Brexit: Relationship of United Kingdom’s and European Union

United Kingdom’s Relationship – European Union

Brexit vs Membership

Version 1.0

The document is intended to give a balanced view of the upcoming referendum on continued membership of the European Union and does not nessasarily reflect the authors personal views, for information purposes only.

Contents

• Introduction
• History
• Political evolution to Brexit
• Cost-benefit analyses of EU membership
• The effect of the EU on UK trade relations
• Impact of immigration from the EU
• The impact of EU regulation
• Fiscal consequences of EU membership – the EU budget
• The EU’s effect on consumer prices
• Foreign direct investment (FDI)
• UK’s Exit by 2020 vis-à-vis Current Status
• Conclusion

References

Introduction

EU membership of UK has several economic impacts. The most critical one, arises through the single market programmed which provides market integration with EU. At the same time, there are other areas in policy matter which is significantly impacted by the EU membership of UK. However, UK membership is ongoing debate in political and economic circle in the region. Many European experts has decided that it may be effective to develop debate on the suggested alternatives about the UK membership. For the purpose of referendum, it may be highly useful that those who are supporting UK to quit EU, may draw up alternative argument on trading and other arrangements. This can also help the debate to run up to the referendum. At the same time, those who are against UK’s membership must focus on the trade and economic issues relating to EU and UK without getting into other subject. In this report, an endeavor will be made to develop insight on the subject from various economic and political aspects. The purpose of the report is not to develop inference or conclusion about merit and demerit of Brexit. The focus will be more on various political and economic impacts including its implication on UK. With the understanding of economic and political aspect and its impact, it will provide a framework to assess the costs and benefits of EU membership. However, it may not still indicate conclusively that UK will be better or worse outside EU membership. In this manner, a counterfactual case study is necessary for cost and benefit purposes. It may not be of any use to know that Common agricultural policy will cost UK £10bn on a yearly basis without having clear knowledge about the scenario that how UK’s agricultural sector would be supported post Brexit.

History

“We must build a kind of United States of Europe. In this way, only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living. The structure of the United States of Europe, if well and truly built, will be such as to make the material strength of a single state less important. Small nations will count as much as large ones and gain their honor by their contribution to the common cause.’’ Winston Churchill, 1946. In this historical speech shared with academics of Zurich University, Winston Churchill had elaborated on his political vision for European Union. After over half-a-century, the name Europe is still not equal to EU as it does not include all European states from the continent. EU is a super political, economic and governance structure of its member nations where EU’s power is much more than any of its single member state. Thereby when a European state decide to join EU, it decides to give up sovereignty to a great extent and also agree to adopt policies of political, economic and social issues in line with the common interest of member states. As a result, national laws and policies are also governed by EU regulation, norms and institutions. Still, there are some member states who are better integrated than some of the other nations. Though UK’s Conservative PM, Wisnton Churchil had provided theoretical base for the modern Europe, the irony is that UK has consistently cited difficult issues for European integration. UK is one of the most Eurosceptic than other states and always find it difficult to connect with European policies and domestic ones. The root cause could be attributed to UK’s historical, strategic, traditional and institutional background.

The free movement of people, capital, goods and services had been a basic principle of EU formation since Rome Treaty, in 1957. However, achieving harmonization in level of economic integration and legal process was always a very complex challenge and became a continuous exercise. As a result of free movement of services and goods, it has reduced the major barrier for trade within the European union leading to enhanced trade and commerce. Theoretically, this is favorable to all member states as it facilitates each nation to focus on those areas where they have relative advantage, better economies of scale and higher efficiency. With the removal of barrier, trade is significantly increased as market gets naturally expanded beyond domestic limit. This creates huge economic benefit for the industry, trade and commerce. At the end, this results in lowering prices, improvement in quality and increasing in consumer welfare although some of the sectors may have to be either phased out or closed down due to free competition. On the other hand, creation of trade benefit is also get off-set partly by the diversion from countries outside EU. This is because when goods or services arrive UK from the nation outside of EU as a single market, EU applies a tariff such as 32% on wine and 9.8% on vehicles from outside Union. In this context, some experts believe that EU arrange is so protectionist that it divert more business than it creates due to its integration. In reality, gaining free movement of labor and capital indicates elimination of exchange control and allows freedom of business to invest in the Union. This also eliminates immigration restriction though it is not beyond controversy. Despite all these positive elements, there are few concerns which remains as contentious issues such free movement of labor, unemployment of local population and depressed wages for others.

