Brexit - What Happens Next?

I am very confused – yes I know it does not take much. I recall when the Brexit result was announced there was much rejoicing from the leave campaign, including a number of my friends here in Australia. My initial reaction was one of shock to be honest; I did not vote but if I was in the UK at the time I would have voted remain. You may recall that the campaign itself was a very bitter one, with all sorts of accusations being levelled by both sides. My reasoning behind voting to remain would have been primarily based on the fact that the economic advantages of being within the EU outweighed the perceived disadvantages. A major issue for myself (I did post this at the time) was once the vote had been cast, was the level of complexity it left behind to disentangle the UK from the EU. Much of that detail is now being uncovered, and many of the advantages which were listed during the campaign have been debunked. Despite this there is still an enormous amount of support for the leave decision which does not appear to be based on fact just statements such as “we are taking control back”. This has led to my confusion.

I will try to summarise some of the arguments which were discussed and also be reasonably specific as to which EU laws may be rolled back. Much of this detail is still under debate but these are the high level considerations.

Cost. The costs of EU membership to the UK is ￡15bn gross (0.06% of GDP) – or ￡6.883 billion net. UKIP claimed that the cost of EU membership in total amounts to ￡83bn gross if you include all possible costs, such as an ‘estimated’ ￡48bn of regulation costs – or ￡1,380 per head.

Inefficient policies. A large percentage (40%) of EU spending goes on the Common Agricultural Policy. For many years this distorted agricultural markets by placing minimum prices on food. This lead to higher prices for consumers and encouraging over-supply. Reforms to CAP have reduced, but not eliminated this wastage.

Problems of the Euro. Membership of the EU doesn’t necessarily mean membership of the Euro. But, the EU has placed great emphasis on the single currency. However, it has proved to have many problems and contributed to low rates of economic growth and high unemployment across the EU. Fortunately, the UK stayed out of the Euro.

Pressure towards austerity. Since 2008, many southern European countries have faced pressure from the EU to pursue austerity – spending cuts to meet budget deficit targets, but in the middle of a recession these austerity measures have contributed to prolonged economic stagnation. In particular, Greece was forced by its creditors to accept austerity, when some economists have argued this is counter-productive.

Net migration. Free movement of labour has caused problems of overcrowding in some UK cities. The UK’s population is set to rise to 70 million over the next decade, partly due to immigration (of which 50% is from EU and 50% from non-EU). Immigration has helped to push up house prices and led to congestion on roads. The concern is that in the EU, the UK is powerless to place a limit on immigration from Eastern Europe because free movement of labour is a cornerstone of the EU. I will look at this in more detail in a separate section given it was deemed to be very close to the top of the list of reasons for leaving the EU.

More bureaucracy less democracy. It is argued that the EU has created extra layers of bureaucracy while taking away the decision-making process further from local communities. For example, the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is ￡7.4bn. The introduction of Qualified majority voting (QMV) means that on many decisions votes can be taken against the public interest of a particular country.

Now some of the laws that UK can potentially unwind upon leaving the EU.

Free movement of labour law. Immigration was largely cited as a reason for people voting Brexit. As a member of the EU, the Government does not have control over the number or type of EU migrants who come to the UK seeking work. Leaders of the Leave campaign said they will introduce an Australian-style points system, where all migrants would be subject to the same rules, and could be selectively refused entry. Free movement of labour applies across the EU, extending even to Switzerland and Norway – who are not EU members, but have free trade agreements with the EU.

Child Benefit for migrant workers law. Currently, EU citizens working in the UK can claim child benefit, even if their children are not living in the UK.

Working time directive. Under EU law, it is illegal to make an employee work for an average of more than 48 hours a week. In 1992, John Major opted out from this directive, but the Labour Government opted back in six years later. Working voters who backed Brexit are unlikely to want to see this protection disappear, but it could still be scrapped.

