The Political and Economic Impact of Brexit on the EU

By Elinor Aspegren (PZ ’20)

In a referendum on June 23, 2016, 51.9% of voters in the United Kingdom (UK) elected to leave the European Union (EU) in a decision commonly referred to as Brexit. On March 29, 2017, the UK government invoked Article 50 of the Treaty on the European Union, kickstarting negotiations regarding the UK’s departure from the EU. Brexit’s impact extends beyond the UK, as there are also severe economic, political, and social costs for the countries within the EU.

The EU is a group of 28 countries that operates as a cohesive economic and political block. With 500 million people, the EU has 7.3% of the world’s population but accounts for 23% of nominal global GDP. Free movement of labor and capital have helped create a more flexible European economy. Nineteen of the countries use the euro as their official currency. The UK contributes about  £8.1 billion (around US $10.1 billion)— unlike most EU members, the UK does not use the euro, unlike most EU — to the EU yearly.

The UK and the EU have always had a strained relationship. The EU began in 1951 as the European Coal and Steel Community (ECSC), and although the UK was encouraged to apply, it stayed on the sidelines. 10 years later, the UK applied to join the EU, but its entry was vetoed twice as they were accused of a deep-seated hostility towards European unification, and prioritizing their relationship with the US rather than European counterparts. Ultimately, the UK was accepted in 1973 after a change of leadership in the EU.

Less than ten years into the partnership, the UK proposed leaving the EU because of concerns about unification creating domination, and in 1992, the country withdrew from the Exchange Rate Mechanism, discarding use of the Euro in exchange for the pound.

The greatest problem experts foresee the UK will face in response to leaving the EU is diminished domestic economic growth. Further, exit fees could ultimately cost £60 billion over the next two years, because the UK signed up for the EU budget when it became a member, which is spread out of seven years (ending in 2020).

Another disadvantage is the potential loss of Britain’s tariff-free trade status with the other EU members. Tariffs raise the cost of exports, making British companies higher-priced and less competitive, as well as costing the UK more money for goods they could originally get for cheaper.

Beyond the UK, however, economic effects for the EU are numerous.

A study published by Erasmus University Rotterdam predicted that countries closest to the U.K. — such as Belgium and the Netherlands, plus those with high volumes of trade with the UK which include  Germany and France — will suffer the greatest economic impact from Brexit in comparison to other EU countries.

Trade, is the greatest concern for Germany and Cyprus- as the UK is Germany’s  third largest trading partner and Cyprus’ second largest trading partner. Ireland will also be greatly affected by the vote due to the country’s deep economic ties to the UK, as it imports 89 percent of its oil and 93 percent of its gas from the U.K..

Brexit will also ultimately lead to a smaller EU budget as a whole, with increased member-state contributions. As the UK is the third largest contributor to the EU behind Germany and France, other member states will have to make up for that loss.

In the long term future of the EU, Brexit could inspire greater protectionism within the  EU, as the strength of smaller protectionist states grow. Protectionism is the practice of shielding a country’s domestic industries from foreign competition by taxing imports. Protectionism has already grown in the EU, with almost half of all EU trade policies created since 2009 hindering international trade with countries outside of the EU. This protectionism could lead to heightening trade restrictions, a rise in geopolitical tensions and a rising economic toll from natural disasters.

Beyond economic implications, Brexit may also disrupt political processes within the EU. UK representatives and citizens are currently present in all of the EU’s core institutions, including the European Parliament, Court of Justice of the European Union, and the European Council.

Moreover, some believe that Brexit would significantly weaken the EU’s global role. UK is the EU’s foremost military power and also brings significant diplomatic network, intelligence capabilities and soft power to the EU.; Because the EU lost a substantial amount of military support, they created a new military coalition called PESCO.

Brexit could also shift the power balance in the EU. Smaller member states are worried about emboldening Germany based on 20th century history, which would influence decisions one way in the EU, as the country seeks to exercise EU leadership.

Overall, while some believe that Brexit will ultimately lead to a slew of countries leaving the EU, it is more likely that this vote will strengthen the relationships between remaining members of the EU. The economy of the EU will likely weaken and suffer for a time, but it will likely will balance out with time. Ultimately, this vote will not lead to the disappearance of the EU, but its strengthening.

Leave a Reply