In the global economy and politics, each country wants to have certain idea of their role in global stage which provides unique identity to the nation and the way it sees any subject with respect to other nations. The historical epoch of UK and British Empire had significantly impacted the way UK’s political elite sees their country’s position in Europe. In the end of 16^th and beginning of 17^th century, first British colony was established. Later it has expanded this to greatest world empire. In those days, Britain had a colony in each continent and in every ocean. During 20^th century, the empire had seen major decline and finally Hong Kong was also returned to China and all other became independent. In the first half of 20^th century, British Commonwealth was established. It was a voluntary inter-governmental cooperation body mostly within the colonies of British Empire. Despite these states are now independent states, they symbolically remain loyal to British Crown. As Britain has shaped the history of the world over three centuries, British politician and by and large its population, feel superior to other in the European nations. Additionally, when entering EU most of the European nations and their people saw it as a positive step towards reaching out to external world. This is also seen as way to improve its communication with other world economies. While smaller nations had seen as an advantage such Slovenia, on the other like Germany wants to improve unfavorable position from the past. As per former British Empire, staying on with European Union has been a constraint as this means to lose their world-wide influence. With too much focus on Europe, it has narrowed its own opportunities. Though it may be called psychological constraints, it has resulted in major difficulty in relationship between Europe and UK.

Political Evolution To Brexit

To begin with the discussion on Brexit (British Exit), the first step is to understand the effect on withdrawal from European Union with a pre-withdrawal negotiation between Government of UK and European Union. The victory of Conservative party in last year general election, has activated the manifesto pledge for conducting an “in” / “out” referendum about British membership with European Union by end of 2017. After a deal in Brussels, David Cameron has declared that the country will go for vote on 23^rd June 2016. The Prime Minister is under pressure from the backbenchers having Eurosceptic mind-set from his own party and at the same time, he has promised to deliver on the referendum. After referendum, he has to start renegotiation process for UK’s relationship with European Union which has been concluded in the summit of February 2016. He has also vowed to go for passionate campaign with his “heart and soul” for keeping UK within the European Union in reformed manner what he calls as “reformed union”. While he is preparing to go for this move, some of his own party-men are expected to challenge him to remain within the bloc. In the process of negotiation, the key areas of discussion would be to look into what would be benefit forthcoming to UK for continuous membership with EU. At this stage, the government has to compile concession agreed by at least 75% of EU member nation into an achievable and realistic offer. Once this is done, the choice will lie in between leaving EU or accepting offer to put into referendum. The result of referendum would then be binding where the minimum requirement would to have 20-25% of eligible voters.

In his analysis of Adam Lazowskim and as per provision of Article 50, there are three possibilities of negotiation in the treaties. The first one is to allow the departing nation to withdraw. The second one is to amend the EU treaties by eliminating references for the departing nation. The third one is to join European Free Trade Association and remain in economic areas of European Union. The proposed process may also be looking into the negotiation of a Treaty in London which may be ratified in 2017 and may be consist of four conditions dealing with:

1. UK to withdraw form EU;
2. Amendment of proper treaties of EU by removing UK and removal from ECJ, ECHR and EAW;
3. Implementing an interim and transitional arrangement for EU and UK citizens;
4. Retaining present condition as status quo ante for free trade with a modified version of EFTA membership.

The above is to be now looked, in the light of recent development. David Cameron has completed his renegotiation now in February 2016 and as predicted before it is receding in distance. As the time, the voice is getting matured for campaign. The focus has shifted from his modest achievement in Brussels to the present big argument. What would Brexit mean to UK or EU? Would it be leaving UK stronger or weaker? There is a clear divide in Westminster in between those who would like to leave EU for better relations with Anglophone & emerging as stronger power for the other continents and those who feels that EU is a UK’s stepping into wider world. In recent interview by Ian Bremmer, the president of Eurasia Group, a group in political risk consultancy and guru in foreign policy, has made certain worthy arguments on the subject. Against the question made to him about UK’s decision on June 23^rd 2016 and the meaning of UK’s role on global politics and economy, he has answered with a grave warning of the risk of out vote.