Fisheries Policy - The Common Fisheries Policy gives European fishing fleets equal access to the waters of all EU states within 12 nautical miles of the coast. Quotas are imposed to preserve fish stocks – which Boris Johnson has previously described as ‘crazy’. The Leave campaign promised that Brexit would help fishermen ‘take back control’ of Britain’s fishing waters and fish stocks. It should be noted however that communities such as Grimsby rely on jobs which process fish caught within the EU not just the UK waters.

VAT on energy bills law. EU law says that the standard VAT rate must be at least 15 per cent. The reduced rate, which only applies to certain specified goods and services, must be at least 5 per cent. Governments aren’t given the freedom to decide that there should be no VAT on chosen items. Outside the EU, the Government could make gas and electricity bills VAT-free. This move would be socially progressive, as the people most affected would be those on the lowest incomes.

Climate Change Directive. The Open Europe think tank see the renewables directive as the most expensive piece of legislation imposed by Brussels. It sets targets for tackling climate change, such as achieving a 20 per cent share of energy from renewable sources by 2020. The cost required to achieve these targets is reputedly ￡4.7bn a year, and with Brexit campaigners tending to be sceptical about climate change, scrapping this directive could be seen as a useful way to save money – although many would disagree.

So let’s now consider the counter arguments.

The cost of the EU is a relatively small percentage of overall UK government spending – 0.06% of GDP.

The UK has received regional funds over the years, which has helped economic regeneration of areas like South Wales and the North East.

The CAP and other policies are in a long slow process of being reformed. If the UK stays in the EU, it could, in theory, help to promote policies which work in the long-term interest of the UK and reform inefficient policies like CAP.

An estimated 3.5 million jobs are linked to trade with Europe. Some jobs may be threatened if tariff barriers were to rise outside the EU.

The UK is the third largest recipient of inward investment in the world. Access to the Single Market is one factor in encouraging this inward investment. The investment is important for UK economic growth and jobs.

Some EU bureaucracy has been beneficial in promoting competition, e.g. forcing mobile phone networks to limit charging when using mobiles abroad.

UK newspapers have tended to exaggerate and even misinform readers about ‘EU rules and regulation’. This is an extensive list of EU myths– where UK newspapers have blamed EU regulations, but it was actually inaccurate or misplaced.

Issues like farming and fishing and the environment are global issues which need to be tackled within a European framework; it is insufficient to have just a national policy on fishing and the environment because the issues by nature require global co-operation, e.g. solve global warming, over-fishing.

The EU Health Insurance Card enables EU citizens to receive emergency healthcare on the same terms as the citizens of the EU country they are visiting (often free). (Euro-movement)

By staying out the Euro, the UK has retained independence over monetary policy, fiscal policy and the exchange rate. The UK doesn’t have the same pressure to pursue austerity as countries in the Eurozone have. This shows that the UK can combine membership of the EU with flexibility over economic policy.

Migration works both ways. Many British people have emigrated to take advantage of opportunities elsewhere in Europe. An estimated 748,010 Britons live or work in the European Union. However, net migration has been running at around 200,000 a year since the early 2000s.

EU migrants are net contributors to the UK Treasury. Although they cost the UK regarding demand for public services, they contribute relatively more in taxes. The main reason is that migrants are more likely to be of working age 20-40. Therefore, they need relatively less health care and no pensions. The UK native population is rapidly ageing – this places stress on public finances because of a greater need for health care and pensions. Without net migration, there would be a greater strain on public finances.

The free movement of labour enables a more flexible labour market, with immigrants able to fill gaps in the UK labour market, such as nursing and plumbing. Also, the additional labour increases UK productive capacity and helps increase real GDP. The large numbers of net migration to the UK in recent years may reflect a temporary situation of relatively higher growth in the UK than Europe and may subside when (if) the Eurozone recovers.

Problems attributed to EU migration are more due to general government policy – e.g. cuts to share of GDP spent on health care.

It should be noted that the UK represents a significant economy which EU countries would wish to trade with. For example about one in seven cars made in Germany are sold in Britain. More German cars are exported to the UK than anywhere else. If however the UK leaves the EU all these trade agreements will need to be renegotiated.

