HISTORY OF EU AND THE FINANCIAL IMPACT OF IT ON MEMBER COUNTRIES
The European Union was originally formed in 1958 by six countries namely Belgium, France, Germany, Italy, Luxembourg and the Netherlands. Konrad Adenauer, Winston Churchill, Walter, Hallstein, Sicco Mansholt, Robert Schuman, Paul-Henri Spaak and Altiero Spinelli are just a few men who today are regarded as being the visionary leaders who were instrumental in paving the road and creating the European Union. These dynamic men used their expertise and motivation to create a space where people found stability and could thrive in an acceptable living standard. The EU was built on the foundation of peace, unity and prosperity. The following timeline views the history of the EU.
The European Union was ultimately established with the goal of bringing an end to the bloody Second World War. This brought about the unification of the European Coal and Steel Communities which united European countries economically and politically with an aim to restore peace. In 1957 the Treaty of Rome established the European Economic Community, also known as the EEC or Common Market. The birth of economic growth during 1960 and 1969 was brought about prompting the EU’s assistance by terminating custom duty charges thus allowing hybrid trading between its member countries. These countries also exercised mutual regulatory control over food production in an effort to ensure that produce was available to all.
The first growth or more commonly referred to as enlargement, was experienced between 1970 and 1979 which seen United Kingdom, Denmark and Ireland on the 1st January 1973, join the European Union. During the period the EU started to assist poorer areas by providing financial aid with the goal of creating jobs and building infrastructure. The fight to eradicate pollution strengthened during this period as well which brought about laws to protect the environment.
Greece followed on to become the 10th member of the EU, with Spain and Portugal following suite five years later. In 1986 a very important and pivotal treaty known as the Single European Act was signed which formed the benchmark for a six-year programme designed to resolve difficulties with the free movement of trade traversing the EU borders creating what is known as the ‘Single Market’. Major political confusion erupted in November 1989, when the Berlin Wall was ordered to be removed, opening the border dividing East and West Germany after 28 years. This collapse reunited East and West Germany in October 1990 and further brought an end to communism where central and eastern Europe become close neighbours.
The Single Market was accomplished in 1993, where the 'four freedoms' were established. These were freedoms of movement of goods, services, people and money. It is important to note that two additional treaties were signed, namely the ‘Maastricht’ Treaty on European Union in 1993 and the Treaty of Amsterdam in 1999. Europeans became more and more concerned about ways they could stand together with a common goal to protect the environment as well as look after their security and defence interests.
The EU gained Austria, Finland and Sweden in 1995 and saw the rise of the ‘Schengen’ agreements that increasingly allowed people to travel freely without having their passports checked at the borders posts. This allowed many young people the opportunity to study in other countries with the EU’s support.
During 2000 and 2009 more and more countries were seen adopting the euro. This allowed for conducting business, traveling and moving to other countries, as well as the procurement of good and services more efficiently and a sense of unity was created. Before the euro was introduced, there was a need to exchange currencies which brought about extra costs, risks and a lack of transparency when transacting with other Countries. The introduction of the single currency, conducting business utilising the euro was and still is more cost-effective and there is less risk.
After the New York and Washington bombings of September, 11th 2001, the EU countries started to work closely together to fight and eradicate crime. In 2004 the political divisions between east and west Europe were finally removed by the membership of 10 new countries, followed by Bulgaria and Romania joining in 2007.
In September 2008 a financial crisis hit the global economy which affected Europe servery. The Treaty of Lisbon was approved by all EU countries and enforced in 2009, providing the EU with more efficient working methods. The EU aided several countries financially and established the 'Banking Union' in order to foster safer and reliable banks. In 2012, the European Union was awarded the Nobel Peace Prize. In 2013, Croatia became the 28th member of the EU.