The arguments of Bremmer are:

• Brexit means further marginalization of UK as power with influence;
• The attractiveness of UK’s market and prospects of TTIP (the Transatlantic Trade and Investment Partnership) will get major blow by Brexit;
• In this uncertain moment for EU’s future, 23^rd June will be a very bad for timing;
• From that point of view and changing scenario of UK, it may not be wise to assume that the referendum will result in settlement of European question;
• This could lead to another referendum in the medium term;
• In the world of more currencies getting prominence, it may be possible that UK is to thrive in EU with separate currency for itself;
• UK must focus more on India rather than remain obsessed with China. The country should do everything possible in this direction and for this Germany would be the best partner in the game;
• In reality, EU may not go after convincing UK beyond a point to stop withdrawing from EU;
• It is not UK who is in better place to sell service in China than Japan;
• Withdrawing from EU and reducing UK to second tier power, UK may undermine its attempts to invite Chinese investment and attention;
• It is not wiser step to put all eggs into one China basket;
• UK’s attention about the winning small concessions from Brussels tend to suggest its lack of ambition for world stage. It may not be out place to mention that UK is no longer as relevant as it used to be in the past;
• UK should look for participating in Europe’s weaker course and takes the leadership role in weaker EU which needs UK;
• Brexit may prove to be costly for Eurosceptic in other nations as they will realize how painful and difficult to engineer the exit from the union;
• Brexit may lead to much wider trend in hollowing out the relationship in transatlantic and USA’s related turn towards Pacific;

With the date for referendum, has been set as 23 June 2016, the Tories recommended that the question to be asked is “do you think that UK should remain with EU?” However, after a pressure from Electoral Commission about the bias of framing the question towards the opinion to remain in the EU, the wording has been changed to:

“Should UK remain a member of the EU or Leave the EU?”

The eligibility for vote would be based on the criteria of voting in general election that means citizen of EU nations (who can vote in European election and local in UK) will not be allowed to participate. Anybody who is over 18 years of age and falls into any of the below categories, can cast vote:

• UK’s citizens who is resident in the UK
• UK’s citizens who is resident overseas for less than 15 years
• Citizens of Ireland, Malta and Cyprus who are resident in UK
• Commonwealth citizens who are resident in the UK
• Commonwealth citizens who are resident in Gibraltar

At the same time, the citizen of Jersey, Isle of Man and Guernsey (not part of EU) will not be able to cast vote in referendum. The members of the House of Lords who are otherwise ineligible for casting vote in general election, will be able to cast vote in referendum. As per recent “polls of polls” conducted by media company NatCen Social Research, has shown that “In” camp is ahead of “Brexit” camp by 10 points lead with 55% wanting to remain with EU. At this time, several “In” and “Out” groups are busy in campaign to spearhead their argument in support of their opinion. The key campaign of “In” vote is steered by Tory and earlier M&S boss Lord Sturat Rose. At this moment on the Eurosceptic side, “Out” group is yet to catch some big name. With this argument, it may be interesting to get into the evaluation of economic and political advantage and disadvantage along with cost-benefit analysis of UK membership.

Cost-Benefit Analyses Of EU Membership

Before looking into the cost-benefit analysis of UK’s membership for EU, it is perhaps important to evaluate detailed pros cons argued by many quarters. This will provide better background to develop insight into the cost-benefit analysis.

Trade

One of the strongest argument in favor of trade advantages of EU is free trade in between member nations which makes it easier and cheaper for UK’s companies and businesses to trade with European nations. Some businessmen think that boost in income outweigh the membership fees paid by UK, in case of leaving EU. The UK also has risks of losing its negotiating power internationally once it leaves the trading bloc but on the other hand it would be free to develop its own business relation with non-EU nations directly. Ukip leader Nigel Farage believes that UK can also explore the model of Norway where it can have access to single market but not restricted by EU law in the areas of justice, home affair and agriculture. On the other hand, some argues that an amicable separation may not be possible. As per economist, even after leaving the bloc, UK would still be subjected to economics and policies of Europe but will not have any seat at the table for discussion and negotiation of the economic matters. The study group of think-tanks Open Europe, wants to suggest for radically reformed EU and argues that the worst-case could be Brexit scenario where UK may finally lose 2.2% of UK GDP by 2030. However, they suggest that GDP may get incremental effect of 1.6% in case UK could derive negotiated deal on free trade with Europe and obtained very ambitious deregulation.

