Brexit and The European Union Dissertation

Brexit and The European Union

The year 2016 is going to be remembered for long years to go for the historical term “Brexit” that meant Britain exiting from European Union. This possibility aroused since 2007, under the article 50 of treaty of European Union under European states. The final exit decision took place in June 2016 under the referendum where the votes in favor of leaving EU were 51.9%. Though there were many reasons that lead to Brexit, but some of the economic aspects are worth mentioning.

The people of Britain wanted self government system back that had existed hundreds of years ago. There were certain reasons that British citizens wanted to exit from European Union and thus held general elections to get rid of the government. The main issue behind this exit decision was that being under European Union made Britain feel like being ruled by a foreign power where they have no rights of taking their own decisions (Dagnis Jensen and Snaith, 2016). One of the key economic impacts is that Britain had been facing trade barriers under the European Union that could be well managed by this exit decision. The market prices for EU are much higher than the world market prices and that has been affecting the economy of Britain in terms that the country involved in producing more of the products that were worst and less of those it was best in producing. Furthermore this also led the customers to pay higher amounts due to tariff and trade policies of EU and thus the exit from it was the much significant decision (Weiler, 2015).

Figure 1: Income inequality in UK

Figure 1 above describes one of the key economic reasons why Britain chose to leave the European Union is inequality in Income. It describes that though the overall European economy was doing well and had larger benefits and shares, still these benefits are not being felt by population in an even and justified manner.

After this exit, the barriers both tariff and non- tariff on trade could be removed from UK that were being imposed upon by EU till now. This will in turn benefit the customers and raise their living standards due to larger decrease in import prices. In contrast to this there are certain arguments against this decision of exit of Britain from EU (Boulanger and Philippidis, 2015). The key UK producers could determine that the prices that they would get in the free market would be different they used to get inside EU, in fact it would be lesser.

The products they sell outside are no different they sell inside EU but the protection of customs union premium provided by EU would be lost that would affect these producers. It can be concluded from the above statements that the customers would be the people in benefit from this exit decision and also those firms that are willing to buy the products at the world prices, whereas the producers within the union would be disheartened as they would have to lose their share of premium under the European Union. There are further arguments describing that after Brexit, UK may opt to trade under World Trade Organization (WTO) policies (Dhingra, Ottaviano, Sampson and Reenen, 2016). In such case it would not be able to get benefits of tariff free trade as it had, being under the membership of EU. Further this would also support the companies in halting the inflow of less skilled workers from EU. It would also provide relaxation in migration policies and provide ease to the highly skilled immigrants from EU and non- EU countries to work.

Another economic perspective towards this decision of Britain is the gain that the customers and firms would have while balancing the resources and allotting them to industries which are efficient and removing from that are less or inefficient (Oliver, 2016). The key economists of the country also estimate the gain in trade of Britain after this exit to 4% rise in GDP. Despite of this there are arguments with risks of loss in job and foreign direct investment. It has been argued that the foreign investments would be reduced but it has neglected the fact that FDI is just due to better returns in foreign capital and thus the countries can invest, just the sectors would change where there are free trade policies. Further with the investments in new sectors, the jobs will also arise in those, thereby fulfilling the loss of jobs created in the European Union protected sectors.

After the result of referendum on Britain exiting EU, many economic, political and financial impacts are most likely to be seen. It would be not new and surprising to know that after the decision, London is to face a number of financial issues that would further have an impact on overall economy of the country (MacShane, 2015). The very first impact that could be seen in London would be loss of jobs. In making the decision of exit from the European Union, the future of the city of London has been one of the key concerns.

The government of London will have to involve in effective strategy formulation to manage the possible financial and economic effects of this referendum. There are possibilities of clash in market with the change in currency values that will have an overall impact over London and its market. However, it is being argued that the city will remain as the key financial centre of the world and will be successful in managing the “Brexit” situation as it has already undergone such crisis situations during the world wars too (Barrett and et.al, 2015). While London was within the European Union, it had been enjoying the title of world’s important financial centers which is now likely to get affected by various policies and regulatory aspects.

