Fears of ‘Grexit’ has yet to wane, but the press is talking about another country’s possible retreat from the EU—Britain. The Economist claims that ‘Brexit’ has become “increasingly possible;” a columnist at Reuters even warns, “Brexit could come before Grexit.”
A similar scenario is unfolding in England. They say blood is thicker than water; as in Greece back in May, politicians in Britain are refusing to adhere to the dictates of Brussels, especially when they conflict with national priorities. David Cameron had hoped to negotiate a freeze on the 2014-2020 budget, but Euroskeptic parties in the House of Commons voted against his plan, calling for a reduction. They refused to chip in more to the EU budget while slashing their own bills.
This is not a big surprise, as Britain has been the ‘bystander’ of the continental tradition; it only joined the Community in 1973. As the Eurozone jumps into deeper economic and political union, Britain is once again having trouble deciding where to stand.
This short post considers the major benefits of Brexit, and points out that the fruits of exiting are not as large as they initially seem. True, an exit might occur out of a political mishap; a ‘yes’ vote on the national referendum would quickly take the country out of the block. But politicians, if they are indeed rational, would not hit the button.
The ‘Pro’s
- Britain could gain £8 billion ($13 billion) a year, the Economist claims, in net budget contributions; the UK annual budget is roughly around £690 billion. (Click here to see the net contributions by each member state in 2010)
- Its financial hub would be freed from various financial regulations that will be implemented to stem future crises, not to mention the financial-transaction tax that might be introduced to expand the small EU budget.
The ‘But’s
- The Single Market now accounts for half of Britain’s exports. If Britain exits, it would no longer be able to enjoy the Single Market’s free movement of goods, capital, services and people, and pay higher tariffs.
- Britain would also have to go through the burden of re-negotiating bilateral trade deals with each of the twenty-six member states.
- The country’s capital also benefits significantly as the hub of euro-denominated transactions; would it be able to retain the position if it no longer belonged to the Single Market?
Perhaps this is simply Britain’s way of negotiating with the continental members. But will it work? Europe has a lot more to lose with Brexit than it does with Grexit. A Greek exit from the euro would raise the risk of a full eurozone collapse. Panic would ensue as depositors start a run on banks in other Mediterranean countries. The risk would be too high. EU members have strong incentive to prevent Greece from leaving. But what high stake does Britain’s exit have for the EU?
Moreover, there is no exit clause in the EU Treaty, making it hard to envision what it would look like. Last year, British businessman Simon Wolfson and a London-based think tank, Policy Exchange even launched the Wolfson Economics Prize that offered a reward of £250,000 for an individual who comes up with the safest plan for how the euro could be dismantled. A winner was announced. “People may disagree on whether leaving the Euro is a good thing,” the winner Roger Bootle at Capital Economics said, “but the contribution of the Wolfson Prize has been to demonstrate that it can be done.”
But so long as everyone continues to play the game, there is simply too much to lose. Even if the Euroskeptics refuse to admit it, the centrifugal force pulling their country closer into the EU is getting more and more powerful.
One would have to assume that if a Greek exit would destabilize global markets, a UK exit would do so as well, perhaps to a different degree. And if that’s true, isn’t it safe to assume that U.S. would be waiting in the wings, pressuring Cameron to ensure that the show goes on?
Hi Ben. I agree that markets would respond to a UK exit, but I don't think there would be the kind of contagion a Greek exit would accompany. The Greek exit voiced by the radical Syriza party came from its refusal to accept the terms of the bailout. A panic would arise because investors would worry about serial default, questioning other Mediterranean governments' ability and willingness to pay. But the UK exit doesn't really concern debt restructuring and default. Nor is the UK part of the eurozone. I think Brexit has more to do with the Brits' refusal to abide by the rules set by a project they were never so fond of.
Never mind. Perhaps you're right. A Brexit would destabilize global markets by illustrating that an exit is actually possible. This would raise the possibility of Grexit and the associated destabilizing panic.
But given this possibility of panic, wouldn't Cameron and his government find it too costly to exit? The stakes are too high. I think the only scenario in which an exit would arise is if the members of the eurozone agreed to exit simultaneously, as the winner of the Wolfson price claims.
I am not an expert on US politics, so I ask back to you: what do mean by the US pressuring Cameron to head towards Brexit? What incentive does the US have in taking Britain out? and if it does destabilize global markets, why would the US want to do that?
Sorry this was such a long reply. You made me realize I didn't articulate my view (that Brexit and Grexit were very unlikely) well enough. Thanks for the comment!