Currently climate change remains high on the agenda and leaders continue to agree in reducing harmful emissions. Today the EU is a political and economic union made up of 28 countries. Member Countries are free to trade with other members at no additional taxation thus keeping prices of goods, services and food at an acceptable standard. Movement between all of the countries in the EU is completely free and open for all citizens thus allowing for more trade, job and education opportunities for people, especially the poorer countries. The EU has no “official language” and therefore does not interfere with the cultural facets of any country. This allows membership to one union but still as independent Countries, thus averting countries from getting embroiled in political or economic problems with one another and promotes a sense of peace throughout the continent.
Financial benefits of trading in the European Union relates to being a member of the largest single European market in the world. This allows for greater competition in services which is effective for business and consumers. Further benefits include the removal of trade barriers, reduction of business costs, greater business efficiency and elimination of anti-competitive practices – such as monopolies and cartels.
The EU has adopted measures to improve trade amongst Countries by reducing bureaucracy and paperwork, harmonising technical and safety standards, introducing the euro as a single currency to trade with and implementing the movement of people by permitting member state citizens to travel freely between other countries.
Reasons for Britain to leave the EU – political and financial
Political
Britain is commonly known as the origin of modern Parliamentary democracy. The Political reason for Britain to leave the EU is so that Britain can run independently once again as a democracy allowing the citizens to voice their opinions. The EU is anti-democratic and leaving the EU will allow Britain to vote for their own lawmakers (It is in order for Britain to have the freedom to make their own rules and regulations). All EU laws which are in forced in the UK will either be kept, changed or removed. Due to decisions made at the EU level only some British rules were accepted and applied.
By leaving the EU Britain will be able to create more job opportunities for their citizens and also have control over who comes into the country. It was stated that the EU was an economic disaster resulting in 20% unemployment in South Europe. Another political reason for Britain to leave the EU is Sovereignty -The rise of nationalsm across the world. Before Brexit, the EU members allowed European Citizens to enter their countries without restrictions. The right of free movement has permitted thousands of Europeans to reside and work in Britain. However, Britain will allow the lawful EU Nationals residing in Britain for at least five years to apply for settled status. EU citizens who are working in the UK will be allowed to carry on working and residing in the UK post Brexit and immigration will no longer be able to take place. According to the EU aiding the refugees was a moral obligation.EU citizens travelling to the UK will need their passports to enter.
Financial
Most of Britain’s taxes goes to the EU. A portion of that money comes back to Britain in subsidies to farmers and grants to universities etc. In 2015 their gross contribution was 18 billion pounds and around 6 billion comes back in subsidies. Britain was the second biggest contributor to the EU budget.
Brexit has also caused an increase in Britain’s GDP, by leaving the EU the GDP will increase by 0.5% (e.g. without trade unions). According to estimates, in 2030, the GDP would be 2%.
Nancy from Hornchurch has discovered that Britain is one of the ten member states who contributes more into the EU budget than what they get in return. Britain would also cut costs as they fund the EU’s foreign aid. In 2013 15 billiion was spent on this.
With all the pro’s that I’ve mentioned about brexit there are cons too. The loss to Britain’s goods exporters of leaving the European Union in place would be at least 4.5 billion a year. If the UK leaves the EU without any agreement, the UK will be forced to trade with the World Trade Organization Rules. This will mean that the UK exporters would be hit with the EU’s Customs Tariff. These would fluctuate the costs of UK exports, rendering them less competitive in local markets and damaging British-based exporting firms.
Big businesses voted for Britain to stay with the EU as they would be affected by Brexit. Being interdependent with the EU makes it more simple for businesses to move money, people and products around the world. Many jobs will also be lost in the EU. The EU also wants the UK to settle any outstanding bills before they leave.
In summary, there are going to be pros and cons in Brexit as the EU and Britain worked interdependently with one another. It’s a risk they are willing to take. According to Britain they are casting off the shackles, which is a positive remark on their behalf as they are certain they would thrive like Norway or Switzerland. The British has stated that they would negotiate their own trade deals with China, United States and Russia on their terms and to suit the national interest; taxpayers would get saving of over 20 million pounds a day; Britain would no longer be paying money into the EU budget and British farmers, fisherman and small businesses would all be free from harmful Brussel policies.