There are number of companies that have already announced that with this decision of exiting from the European Union, they would be moving their employees out of London. J.P. Morgan also in this context said that it would be relocating around 4000 of its employees out of Europe. There are many banks outside the nation, like from US that have been trading in London as to escape from the restrictions that exist outside the European markets (Swinbank, 2016).

Similarly with the news of Brexit, Deutsche Bank also said that it is going to relocate its employees. The effects of Brexit decision are to be studied for London, as it is not only the financial centre of Europe but has topped the list of world’s best city to do business due to fewer barriers. Therefore this decision will definitely be affecting its title and the overall business economy. There are many businesses dominating in London like banking, mortgage brokers, real estate firms and the overall financial industry that is much likely to be affected with this referendum. Furthermore, there are cities in EU like Paris, Frankfurt, Amsterdam and Dublin that would be most benefited with this change and have prospective of becoming the new London for the world markets (Springford and Whyte, 2014). The overall situation can also be understood with the concept of Passporting with context to EU that describes that all the European Union based financial institutions can sell their services without getting the approval of regulator.

Further after the Brexit, every such firm would need to get regulatory approvals on local basis that is a key factor driving their decision to move their business out of London. Passporting is one of the key features that have led to the success of the banking industry with EU nations due to ease of cross border transactions and investments. After this decision, London would need to develop a new regulator that would not only require cost but would also involve authentication to develop trust among the various business firms to rely upon (Danielsson, James, Valenzuela and Zer, 2014). Further authorization of new regulators would also take considerable time to establish itself that will bring a change in the overall financial and economic status for London for its exiting decision from the European Union.

There are various risks associated with all the firms working in UK that would be affected with the decision of Britain exiting the European Union. The city like London have been the financial hub of UK that would be the most affected area after the referendum result in Britain exiting the European Union. Most of the firms that are likely to be affected by this decision would be the financial institutions, banks, real estate firms, etc. Before this referendum’s result, there are many companies that have already announced their changing business plans and strategies for their firms in Britain, if the country was to leave EU (Virasami, 2016). Most of the banks and companies are already in need to leave UK, and shift their operations to other country under the European Union states. This is due to the ease of business and lesser trade barriers and tariffs under the European Union policies that might have a larger economic and financial impact on every business.

Companies like Vodafone have warned UK that it would be shifting its headquarters from London to some other country if it exited the European Union. On the same track, one of the biggest lenders of Britain, Lloyd’s Banking group had made plans to sell out the shares of the taxpayers that are prone to be affected once the decision is being made. Furthermore companies like Virgin group have plans to cut down around 3000 jobs with the Brexit. Apart from this there are companies that have put their future export and investment plans on hold after the final decision being announced. Also the lending firms have cut short their property purchasing in London (Helm, 2016).

The risks associated with the decision of Britain exiting EU are not countable or measurable but could be understood in terms of financial and economic losses. Large numbers of firms are to face the loss in market share and affect the availability of jobs as well as personnel. The risks for the companies also involve lowered profits for the firms and control over the personnel. This decision is also likely to affect the political and social scenario of the country. Immigration is a problem that is being faced by the nation and more than half of the population is immigrant of some other place. However, with this decision, the immigrants would move again in search of better opportunities and jobs. Also as studied above, after exiting EU, the regulatory approvals would become more difficult and troublesome for the firms to continue in the same way as it existed before. Though this decision is favorable for customers and buyers but producers and investors are the ones that are most likely to be affected (Williams, 2016).

The final decision of Britain exiting the European Union would completely reform the financial services industry of the country. It has been evident that the city of London had been the largest centre of financial investments in the complete European Union and has been attracting large number of banks and financial service providers. It will thus be required for UK to formulate effective polices and plans to retain all its existing business firms and develop regulatory authorities to manage the approvals after exiting from EU (Palmer, 2016).