Investment 

On the investment perspective, there is an apprehension among many that inbound investment may slow down in the course of leading to referendum. This may be due to uncertainty on the resultant effect and the outcome, in similar line with the Scottish independent referendum in 2014. The views in the long-term is quite divergent. Pro-EU considers UK as one of the world’s biggest financial center which will come under threat when it will not be seen anymore as gateway to the EU for areas like banking. Brexit campaigner on the other hand, argues that London’s unique appeal will not be diminished with the development. Barclays has put forth an argument which may be seen by the pro “out” group as favorable to leave EU. As per the same report, it suggests departure of union’s most powerful economy would hit the finances and will also boost anti-EU movement in other countries (The Daily Telegraph say). This could open a “Pandora’s Box” which could result in “collapse of European projects”. In the event, UK has been considered as safe haven from risks of `boosting pound, attracting investor and reducing risk where Scotland would keep relative safety for UK in an uncertain EU.

Jobs

From free movement point of view in EU, people of UK who wants to travel, can avail job opportunities across Europe. It also makes easy for the UK companies to employ EU workers. On the other hand, other experts suggest limiting this freedom may deter sourcing ability of UK companies to get the “the best and brightest” of the continent who tend to come to UK. On the other side, it will ease of immigration control issue while reduces the pool size of candidates.

Regulations

Eurosceptic argue that large number of medium and small enterprises do not deal with EU as they are limited by major regulatory burden as imposed by EU. However, they warn that the millions of jobs could be lost in case global manufacturers shift their facilities to lower cost EU nations while UK farmers may lose billions in EU subsidies too.

Influence

On the defense aspect, there is a possibility that UK lose its military influence which may allow USA to feel UK as less influential once it is separated from EU. On the positive side, UK can claim back its territorial water for fishing, scrapping working hour stipulation, freeing itself from renewable energy program of EU and clearer & freer market economy. This could turn London as a financial hub of emerging economies. It may also be argued that the separation may lead to a situation where UK may find itself “as a scratchy outsider” with very limited access to a single market and losing influence over wider group of friends. It is also very conclusive issue for UK as once it leaves the bloc, it may become impossible to get back to old fort again.

Security

In case of pensions and other security scheme, many government experts shared their views on the subject in public domain. Iain Duncan Smith, Work and Pension Secretary supports the Brexit, and believes that by remaining in EU, it leaves doors open for terrorist attacks. As he says leaving EU, UK can check and control people entering its territory. At the same time, many military experts and former defense staff Jock Stirrup and Lord Bramall feel opposite to this. In a letter published by No 10, they have argued that EU should be considered increasingly stronger pillar for UK’s security especially in case of resurgent Russian nationalism and uncertainty in Middle East. Defense Secretary Michael Fallon has emphasized UK’s benefits as being part of EU, Nato and UN. He also suggested that it is because of EU where UK gets benefit of exchange of passenger movement data, criminal records and cooperation on counter terrorism. It is always favorable for UK to have collective weight of EU to fight terrorism and Russian aggression. However, on the contrary, Colonel Richard Kemp, the international terrorism head in former Cabinet Office, has written in “The Time” that through critical bilateral program, one can deal with the limitations. It may be fair to assume that EU will be at greater risks by reducing cooperation with UK in case of Brexit. As Kemp emphasized by leaving EU, UK will be able to control and determine who does enter and not in UK. In absence, of having such control, it endangers people of UK and increases threat which is betrayal with the country.

Cost-Benefit Analysis

The cost-benefit analysis of UK membership with EU is now become a major subject of debate. It has been observed above that the campaign for “In” and “Out” are gearing up for their own support and even in some of the contentious issues like security, the opinion is still divided within defense experts of UK. As the study here is to put forth argument for developing critical insight and not to develop any conclusion, the cos-benefit review should have special significance for Brexit at the time when UK is gearing up for referendum. It may not be wrong to say that it is highly unrealistic to assume that Brexit will have favorable economic and political effect on UK. There is no definite study which suggest such conclusion. Therefore, developing one single number or even showing one net effect as negative or positive, will be a difficult exercise. This is because many of the adverse effect and positive impact are quite subjective or intangible which cannot be assessed in numerical numbers. There are several assumptions which have to be made for developing one hypothesis. Over time, this assumption may not hold good. Any estimate will be under influence of such assumption and can be embedded with degrees of optimism towards opinion made. It tends to suggest that in such cases EU cost-benefit may appear with prior conviction for those who are undertaking the analysis.

