of new words. Brexit has spawned many of which Brexcitement, Bregret and Neverendum are more colourful. 'Neverendum' is already known to Canadians.

Brexcitement means excessive excitement over any event. Brexit qualifies for this because it is a story that is a heady cocktail of historical recidivism, political tantrums, economic misinterpretation and bureaucratic bungling. Each of these four misadventures is capable of landing us in immense trouble. Together they can result in a disaster.

Europe has been repeatedly torn asunder by wars, major and minor. The Religious Wars of 1618-48 proved that religious differences could destroy societies. Desire to bring about sustainable peace resulted in the Treaty of Westphalia which brought to the fore the concept of nationhood to enfeeble religious movements. First half of the twentieth century saw two World Wars with European roots caused by the urge to uphold the superiority of one nation over others. Emotive nationalism proved cataclysmic and self-defeating.

In 1951, Europeans understood the need for uniting as a group to counter the business competition from the American behemoth and also to avoid internecine conflicts among the nations in the Continent. Thus were born the European Coal and Steel Community, European Economic Community and the European Union. The EU enabled maintenance of political independence of 28 European countries even while reaping the benefits of economic union.

Globalisation was an inexorable consequence of  the realisation that nations could achieve more through cooperation and by forgoing political sovereignty over rules of trade and investment. EU facilitated growth of globalisation which inevitably led to weakening of sovereignty of nations. Dani Rodrik, a Turkish economist with Harvard University, captured this situation beautifully when he said "societies cannot be globally integrated, completely sovereign and democratic at the same time".

Something had to give way. Some EU members started wondering if they must not reemphasise the priority of national sovereignty over the spirit of globalisation. In other words, they started going back in history to recapture the Westphalian essence. This recidivism was the foundation for Brexit.

The Telegraph captures the chronology as follows:

·         1957

Treaty of Rome is signed

France, West Germany, Italy, Belgium, Luxembourg and the Netherlands, six founding members of the European Economic Community, sign the Treaty of Rome, but Britain withdraws from early talks.

1963

With its economy flagging, Britain makes its first attempt to join the Common Market but is vetoed by Charles de Gaulle. The French President accuses Britain of a “deep-seated hostility” towards the European initiative.

·         1973

Britain joins EEC

With de Gaulle out of office, Britain is allowed into the European Economic Community at last, but within a year calls for major reform of Common Agricultural Policy as well as changes in way the budget is financed.

1975: EEC Referendum

Harold Wilson’s Labour government holds a referendum over EEC membership, which splits the party but results on two thirds of British voters saying they want to stay in.

·         1983

Michael Foot defeated

Labour leader Michael Foot promises withdrawal from EEC in his election manifesto, but his party is heavily beaten by Margaret Thatcher’s Conservatives.

1984: Thatcher wins rebate

A key victory for Mrs Thatcher sees her win a “rebate” from Brussels. She had threatened to halt contributions because Britain was receiving far less in agricultural subsidies than some other members, notably France.

·         1990

Britain joins Exchange Rate Mechanism

Britain joins the Exchange Rate Mechanism, 11 years after it was set up to harmonise European countries’ financial systems before the creation of a single currency.

·         1992

Black Wednesday

In what became known as Black Wednesday, Britain is forced to withdraw from the European Exchange Rate Mechanism, after failing to stem intense currency speculation.

·         1997

Single European Currency

Britain declares it will not be joining the euro for the duration of that parliament, after the single currency fails Gordon Brown’s ‘five golden tests’.

1999: British Beef Row:

Tensions rise over France’s ban on British beef during the “mad cow” disease outbreak. France given an ultimatum from Brussels but the ban is not lifted until years later.

·         2007

The Lisbon Treaty

Gordon Brown misses a televised ceremony of leaders signing Lisbon Treaty, which hands greater powers to Brussels. The controversial treaty took two years to negotiate, after plans for an official constitution were abandoned.

·         2011

Bank levy clash

David Cameron clashes with Europe over plans to introduce a levy on banks and restrict London’s financial sector. The Prime Minister promises to bring back powers from Brussels.

·         2013

Cameron makes referendum pledge

David Cameron promises an “In-Out” referendum if he wins the 2015 general election, which he does. He reiterates his manifesto commitment to hold a referendum before the end of 2017.

2016 Feb:

EU Referendum deal:

David Cameron negotiates “new EU deal” for UK after 30 hours of talks but has to make series of concessions. The Prime Minister then announces the referendum will be held on June 23.

2016: June 23

In a close-run vote, the British public decides to exit the European Union. An emotional David Cameron resigns as prime minister the next day.

  

Brexit in figures

                                                     Brexit in figures

	Great Britain	European Union
Inflation (CPI) p.a.	0.1%	0.5%
Population	65 million	508 million
GDP	$ 3 trillion	$ 18 trillion
Per Capita income	$ 46,000	$ 35,000
GDP Growth	2.3%	1.3%
Below Poverty Line	16.6%	17%
Unemployment Rate	5.4%	9.6%
Current Account Balance	Deficit $ 60 billion	Surplus $ 280 billion
Fiscal Deficit	4.38%	2.9%
Exports	$ 503 billion	$ 3,182 billion
Imports	$ 783 billion	$ 2,902 billion

	GB	EU
India’s exports to	$ 8.8 billion	$ 44 billion
India’s imports from	$ 5.1 billion	$ 43 billion

Annual trade between GB and UK is $ 575 billion.