Impact on Britain’s economy after leaving
Financial services and the City
Financial services have more to lose immediately after a European Union exit than most other sectors of the economy. Even in the best case, in which passporting rights were preserved, the United Kingdom would still lose influence over the single market’s rules. The City would probably be hurt in the short term, but it would not spell disaster. The City’s competitive advantage is founded on more than just unfettered access to the single market. A European Union exit would enable the United Kingdom to broker trade deals with emerging markets that could pay dividends for the financial services sector in the long run.
Foreign investment
Concerns about a drying up of foreign direct investment if Britain votes to leave the European Union are somewhat overblown. Access to the single market is not the only reason that firms invest in Britain. Other advantages to investing here should ensure that foreign firms continue to want a foothold in the country. It is likely Britain would remain a haven for foreign direct
investment flows even if it was outside of the European Union. Of course, we could see a period of weak foreign direct investment inflows as the United Kingdom’s new relationship is renegotiated. However, if Britain is able to obtain favourable terms, then foreign direct investment would probably recoup this lost ground.
Public sector
The British government could save about £10bn per year on its contributions to the European Union’s budget if the country left the bloc. This figure could be higher if either the British rebate was to be threatened in the years ahead or Brexit was to result in overall faster economic growth.
On the other hand, a little economic disruption and lower migration as a result of Brexit could offset these savings. The government might also continue to make some contributions to the union if it wanted to preserve single market access, it might need to compensate sectors of the economy and specific regions that currently benefit from European Union handouts and it may have to sacrifice customs duties income to strike new trade deals with countries outside Europe.
We expect that Brexit would benefit the public finances, but not to a huge degree.
Overall
Although the impact of Brexit on the British economy is uncertain, we doubt that Britain’s long-term economic outlook hinges on it. Things have changed a lot since 1973, when joining the European Economic Community was a big deal for the United Kingdom. There are arguably much more important issues now, such as whether productivity will recover. The shortfall in British productivity relative to its pre-crisis trend is still over 10%, so regaining that lost ground would offset even the most negative of estimates of Brexit on the economy. Based on assessing the evidence, we conclude that:
• The more extreme claims made about the costs and benefits of Brexit for the British economy are wide of the mark and lacking in evidential bases
• It is plausible that Brexit could have a modest negative impact on growth and job creation. But it is slightly more plausible that the net impacts will be modestly positive. This is a strong conclusion when compared with some studies
• There are potential net benefits in the areas of a more tailored immigration policy, the freedom to make trade deals, moderately lower levels of regulation and savings to the public purse. In each of these areas, we do not believe that the benefits of Brexit would be huge, but they are likely to be positive
• Meanwhile, costs in terms of financial services, foreign direct investment and impacts on London property markets are more likely to be short-term and there are longer-term opportunities from Brexit even in these areas
• It is not likely that any particular region or regions of the country would be more adversely affected by Brexit than the country overall. Likewise, we do find support for the notion that Brexit would benefit some sectors more than others, but the range of outcomes for production / manufacturing industries is probably wider than for services
We continue to think that the United Kingdom’s economic prospects are good whether inside or outside the European Union. Britain has pulled ahead of the European Union in recent years, and we expect that gap to widen over the next few years regardless of whether Brexit occurs.
The pound and share prices
The pound fell dramatically after the Brexit vote last year, and since then has been trading around 15% lower compared to the dollar and 12% lower compared to the euro than it was before the referendum.
The fall in the pound has helped exporters but it has made foreign holidays more expensive for British tourists.
Interest rates
Importantly, many forecasts of immediate economic gloom if the UK voted to leave the EU were proved wrong. They did not take into account possible compensatory action by the Bank of England in the wake of a Brexit vote.
After the referendum the Bank of England took steps to boost the economy. In particular it cut interest rates from 0.5% to 0.25% in August – the first reduction in the cost of borrowing since 2009 – taking UK rates to a new record low
IMPACT ON WORLD ECONOMY DUE TO BRITAIN LEAVING
Impact of the United Kingdom leaving the EU will increase the financial market instability in the short term, but remains much less simple than the case of Greece.