While there have been several attempt by many groups about the impact of Brexit for UK and EU, but most of the studies looked at the significant net cost of membership by taking static approach. As a result, the calculation of various impact (say trade, regulatory, fiscal etc.) in a particular year and summing it up for a period, will produce an overall cost. However, this will be involved with various limitation and dynamic elements in the bilateral trade and economic issues. There are some studies which attempted to put estimated net benefit to UK for EU membership through cost-benefit as portion of GDP. This type of conclusion may not be precisely comparable with different scenario or interpretation. On the other hand, some other studies have shown longer-run effect of UK’s membership with EU and some more restrictive trade arrangement with gains coming from higher trade flows. But at this stage, no recent studies have tested the degree of its options to various assumptions or counterfactuals. Whether or not UK will gain from the continuance membership of EU, withdrawal will certainly bring certain adverse impact on sectors such as farming, West Wales, etc. This is to be seen in post referendum scenario as how UK government filled the gap created by this change and resultant economic effect.

The Effect Of The EU On UK Trade Relations

EU members are part of custom union where no tariffs is applicable for the goods moving in between member nations and common tariffs are applied to all goods entering from other non-EU nations. Member nations are not allowed to have independent trade policies including having any free-trade agreement with non-EU nations. All the external trades are regulated at EU level through Common Commercial Policy (CCP). The Trade Commissioner of EU acts as a negotiator in bilateral and multilateral trade arrangements with parliament and council are making some formal decision regarding mandate and commencement of negotiations and approvals. The basic principle of free trade of services in between EU member nations is also protected in the EU Treaties. The structure of UK economy and its advantage from certain service sectors indicate the government’s special emphasis on the complete implementation of Services Directives making specific priority of boosting services competitiveness. In general, dealing with the emerging and outstanding barriers to trade with EU nations, is an ongoing s areas for UK. The meetings with European Council and European Commission have taken into consideration the importance of establishing Single Market while UK has agreed to reduce further trade barriers with other EU nations for the “opportunity not to be missed”.

At this time, there could be various arrangement emanated from the “Out” scenario. As per principle of non-discrimination requires WTO members not to consider any members in a less advantageous manner than other by granting one country a preferential treatment. There are exceptions to the regional free trade norm and custom unions like EU. But in principle, it applies that the tariff which will apply to the “most-favoured-nation” (MFN), must be applied to all in similar fashion. In reality, this would restrict punitive or discriminatory approach to tariff fixation either with UK on EU or vice versa. The highest tariff would be the applicable rate to MFN. Over the years EU’s MFN has been dropped steadily which suggest that the advantage of membership has on the decline too.

Impact Of Immigration From The EU

As per EU Directive 2004/38/EC, EU nationals do not need visa to enter any other member nations and there is no time limit imposed on their duration of stay. Swiss and non-EU EEA nationals are also eligible for similar free movement rights and are treated in line with EU national for UK immigration control purpose. UK is not able to limit on immigration from Switzerland and EEA nations has been a controversial aspect of EU membership as with the expansion of EU to eastern Europe from 2004, there was rise in net migration. The economic impacts of this immigration are quite often a critical element of debate on the subject. As on date there are about 1.5 million non-UK, EU nationals are working in UK which is nearly 5% of the total employment strengths. The statistics shows that working class of age 16-64 are higher at 76.9% for people who born in EU than the native population of 72.0%. For A8 countries, the employment is still higher at 79.5%. The economic impact of immigration has been difficult to estimate and it is widely accepted that there is no clear basis of assessing immigration effect of EU on the economic welfare with its member nations. In general, migration effect of EU on the UK economy tends to show adverse impact on employment, wages and living standard. Some studies show some negative impact on displacement of resident workers in low skilled jobs and depression of wages. While the sign impacts do exist, but the effect varies from locality to locality. It also depends on the characteristics of migrants as compared to the local population. The impact of migration on the overall living standard was measured by GDP per capita which is observed in number of studies to be small but positive. The effect of migration on the wages and employment depends on whether any quality and skill possessed by migrants are substituted with native skill, then the welfare is reduced. In case of UK, the effect is consistently adverse and some part of this effect originates from EU nations. To deal with this situation, UK may explore possibility of EEA like Switzerland where it would remain in EU single market but can accept some restriction from EU regulation. In this arrangement UK may try for restricting free movement of people from EU but it will depend on the negotiation of EU and UK.