BREXIT is in a way a vote against immigration. GB receives immigrants mainly from Romania, Poland, Spain, Portugal, Lithuania and Italy in descending order. There is net immigration from  GB to Austria.

	Per Capita income in Euro	Unemployment Rate
UK	32,000	5%
Romania	3,000	7%
Poland	8,000	8%
Spain	20,000	22%
Portugal	12,000	12%
Lithuania	6,000	9%
Italy	20,000	12%
Austria	28,000	5%

The table above demonstrates that lower p.c. income and / or higher unemployment rate in other EU countries are causing an exodus into GB. Brexitters want to stop this.

EU started with 6 members, 4 languages, 177 million people and $ 1.6 trillion (2014 prices) GDP. Now it has grown to 28 members speaking 24 languages, 505 million people with $ 19 trillion economy.

USA and EU: American investment in EU is 4 times their investment in entire Asia. EU investment in the USA is 8 times their investment in India and China combined.

Brexit

1)    Global economy continues to teeter between “Risks Off” and “Risks On” situations. Brexit escalates Risk Aversion and signals the onset of another ‘Risks Off’ position. Investments will seek safer havens like the US $, Japanese Yen, gold and other precious metals. Sterling and Euro will face rough weather. Currencies like the Indian rupee will appreciate vis-à-vis Sterling and Euro and depreciate against the US $.Nearly $30 billion FCNR deposits mobilized with extra incentives to avert the foreign exchange crisis in 2013 are likely to be closed in HY2 of 2016-17 creating additional pressure on the rupee.

2)    Credit Rating institutions have warned that UK’s rating may witness a downward movement. UK is likely to dip into recession. Unemployment position will worsen. This will have a ripple effect all around.

3)     BIS (Bank for International Settlements) forecasts the onset of “Risky Trinity” of low interest rates, heavy debts and low productivity. Bank of England has already announced that it is ready to pump in Sterling 250 bn equivalent to $345 bn to stave off any liquidity problem. Quantitative easing gets longer life.

4)    The much talked about interest rate hikes in the US will continue to be on hold. This will benefit India and other emerging economies because reverse flow of investments to the US will pause for a longer time.

5)    UK’s likely recession and depreciation of its currency will adversely affect Indian exports (and exports from other countries also) to UK.

6)    London City’s significance as a financial centre of the world will get dented. Consequent loss of employment and revenue will ravage Britain.

7)    Brexit is caused by and leads to fiscal problems like expenditure on refugees, subsidies etc. Ability of monetary steps like reduced interest rate to solve what are essentially fiscal issues is suspect. The world is moving into deeper uncharted waters. Unconventional monetary  policies introduced post global crisis 2007-08 seem to be never-ending.

8)    Brexit is likely to cause an Exit Contagion. If some of the remaining 27 economies decide to exit the EU, problems will get compounded. Brexit already leads to 16% drop in the economic size of the EU. Any further emasculation will greatly reduce the significance of the Union as a strong trading bloc. The US economy will become more unipolar.

9)    Growth in emerging economies barring a few exceptions like our country has already slowed down. The uncertainties created by Brexit will slow it down further.

It appears that Great Britain has cut its economic nose to spite its political face.

Britain emulates India

In its coverage on Brexit referendum, The Economist has noted that Tories and Kippers have urged their supporters to take their pens into the polling booth on June 23rd to prevent the intelligence services from doctoring their votes. Do they suspect that something like what is alleged to have happened in the Rajya Sabha poll in Haryana may be repeated in Britain?

On the quality of debate in Britain, the magazine fears "the currency of facts will be debased, that of stunts inflated, that of conviction sidelined. It will be de rigueur to question an opponent's motives before his arguments, to sneer at experts, prefer volume to accuracy and disparage concession, compromise and moderation."

British politicians are learning fast from their Indian counterparts.

Brexit or Brin ?

Proposed referendum in Britain on exiting or remaining in the European Union has economic and political consequences irrespective of the voters' choice. Current trends are given in the table below.

President Obama favours the status quo whereas Donald Trump has urged the British to walk out. People's preferences appear odd. Conservatives and the poor appear to be on the same side. Interests of Labour party and the rich seem to coincide.

Financial markets which are already in turmoil may undergo more strain post June 23.

Tension created by adversaries in the referendum has already claimed the life of one Labour MP, Jo Cox. If Brexit is favoured, David Cameron will probably resign as prime minister creating political disarray at least for some time.

Tending towards Remaining	Tending towards Exiting
Labour partymen                Liberal Democrats                Females                Rich                Young                Scientists	Conservatives                    UK Independent Party                    Males                    Poor                    Old                    Farmers