With the step towards taking the decision of exit from EU, there are many threats and risks associated with Brexit. There are many uncertainties and challenges that British firms have to possibly face after this decision. After this, UK will have to lose its membership of European Economic Area, European Free Trade association etc. The committee handling risks have been analyzing potential risks and have coordinating to make sure they have better plans to deal with short term and long term risks. There are companies like British gas Insurance that may not have direct potential impact through Brexit but if their parent company Centrica is impacted then they might also face risks for which they need proper mitigation approaches.

Communication

There are companies that are getting involved in improving communication among the different managerial levels. They have plans to ensure each and every message and update over the Brexit issue and let all the people all over the organization know about it on consistent basis (MacShane, 2015).

Stakeholders

The risk managers have also plans to keep their stakeholders assured and manage them cautiously. They too are to be updated timely about their losses or gains with shareholdings in the firms. Also the stakeholders must have clarity of situation and the company must not make fake promises to them.

Change Management

This is one of the most important aspects to be considered in risk management approach. The firms and its employees must be completely ready to accept the possible changes that are to occur if UK leaves EU. There would be lot of changes in legal, economic and political scenario that would have an overall impact on the complete economy. These impacts could be seen not only for few days or months but for years (Springford and Whyte, 2014). Thus the managers must be aware about the next steps they are to take up for managing the changed scenario of UK after leaving the membership of EU.

There are possibilities that if Britain exits EU, there will be migration, attrition, policy changes and loss of shareholders that will change the complete business scenario for the country. Also the legal and authorizing business approvals would have to be established in a completely new form that would need the firms that intent to continue with UK, to manage the upcoming challenges.

There are many firms that have announced that they would be shifting their operations partially or fully to some other country that is an EU member state (Oliver, 2016). This is an approach that many firms have adopted in order to ensure that they do not face extreme losses or trade barriers.

It has been evident that EU states have benefits of free trade with least barriers but this would not be the situation if UK exits this membership. It has been a fact that the jobs in Britain are being safeguarded by EU as it has been a market centre for more than 500 million customers and it is Britain whose membership with EU has been the most attracting factor for FDI.

However this decision of Britain had led the firms to hire new people called effective troubleshooters that would help them in dealing with such situation after Brexit. The demand of lawyers, consultants, financial advisors and experts in the country has increased with this news flowing around for the sake of safeguarding the business from the post effects of this decision (Weiler, 2015). The organizations have started working on the reframing of trade agreements, funding problems and their solutions, staffing concerns, trade barriers and plans to deal with them. Though EU had provided free trade but the extreme interference of its policies in trade and profit sharing for the firms had made Britain to take such decision. Thus there are many firms that are still in support of this decision of Brexit, despite of the fact that this can be a potential threat to their business and funding requirements.

References

Barrett, A. and et.al, 2015. Scoping the possible economic implications of Brexit on Ireland. ESRI Research Series, 48.

Boulanger, P. and Philippidis, G., 2015. The End of a Romance? A Note on the Quantitative Impacts of a ‘Brexit’ from the European Union. Journal of Agricultural Economics, 66(3), pp.832-842.

Dagnis Jensen, M. and Snaith, H., 2016. When politics prevails: the political economy of a Brexit. Journal of European Public Policy, pp.1-9.

Danielsson, J., James, K., Valenzuela, M. and Zer, I., 2014. Model risk and the implications for risk management, macroprudential policy, and financial regulations. VoxEU. org, 8.

Dhingra, S., Ottaviano, G.I., Sampson, T. and Reenen, J.V., 2016. The consequences of Brexit for UK trade and living standards.

Helm, T., 2016. Brexit donor’s company spells out risks of quitting EU.

MacShane, D., 2015. Brexit: How Britain Will Leave Europe. IB Tauris.