The Impact Of EU Regulation

With the successive Treaties, the area of legislation where EU can have competence, has been expanded over the years. Despite the drop in quantum of hard law (directives and regulations), originating from 1980s peak, EU still aims towards the sustainable development in the area of social protection and human rights. Regulation has not been able to do enough to protect the benefits of single market to a member nation and any burden of EU joining. EU has power to put in place the legislation in number of areas which can impact business directly. These include: (a) Specification of Products – on Cocoa & Chocolate intended for human consumption as per Directive 2000/36/EC; (b) Competition – Control of concentrations within undertakings and EC Merger Regulation as per Council Regulation 139/2004; (c) Terms of Employment – Agency and Temporary Workers as per Directive 2008/104/EC; (d) Safety and Health from exposure to asbestos at workplace as per Directive 2009/148/EC on exposure to asbestos at work; (e) Unfair Terms in Contracts for Consumer as Consumer protection Directive 93/13/EC; There have been several attempt for estimating the cost of EU law for UK by using the Impact Assessment as prepared by Government. It helps in assessing various potential benefits and cost related to specific measure. The cost for any measures are related to the burden on public companies, private companies and the government for putting policy regulation into practice. There could also be wider consequences from legislation and regulation and those issues are quantified in the study.

As per general principle, cost of doing business in compliance with EU regulations are not always equal to benefits accrues to employees, consumers and society. Open Europe recognises the issue in their analysis and noting that the purpose of regulation is for it to produce total benefit which would outweigh the total cost. The purpose of mentioning “total” is to indicate that there could be aberration in case of particular nation. As per EU analysis, it was found that the cost-benefit ratio of EU regulation is 1.02 which is considerably lower than that the regulation if imposed by UK directly i.e. 2.35. This could be considered as part impact of policy area in which EU controls the regulatory matters. At the end, it has also been argued and accepted that the benefit of EU regulation which enhanced access to single market are specifically great but remain unquantified.

Fiscal Consequences Of EU Membership – The EU Budget

As a EU member, UK’s budgetary contribution is one of the most quantifiable cost for its membership. The net benefit through receipts under Common Agricultural Policy, budget rebate and regional funding of EU are the most clearer estimates which amounts to £6.9 bn contribution to EU in 2012 which is 0.4% of GDP and 1% of public expenditure. On the other hand, EU’s budget is aimed for paying towards policies carried out EU level including agricultural subsidies through regional funding to assist poorer parts of EU, common agricultural policy, research and aid to developing member nations. The EU budgeting process is for a set of period i.e. number of years. The present framework was from 2014-2020. The EU’s budget includes limit of allocation of spending to broad areas and annual expenditure. EU member states contribute to the budget which includes four elements names as “own resources”. Approximately 6% of the EU’s budget is spent on EU’s foreign policies, pre-accession aid and international development and another 6% goes to EU’s administration. The balance is re-distributed to various member nations in the form of regional and agricultural funding. Based on size of its agricultural sector and standard of living compared to EU average, member nations get more or less amount which they ‘put in’. As per 2011 budget, 10 of the member nations were net contributors including UK. In terms of per capita while Greece gets net receipts € 752, The Netherland’s net contribution is €207 and UK’s is €150. Out of 45 years of membership, UK has been net contributor in 44 times excepting 1975. The forecast as per market analyst suggest that till 2020 UK will contribute in between 8 to 10 bn per year. [http://www.statista.com/statistics/316964/net-contributions-to-eu-budget-by-united-kingdom-uk-to-eu-european-union/]. The country has already contributed more than £400 billion till 2014.

The EU’s Effect On Consumer Prices

Common Agricultural Policy (CAP) and food prices for farmers from EU nations are typically supported in two ways. First one is subsidies through CAP and the second one is external tariff incurred on agricultural produce sourced from outside EU nations. From this, up to 70% of the CAP budget is paid out as direct support income to farmers based on the condition that they meet environmental, safety and welfare of animal standards. The rest goes towards the development of rural development and support price intervention for agricultural output. The cost of CAP for UK is estimated to be high as UK imports more and produces lesser agricultural produce compared to Italy, Spain and France. UK’s support for the producers are in the range of €6.7 billion in 2011. In case of UK leaves EU, it would call for government to look at the options as how to support UK farmers who are presently protected by CAP and common tariff. This is critical as it would make agricultural sector vulnerable unless dealt with care and caution.