The British government appears to be following a path which is looking for cherry picking all the best parts of EU membership and rejecting the parts it does not like. Obviously the EU negotiators are not accepting this approach. It seems to want to remain in the customs union as part of the single market - which was actually devised primarily by Margaret Thatcher as a point of note. This is not to say that trade agreements cannot be reached but there does not appear to be any sort of plan, and this could be potentially very time consuming.

It is worth considering the immigration issue as this was seen as a major disadvantage of being within the EU. You will note that only 50% of the net migration numbers come from the EU. These figures are debated, but we will assume this is correct. It should also be considered that there are a significant number of workers from the UK working within Europe.

The following information was obtained from the Casey Review: A review into opportunity and integration.

“The unprecedented pace and scale of population change has been having an impact, particularly in deprived areas, at a time when Britain has been recovering from a recession and concerns about terrorism, immigration, the economy and the future of public services have been running high. Problems of social exclusion have persisted for some ethnic minority groups and poorer White British communities in some areas are falling further behind. As the initial fieldwork for this review concluded, the EU referendum posed another question about our unity as a nation, sparking increased reports of racist and xenophobic hatred.”

Over the last two decades, total immigration to the UK has doubled, from around 300,000 people per year prior in 1997 to more than 600,000 in 2015.

 There has been an unprecedented increase in European migration over the last decade, largely for work and shorter-term stays, although there are signs that growing numbers of EU migrants are settling permanently.

 In the year ending December 2015, the ‘net’ immigration figure was 333,000 – but emigration does not really ‘cancel out’ immigration; it is the total churn in population that can alter the characteristics of a neighbourhood and the net figure of 333,000 reflected almost a million people in total arriving in or leaving the country over 12 months. Additionally, the placement of asylum seekers across the country – often in poorer communities – and the presence of an unknown number of illegal immigrants, adds to the level of change being experienced.

 “We were told on a visit to Sheffield that more than 6,000 people of Roma or Eastern European heritage (of which more than half are under the age of 17) live predominantly in one ward. The impact on schools was evident with the number of EU nationals’ children having increased from 150 to 2,500 in five years.”

 There is no doubt that the face of the UK is changing – and upon reading the arguments it is difficult not to conclude that the Brexit vote was based on a viewpoint of controlling migration largely.

 The final area which I will consider is the effect on Ireland. This was something that was never considered during the leave discussion but will have a major impact on the UK moving forward.

 The political sensitivities of Brexit are considerable. Most nationalists voted to remain within the EU. They see themselves as Irish citizens, i.e. members of the EU, and wish to retain that status. A minimum demand is special status for Northern Ireland. A majority (but a far from overwhelming one) of unionists voted to leave. Whilst the risks to the current relative peace are minimal, the extent of continuing inter-communal polarity provides a strong case for special treatment for Northern Ireland.

 A bilateral bespoke deal between the UK and Irish governments to maintain the Customs Union between the two states – which would continue to render invisible Northern Ireland’s frontier with the Irish Republic - would require EU approval.

The UK government has listed tariff - free trade across borders, via a special agreement with the EU, as a priority. Failure to conclude such a deal will impact significantly upon Northern Ireland as a site of tariff checks.

The UK government has listed the maintenance of a Common Travel Area (CTA) between the UK and Ireland as one of its negotiating priorities. Its abolition would have significant potential impact upon travel across the border.

The EU have pointed out that this could potentially create serious issues – and it should also be noted that the Good Friday Agreement in certain cases supersedes EU law.

So what is the conclusion of all this. To be honest I am really confused – and I am not sure what the outcome will be. One conclusion might be that the Brexit vote in effect became a protest vote against perceived changes to the UK where the electorate was never really consulted. This is plausible, however the long term effects of the vote may well be detrimental to the overall economic position of the UK. I would be extremely interested in any inputs which would help explain how the UK has arrived at this point.