Oliver, T., 2016. European and international views of Brexit. Journal of European Public Policy, pp.1-8.

Palmer, K., 2016. How businesses have reacted to Brexit so far.

Springford, J. and Whyte, P., 2014. The consequences of Brexit for the City of London. Centre for European Reform.

Swinbank, A., 2016. Brexit or Bremain? Future Options for UK Agricultural Policy and the CAP. EuroChoices, 15(2), pp.5-10.

Virasami, J.H., 2016. Brexit referendum: in-out, in-out, shake it all about.ROAR, 9, p.2016.

Weiler, J.H., 2015. Brexit: No Happy Endings; The EJIL Annual Foreword; EJIL on your iPad!!!; Vital Statistics; ICON. S Conference. European journal of international law= Journal europeen de droit international, 26(1), pp.1-7.

Williams, S., 2016. Brexit: What Companies Should Do Next.

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International Relations Theory

The theories of international relations try to find out the key patterns of interaction between parties involved in international politics and provide a framework to explain the underlying structure and nature of these interactions (Nye, 2004). The theories generally state the manner in which international politics should be carried out and how the world should look like. According to Nye (2004) the theories have historically been viewed as unequal and competing with each individual theory providing its own alternative explanations to the nature of international relations. The historical evolution of the theories is that they try to critique the flaws of each other in providing an alternative explanation. The international relations field has evolved over time and has many theories which use different approaches, methodologies and explanations to explain interaction between nations (Nye, 2004). This paper tries to predict how states and other international actors would respond to an invention of reliable fusion energy technology which is cheap, abundant, safe, clean and carbon emission free by the scientists of one country’s government using neo-realism and neo-liberalism theories of international relations.

The availability of energy is critical to the running of every country. Many people therefore agree that the issue of energy security has been a very important for many countries since the energy crises that affected many countries in the 1970’s (Wenger, Robert & Jeronim, 2009). The oil consuming countries have experienced shortages in the past since they depend on oil imports from producing countries for supplies to meet their energy needs. The issue of energy security has therefore been very important in international relations debates. The energy debate has therefore been mostly shaped by the inequality between the oil producing and oil consuming countries. Oil supply has become a subject of both real and perceived susceptibility for different states (Wenger et.al. 2009). Different studies have been carried out in relations to the increased rate of energy consumption and increased dependency on energy imports by different countries. The studies have also focused on the contribution of competition for energy to different conflicts. The international relations theories can be directly applied in understanding the forms of collaboration, competition and conflicts relating to energy. This paper seeks to try and explain the underlying theoretical assumptions the neo-realism and the neo-liberalism theories provide for understanding what would happen if one country discovered a new and more efficient fusion energy technology.

Neo-Realism and Energy

Neo-realism is one of the general schools of thought within international relations and was put forward by Kenneth Waltz (Nye, 2004). The theory is a specific variant of realism. In the neo-realist theory waltz classified the actors in international relations into three levels. These levels include the individual, the state and the interstate system. According to this system the interstate system is the most important in international relations. According to this theory the interstate system comprises of states actors which compete with each other to fulfil their own self-interests (Nye, 2004).

The neo realist theory makes three important assumptions about the states and the characteristics of the international system in which they belong. First the interstate system is anarchical in nature with each state being sovereign from each other and therefore chaos is expected since no state can control the others. According to Walt (1998) “the international system consisted of great powers each seeking to survive and because the system is anarchic each state has to survive on its own”. In this system the survival of any state is not guaranteed and in order to survive each state is driven to accumulate power in order to provide for its own security. According to Wendt (1992) “Each country in this system acts in its own self interest in order to maximize its own survival and is therefore driven to accumulate as much power as possible”. Conflict may therefore arise as there is no supreme authority to prevent way between states due to a breakdown in international relations.