• After the big broadcast of the referendum date, the British pound weakened by 2.3% against the US dollar, the lowest in 7 years. The United Kingdom government bond earnings however did not change. EIC views these movements as short term instability with a predetermine timeline. If the United Kingdom chooses to stay with the EU in June, the outcome will reaffirm its status as an EU member. On the other hand in the case of an exit outcome, the Lisbon Treaty (2009) specifies that once the member state exit notifies the European Council of its intention to exit, it will take at least 2 years before the membership ends.
United Kingdom referendum adds uncertainty to the global economy on top of existing fragility.
• The weakening of the euro and pound from the increasing Brexit possibility reveals market concerns negative consequences on both economies. EIC assesses that recent developments reflect short-term market panic rather than fundamental changes. A correction should occur as the panic subsides. Despite being short-term, the increase in market volatility could hurt business sentiment in terms of economic prospect and investment, adding pressure to the recovery of the overall European economies. As a result, the chance of the ECB expanding its QE program in March has increased.
Thai baht Impact on the export remains limited.
• The Thai trades to the United Kingdom are about 2% of the total Thai exports. As a result, the short-term direct effect on trade is limited. The effect of the Brexit risk on THB/USD is small. However, recession. This could have a strong consequence on Thailand export sector because combined exports from Thailand to the EU and the United Kingdom account for 12% of total exports. Furthermore, the on- going free trade negotiation between Thailand and the EU will not cover the United Kingdom and will require separate talk.
The Brexit shock increases the likelihood of a global economic downturn.
• The Global economy is easily broken due to the sharp slowdown in developing market growth and persistent weak growth in the US and Europe since the 2008/09 crisis. With public debt high and interest rate at historic lows policymakers have little fiscal or monetary policy option remaining to encourage growing. Brexit could push this situation into an overdue global slowdown, or even recession.
The Brexit shock increases the likelihood of an emerging market crisis
• Developing market debt – particularly private sector debt was already at historic highs, raising the risk of a crisis. Brexit will force a review of political risk across Europe and in many developing markets; potentially cause financial and currency instability as positions are unwound. (Chutima Tontarawongsa, 2016)
Country/ region Main Scenario Risk factors
UK The economy will slow down mainly in the field of domestic demand due to the uncertainty on its new relationship with the EU. The GDP growth rate is expected to be negative from the end of 2016 toward the beginning of 2017 • Delay in the withdrawal notification to the EU and difficulties in withdrawal negotiations with the EU
• Sharp drop in real estate prices
Eurozone Investment will be restrained due to heightened uncertainty on its new relationship with the UK, and the economy is expected to slow down from the second half of 2016 toward the beginning of 2017 • Increase in political risk driven by a rising anti-EU movement.
• Heightened uncertainty over stability of the financial system on the back of the weak financial sector in countries like Italy, which suffers from a bad debt problem.
Japan Although the yen appreciation and stock market fall will serve as a drag upon the GDP growth rate, an economic slowdown should be averted due to measures such as the economic stimulus package • Possibility of an economic downturn if the yen appreciation and stock market fall continue driven by risk-off.
• Further pursuit of negative interest rates is a double-edge sword.
US The impact of Brexit through trade will be limited, based on the premise that there is no further market destabilization • Appreciation of the US dollar driven by risk-off.
• Increase in the risk of a cyclic economic slowdown in the US.
