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Current news 10 Mar 2016

Brexit: Yes or no?

In barely three months the British will go to the polls to decide the future of the United Kingdom. Will there be a Brexit?

With a referendum already set for June 23, supporters and opponents of the United Kingdom remaining in the European Union continue to put forward arguments supporting their positions. With the assistance of the BBVA Global Markets Research analysts, we have identified five key aspects used by both sides and analyzed what the impact would be for the country should the Brexit materialize.

Broader foreign market for the UK

The UK’s largest external market is the European Union (EU), which is why it is advisable for the country to remain in the Community block. The Brexit could result in a fall of UK exports to the EU. Productivity could decline. This would happen in the event of disruptions in the price and availability of EU goods and services in the UK, a likely outcome since new trade agreements and conditions would be established.

Growth of trade with non-EU countries

The UK’s trade growth with non-EU countries is much stronger than with the EU. In addition, remaining in the EU’s customs union is increasingly bringing problems to trade growth, since its net exports continue to grow outside the EU, while inside the block they fall.

Without work visas

The United Kingdom is not a member of the Schengen agreement*, and it therefore requires visas for entering the country. However, the UK is a member of the EU and enables free movement and offers jobs to European residents without requiring work visas. The EU has proved itself to be a very valuable and productive source of young employment. Considering that the British population is aging, an exodus of the European workforce from the country would be a risk that could reduce its productivity.

Barriers to non-EU labor

The migration crisis and the welfare rules in the EU are two hot policy issues that would be at the heart of the referendum campaign, but the decision goes far beyond. The EU establishes barriers to the free entry of non-EU labor, meaning that an open, autonomous and globally communicated economy like the UK finds itself at a competitive disadvantage. There is clear evidence of this, since the British labor market has grown dramatically over the last 15 years. However, the lack of skills also reaches record levels, revealing an imbalance between the demand among UK employers and the skills offered by the EU labor force. The main argument of the Brexit is that an optimal balance can only be achieved if the labor market works efficiently. Brexit defenders advocate a restriction on the entry of European emigrants, putting them at the same level as non-EU citizens, which would not be possible if the UK remains in the EU.

Growth of capital flows

The UK has benefited significantly from being within the EU, but out of the Eurozone. As regards foreign direct investment (FDI), the UK benefits from belonging to a single market that allows the free movement of capital inside its borders, and from which it has historically received nearly 50% of its FDI stock. The UK’s capital flows have increased in recent years, becoming the third largest in the world in 2014, only surpassed by the flows to the U.S. and China. The Brexit could trigger an outflow of investment if the UK becomes a much less attractive place for keeping assets.

Strict EU regulation

The UK is funding its trade and current account deficits with the increase in net foreign direct investment flows, so the Brexit should make sure that companies preserve those flows. The defenders of a Brexit claim that this will be the case, since the EU is about to unveil a very strict regulation that would affect the British financial sector and FDI capital flows. Brussels is penalizing the foreign financial institutions located in London by imposing taxes on transactions, interfering with banker remuneration and applying multiple regulations that many finance professionals consider burdensome and unnecessarily costly. Many question the need for so many regulations and arbitrary taxes. The Brexit would free the British authorities from a highly politicized and bureaucratic legislation, which is one of the distinguishing features of European institutions. The defenders of the Brexit believe that more global legal codes should be created, supervised by British institutions, which would contribute to the streamlining and liberalization of the financial markets, enabling the UK to consolidate its leading role in global finances.

Business stability and support

The UK benefits from the standardized system of tariffs and trade agreements between the EU and non-EU countries, which provide stability to businesses and helps British companies plan the development of capital and the workforce in the long term. Leaving the EU would result in an outflow of capital and FDI from the UK, and in the short term in higher unemployment, given that workers located in the UK would return to their home countries in the EU. The opponents of the Brexit have also warned that the EU could penalize the UK by replacing the current trade treaties with more unfavorable ones. Others also point out that the UK would be at a disadvantage, since it would face stiffer competition from both EU and non-EU companies.

Better prices and more flexibility in trade

Should the UK leave the EU, thus no longer being a member of its customs union, it would enjoy the benefits of a liberal market. Lower prices and greater trade flexibility are two key factors. The British Parliament has asked the famous British economist Pat Minford to analyze these benefits. According to Minford, the benefits of a Brexit would be huge and immediate. The British economy would be able to import at “global” prices that, according to his models, would be 10% below the current tariff established for being a member of the EU. This would trigger a positive shock in productivity, helping the UK dodge the immediate adjustment conditions that would result.

Backing from national and NATO military forces

The EU has no standing army, but the national armies of its member states make up a security alliance within the block. Remaining in the EU offers the support of each of the national forces, in addition to NATO, a broader military support base than it would have should the Brexit materialize. The opponents of the Brexit point out that this is not the right time for breaking the alliances with the EU because of factors such as Russia’s expansionism, the migration crisis, the terrorist threat and the conflicts in the Middle East.

The UK is a leading member of the NATO

The defenders of the Brexit do not believe that national security will be threatened because the UK will continue to be a leading member of NATO, is a permanent member of the UN Security Council and has nuclear energy and a professional army. The savings resulting from leaving the EU, however, could help fund key military plans such as the renewal of the Trident nuclear program. The additional funds could also be used to drive other projects that have been reduced recently in years of austerity and, perhaps, could also increase the UK’s contribution to NATO’s budget.

*Schengen agreement allows for passport free travel through 26 European states as participating countries have agreed not to impose border controls

Countries signed up to the agreement are: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweeden, Switzerland.

 

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