Another assumption of the neo-realist theory is that the functions of each state within the system are not differentiated. Each state is tasked with providing security for its citizens from external threat and ensuring there is law and order internally. The final assumption is that the distribution of resources between the similar countries determines the balance of power between these countries. This means that each country has its own resources and capabilities to counter the resources of another country. The status quo in the system is therefore that no one country can be able to dominate all the other countries and therefore each country tries to be better than the other rather than better than all of them put together.

The three assumptions about the nature of the international system lead to a number of hypothesis on how countries are likely to behave within the system. One of the most important hypotheses about the behaviour of states within such a system is that states are more likely to balance against the rising powers and growing threats rather than bandwagon with these states. The balance of power theory provides that each state is independent to choose whether to balance internally by allocating more resources to economic security and the military or to balance externally by forming alliances with states with similar interests and therefore similar enemies. The neo-realist theory is concerned more with power over morality, stability over justice and continuity over change.

Predicting what would happen if a new energy technology was invented using the neo-realist approach requires understanding how this new energy would affect the existing balance of power within the energy sector. There is a balance which exists internationally between the energy producing countries and the consumers. However this balance is threatened by the issue of energy security. After the oil shocks of the 1970’s the security of supply of oil became a matter of security concern for many developed countries. Security can be defined from an offensive or defensive point of view. According to the neo-realist security is from the defensive point of view due to the anarchy structure of the society. According to the neo-realist theory, states struggle to survive within an international system that does not have a worldwide authority to controls what happens. To maximize their chances of survival states therefore try to rise to power by accessing the required resources and therefore influence their relationship. Energy security is the only vulnerability point for many developed countries and therefore they sometime prefer to use an offensive strategy to secure the source.

According to the neo-realist theory security is not considered to be as a result of the direct threat but the political interpretation of the threat. The international relations theory considers anarchy as part of the international system which is why states are very concerned about security. In the international arena there are energy related interactions between states which involve an energy dependency between the states. In the international system the energy interaction involves export, import and transit of energy resources. Energy security between states can be measured using the strength of dependence which is determined by factors such as possibility of diversification, level of domestic resources and the energy trade balance. The dependence of a state on energy from another state is perceived as a threat. A good example is the European countries which depend on Russia for their gas supply. Russia uses manipulation of gas supply and prices as a tool for political influence. Many countries therefore realise that there can be no energy security if one of the energy supplying nations is willing and able to use energy resources as a weapon of influence.

From the above analysis and using the neo-realist theory the states and other international actors would respond in different ways to an invention by one government scientist of a new reliable energy solution. The first way in which the state actors would respond to the invention is through cooperation. The state and international actors with similar interest would form an alliance to protect their own interests. As the States and international actors which currently supply energy would try to maximize their chances of survival in the new order they would form alliances to counter the new country which is rising due to supplying alternative source of energy.

The Neo-realist theory also suggests that the new technology would provide, power, influence status, security, respectability and prestige on both the regional and international stage. The fact that one country owns the technology will increase the worries and fears of the neighbouring states. This would be construed as a threat to the states in the region which may spiral out of control in the form of a regional wide race for the new technology. The neo-realists argue that the states will try to balance internally by allocating more resources in this case to researching the new energy technology.

Neo-liberalism and international energy politics

New liberalism is another widely used theory to explain state behaviour in international relations. This theory emerged in the 1970’s and 1980’s (Baldwin,1993). The neo-liberalist theory was developed as a response to the neo-realist theory. The neo-liberalist accepted the neo-realist argument that states operate in a state of anarchy. However, the neo-liberalists argue that even in the anarchic international system made up of independent states, cooperation can be possible through building institutions, norms and regimes which will bring about positive results for everyone.