Emerging countries The impact of Brexit through trading will be limited, based on the premise that there is no further market destabilization • Sudden drop in the value of emerging countries’ currencies driven by risk-off
• Worsening of emerging countries’ debt problems , mainly in China, due to external shocks
Source: Made by MHRI. (Mizuho Research Institute, 2016)
With the increase in United States dollar and Japanese yen are negative to both economies’ export sectors. In the case of Japan mainly unhelpful to its efforts to re-inflate and strengthen the economy after decades of deflation. The increase of the United States dollar also causes extra pressure on China to float the yuan lower, as it is caught in the disagreement between its two largest export markets, the EU and the United States. For the United States, the negative effect on exports is fairly small compared with developments in domestic demand, but the deflationary pressure on tradable goods will increase the difference between reasonably strong inflation in the services sector vs. reasonably strong deflation in the goods division. The European Central Bank will be certain to raise its level of intervention yet again, as risk premiums across the region increase. The Eurozone members, like Italy is in a particularly defenseless position, they are made more vulnerable. Each blow to members of the Eurozone periphery also further make Germany’s out performance in the Eurozone even more unsustainable. (Forbes, 2016)
In conclusion the impact on the world economy due to Britain leaving the EU, have impacted heavy on the members of the EU as well as the non-members of the EU. Despite being short-term, the increase in market volatility could hurt business sentiment in terms of economic prospect and investment, adding pressure to the recovery of the overall European economies. The United Kingdom chooses to stay with the EU in June, the outcome will reaffirm its status as an EU member. Overall there is a lot of uncertainty within the economy of the world with the Britain leaving the EU.
Why and how is South Africa affected by this movement?
The British leaving the European Union (EU) has raised many questions regarding the impacts of the Brexit movement and what it may mean to the world economy. This may affect different countries but the focus will be on South Africa (SA). This movement have raised concerns to what this may hold for the economy of South Africa and how it will be affected. Several factors may be considered namely trade and investments and the agricultural sector which are seen as one of the most important role players for exported goods to Europe.
According to Peter Draper, Managing Director of Tutwa Consulting, the United Kingdom (UK) is the sixth largest trading country in the world and 4% of goods are being imported to the UK from SA (2016). This trade serves in favour of the South African economy. SA trade could be compromised should the UK follow the recommended route of adopting all EU Free Trade Agreements (FTA), similar to the SA the Economic Partnership Agreement (EPA), then it will expect SA to reciprocate to the outcome. All the uncertainties that SA is facing surrounding the exit of the UK, SA is reliant on the current trade agreement during the Brexit negotiating process. Therefore SA is still uncertain about negotiations with regards to the future trade agreements. If the UK fail to follow this route, all opportunities for exported goods may be lost for both countries. However, as result of the exit from EU Common Agricultural Policy it creates an opportunity for SA in the services and agricultural trade for both imports and exports of goods for both countries in the future.
Professor Richard Gibb (2016) stated that the significant threat that SA may face is reduced exports demands if the negotiations between the EU and UK damages the UK’s economy. As Draper mentioned before, Gibbs is agreeing with his statement that the UK economy will be vulnerable in certain sectors such as agriculture, precious stones and motor vehicles. SA can use this to their advantage to offer some of these services to the UK. According to Gibbs, SA is currently trading under the EU agreement and is governed by the South African – EU agreement. In July 1999 a Trade Development and Cooperation Agreement (TDCA) had been signed which established a trade area of 90% between the EU and SA. This trade will soon be replaced by the signing of the EPA and EU.
This trade will be in place until such time that the UK legally leaves the EU. A new trade between SA and UK will therefore have to be negotiated, signed and ratified by 2019.
Rohitesh Dhawan, director of Global Brexit Centre of Excellence at KPMG warned those companies that are based in the UK that are engaged in investments for clients for SA may be rejected until the establishment of a new European entity is developed. This may be a result of the UK leaving. Dhawan also mentioned that some SA residents may lose their benefit from working in the UK. Once again, the outcome of this is reliant on the negotiations between the EU and the UK (2017).
Based on the analysis done from Industrial Development Corporation (IDC) 2016, the following exported products have been sold in the UK which represented 85% of total goods exported to the country. SA served as an important role player for exported goods to the UK. The highest demanded for exported goods are agricultural products, motor vehicles, parts and accessories, wine, pulp, paper and paper products and processes and preserved fruits and vegetables. This resulted in R18.5 billion which claimed a 44% share of SA goods exported to the UK in 2015. The most exported product identified by the IDC is the platinum group metal that have resulted in a 21% share across the world. This makes the UK an important trade partner for SA.