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Global Market Fears of Brexit Are Way Overblown

Global markets shouldn’t fear Brexit. Contrary to alarmist reports by the “remain” camp, the world will not suffer some sort of calamitous economic meltdown if the U.K. votes in favor of leaving the EU in this Thursday’s referendum. If the “leave” campaign prevails, the U.K. will almost certainly be able to retain most, if not all, of the major economic perks that it enjoys as a full EU member—and do so without having to commit to all the political entanglements that threaten its national sovereignty.

While the mechanics of just how exactly this will all happen have yet to be worked out, it is neither foolhardy nor naïve to believe that the U.K. would be able to craft an agreement that would insulate British businesses from suffering meaningful losses in terms of sales and productivity during the transition away from Europe.

With the vote too close to call, the propaganda battle over whether the world’s fifth largest economy will stay or leave has heated up in recent days. Those in the “remain” camp have been turning up the scare machine in a bid to win over undecided voters, claiming that a U.K. withdrawal from the loosely knit confederation could wreak economic havoc not just on the British economy, but on the world economy as well.

But much of those scare tactics rest on the assumption that if the “leave” camp prevails the U.K. would withdraw from the EU entirely. But the “leave” cap insists that is not the case. The U.K. would never throw up trade embargoes against its former EU allies, for example, nor would it smash 40 years of economic progress based solely on the results of a single (non-binding) referendum. If the U.K. votes to leave the EU, they say, it would be simply withdrawing from the political aspects of the trading bloc—i.e. those which threaten its national sovereignty, not those that affect its economic prowess.

Once upon a time, the European Union was known as the European Economic Community, whose main goal was to lower trade barriers between member states while helping to promote European exports abroad. But while the EEC was successful in promoting intra-European trade, it was less successful in promoting trade with nations outside the bloc, like the U.S., Russia, and China. It was hard to promote trade when each nation in the bloc had their own currency, language, culture and regulations.

It was then decided that for the EEC to be successful on the international stage, member states would need to harmonize regulations, drop internal borders, and minimize currency risk. And to do that would require member states to give up a little bit of their national sovereignty.

The U.K. has always been wary about further integration with its continental neighbors, but it signed the Treaty of Maastricht in the early 1990s and the Treaty of Lisbon in 2007, both of which changed what had been a purely economic trading bloc into the loose confederation we know today as the EU. But efforts to further unite EU members politically into what would essentially be a European federation have been vehemently rejected by the British government.

For example, the U.K. was one of only two nations in the EU to “opt-out” of the EU Charter of Fundamental Rights, on the erroneous claim that it would somehow spell disaster for businesses in Britain. And in 1995, Britain refused to sign the Schengen Agreement, which allowed member states to eliminate internal border controls, thus helping increase trade and efficiency on the continent.

Then, in 2002, the U.K. failed to join 12 other member states in adopting the euro, choosing instead to keep the pound. And following the financial crisis of 2008, U.K. Prime Minister David Cameron vetoed legislation that would have brought eurozone nations closer together in a fiscal compact, because the banks in the City of London were against the introduction of a financial transaction tax—or basically any new regulation that could possibly unify the European banking system.

The U.K,’s obstructionism has hurt the EU’s ability to unify into an effective polity, and as such has hurt its ability to effectively respond to the recent downswings in the global financial arena. The U.K. has either opted out or blocked every major push by member states to create a more perfect union in the last decade, and in doing so has prolonged a recession on the continent, where economic growth has ground to a halt.

 

In this sense, a Brexit would help the EU, and it would get the U.K. of the way so that the core members of the EU—Germany, France, Italy and Spain—could move forward in fixing many of the issues holding the continent back. The policy of allowing member states (like the U.K.) to “opt out” of EU provisions should be ended as it only creates divisions and confusion inside and outside of Europe. By attempting to accommodate all members, the EU has become weak and ineffective. Brexit would give Europe the chance to move forward and build a stronger union.

But Brexit doesn’t have to mean that the U.K. is out of the picture entirely, or for good. By opting-out of the euro and refusing to open it borders, the U.K. has already proved that it can stay independent while remaining a strong trading partner to Europe. Brexit would thus simply reaffirm the U.K.’s current status as an outsider, lumping it officially as an associate member of the EU. Sure, leaving the EU would mean leaving Brussels, but the U.K. never wanted to be part of the European political system anyway.

Brexit is really a downgrade of the U.K.’s membership in the EU, placing it in a similar camp as the non-member nations that form part of the European Economic Area (Norway, Iceland, and Liechtenstein), which all have access to the single market but which maintain sovereign power by being outside the EU polity. Another example is Switzerland, which is neither a part of the EU nor the EEA but has successfully entered the single market through a series of bi-lateral trade agreements with the EU.

In the end, a Brexit wouldn’t signal the end of the U.K.’s association with Europe. It would just confirm its current status as an associate member. The City of London would remain the center of European finance as it would continue operating outside the stringent scope of U.S. and EU regulators (its entire raison d’etre). By exiting the EU’s political process, the U.K. will be able to maintain its precious sovereignty while getting out of the way of the other EU members who want to form a closer union. That’s the definition of a win-win.