According to Peet (2003) “neo-liberals states are not supposed to attack each other but should consider each other as legal and non-threatening”. They believe that global economic ties and international organizations act to strengthen peace. The neo-liberalists believe that the rule of law and the strengthening of democracy make it easier for states to cooperate. The theory advocates that having economic interdependence helps countries meet their needs better than through war. The main tools of this theory are international institutions and free international trade which allows for free movement of goods, ideas and resources which allows people to find affordable resources and to maximize their profits. The neo-liberals also believe that the state should not control the market but let the market forces control the market. The European Union a regional institution has been a good example of how sovereign states can cooperate through economic and political interdependence making war unthinkable in the region (Pease 2012).

The neo-liberal approach can be used to explain what could happen in international energy politics if a new sustainable energy technology is developed. In order to understand what would happen if a more sustainable energy source was invented by one state from a neo-liberal perspective it is important to understand what the current situation is from a neoliberal explanation. Currently the energy market is a less liberalised and is mostly controlled by states and international actors. This allows many illiberal practices to take place in relation to international relations of the energy industry. Some of the notable illiberal practices in the energy sector are secret deals between international companies and oil producing countries which have led to underdevelopment, resource conflicts and support of authoritarian governments (Wenger et.al. 2009). A Neo-Liberal approach would aim at eliminating all the illiberal practices which occur in the market due to control by the state.

From a neo-liberal perspective state and other actors would respond in different ways to the invention of a new energy solution. First states would respond by promoting regional and worldwide energy organization and institutions. From the liberal perspective the development of a big organization with many members would allow members to cooperate and benefit from the new energy technology. A big energy organisation would ensure that the whole market is controlled by one organization which would make liberalising the market easier.

Another way that the state would respond is through greater liberalisation of the economy to eliminate the imperfections within the energy market. Allowing the market forces to determine who provides the energy solution would ensure that only the most economically efficient institution provide the energy solution eliminating the threat of war and conflicts often associated with other forms of energy. This is essential to promote healthy international relations.

Another possible response by state and international actors is international regulation which would deter illegal trade and practices which often lead to conflicts. A nice example of this is the international regulations of diamonds which were seen as the major cause of conflict in different parts of Africa. The regulations require the global diamond industry to commit them to an international process of diamond certification. A similar regulation would be made for the sector.

Another likely way the actors would respond is by promoting good governance in different states to eliminate the illegal practises such as rent seeking and distortions by the rent seeking states. The international actors are likely to demand for more transparency, fairness and accountability in order to ensure that price of the new technology is managed in a more efficient way. The states would respond by demanding more transparency to avoid secret deals which strengthen illiberal practices and undermine international relations. Openness would be one of the preconditions for the different state and international actors to cooperate.

Conclusion

International relations theories provide good models for explaining the nature of international relations in different sectors. The theories offer alternative explanations for the interactions. The neorealist theory view states as competing against each other. It can therefore be conclude that the states would respond in a way that best meets their own self interest. On the other hand the neo-liberal argue that the states will respond in such a way that the cooperation brings positive results for everyone.

References

Barkin J. Samuel, (2002) “Efficiency and ideas,” in international relations: The Key Concepts. New York: Routledge.

Baldwin, David A. 1993. Neo-realism and Neo-liberalism: The Contemporary Debate, New York: Columbia University Press.

Nye, Joseph S. 2004. Soft Power in International Relations: the means to success in world politics. New York: Public Affairs

Peet, Richard. (2003) “Neoliberalism and Nature: The Case of the WTO”. Annals of the American Academy of Political and Social Science, Vol 590 p188–211.

Pease, Kelly-Kate, (2012) “Critical Theories and Approaches,” in International Relations and Organizations: Perspectives on Governance in the Twenty-First Century. New York: Longman.

Walt, Stephen M., (1998), “International Relations: One world, Many theories,” Foreign policy Vol 110 p29-46.

Wendt, Alexander. 1992. ‘Anarchy is what states makes of it: the social construction of power’, International Relations Organization, vol 41 (3) p50-57.

Wenger, Andreas; Robert W. Orttung, Jeronim Perovic. (2009). Energy and the Transformation of International Relations. Oxford: Oxford University Press.

Tag: International Relations