Foreign Direct Investment (FDI)

While UK’s FDI remains highest EU, UK attracted FDI worth $1.2 tn in 2011 to over 1.0 tn in 2014. This also means 2^nd largest FDI after US. UK was also recognized most attractive destination of EU for FDI in 2013. The most important fact is, about 48% FDI originates from EU nations which has been on the decline over time from 53% in 2009. It is often argued that EU membership proves to be very effective for UK from FDI point of view. As part of EU, UK is the most attractive place to invest and UK also has good international market. It also gets the eligibility to do business in entire Europe as single market. However, it may not be easy for the decision maker and the others, to establish the possible impact on FDI in case UK decides to leave EU. While EU membership is a favorable factors but other factors such as integrity of UK legal system, skills, services and language always help in attracting FDI to UK. As a result of this, most of the foreign car makers such as GM, Honda, Toyota, Nissan and BMW, have invested in UK as bridged market for EU. Therefore, it is to be noted that EU membership has significant influence on the FDI inflow to UK which also makes it 2^nd in the world in terms of FDI destination. This has to be looked into with proper economic view.

UK’s Exit By 2020 vis-à-vis Current Status

With the above consideration in view, it is clear that Brexit has a serious implication in UK and EU’s economy. Though popularity of 23^rd referendum is in favor of “In” at the moment, it still not clear how the final outcome will emerge. In such a situation, above study provides significant input to debate among citizens and experts which should facilitate the referendum in favor of larger support of most favored opinion. Post referendum, UK withdrawal (if so) from EU, will create major complications across the country, in government establishment and businesses. It is going to be a major process for UK government and EU must make it as far as practicable hassle-free for both side. Government should ratify the referendum in between 2016-2017. Both side must engage in negotiation and prepare a plan for multi-level negotiation with an aim to complete the whole process of negotiation by 2018. Then the implementation can take place for complete exit by 2020. This separation can be done in four alternate ways:

1. Allowing UK to withdraw from EU;
2. Amending EU treaty removing UK’s name from it;
3. Plan for transition process during 2017 to 2020;
4. Keeping status-quo for free-trade and negotiate other areas;

Apart from the above, the impact on 1.4 million British is also to be looked into who live abroad in EU nations. On the other side there are about 0.4 million EU nationals who are eligible for UK welfare scheme. The ideal way would be to see how UK and EU could deal with this in phased manner to minimize the adverse effect on both the economies in the eventuality of Brexit.

Conclusion

There is no denying fact now that UK’s withdrawal will cause major complication across country and EU. The process will call for lot of courage from both side for the incumbent government as well as their willingness to overlook the warnings of business and political establishment for their favorable effect of EU inclusion. However, it is neither difficult nor impossible. UK will certainly survive well outside the EU with the benefit from bilateral (including Lisbon Treaty) free trading where liberation of UK’s legal process can be achieved. It will also disburden itself from shifting of growth in indirect taxation over time and can pursue its own interests with regard to trade and commerce without going through 27 country driven process. It can develop its energy security by building power plants without having so much dependence on carbon trading scheme and coal power plant decommissioning. The uncontrolled migration from EU, will be a major relief for UK authorities. While there is no doubt that there will be a complication in the process leading to the Brexit in 2020, but UK may be freer, prosperous and fairer rather than sticking to it if all other elements are managed well and fall in favor of “out” process.

References

Churchill, Winston. Winston Churchill’s speech to the academic youth. Zurich, 1946 http://www.europa-web.de/europa/02wwswww/202histo/churchil.htm (last viewed 22.03.2010).
Lazowski, Adam. “How to withdraw from the European Union? Confronting hard reality” CEPS Commentary. Published on: (16/01/13).
Ian Bremmer interview date 23/02/2016 http://www.economist.com/blogs/bagehot/ 2016/02/ meaning-brexit.
The economic impact of EU membership on the UK Standard Note: SN/EP/6730 Last updated: 17 September 2013.

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