What is ‘Brexit’ and why should Minnesotans care?

REUTERS/Russell Boyce

“Should the United Kingdom remain a member of the European Union or leave the European Union?” That’s the question that UK citizens will answer in a referendum next Thursday, June 23.

If a majority of voters choose to remain, then nothing changes in terms of Britain’s membership in the EU. A vote to leave triggers Brexit, i.e. a British exit from the European Union. Polls indicate that British voters are closely divided on the question, with the latest data giving a slight edge to the “leave” camp.

What are the consequences of a Brexit? And, why should Minnesotans care?

General consequences of Brexit

The United Kingdom joined the European Union (then known as the European Economic Community) in 1973, after having twice been rejected for membership in the 1960s. At the time, the EU was what economists call a customs union. That is, all tariffs (i.e. taxes on imports) were eliminated among EU members and all members levied a common tariff on non-EU imports. For example, if a French company or a British company imported a product from the U.S., they would charge the same tariff on that import.

Since 1973, the EU has evolved from a customs union into a closely linked set of political and economic ties among its member nations, summarized in the Treaty of Lisbon. (For more details on the EU, see my Econ in English video on the topic.) These include a common currency, the euro, adopted by some members, along with common regulations on trade in goods and services, and the movement of people.

Article 50 of the Treaty of Lisbon is the key to Brexit. Unlike the U.S., where we had to fight a civil war to decide the question of secession, Article 50 states that “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.” Once a government announces its intention to withdraw, it enters into negotiations with the EU to specify the terms of its withdrawal.

Thus, if there is a vote for Brexit next Thursday, the UK will not immediately leave the EU. Instead, there will a period of time during which all of the agreements between Britain and its European brethren will have to be renegotiated.

Why Minnesotans should care

Brexit could affect Minnesotans, generally, and Minnesota businesses, in particular, in a variety of ways, none of them good. If you travel or have business interests in Europe, here are some possible consequences.

Currently, once an American enters the UK they can move throughout the EU without obtaining a visa in any other EU country. With a Brexit, there would probably be border controls between Britain and other EU countries. In fact, this is one of the most important issues in the debate, as many British citizens believe that membership in the EU allows far too many people to migrate to Britain and that a Brexit will allow the UK to better control immigration.

Goods and services
Brexit will take the UK out of the European single market and force Britain to rework its trade relationships with other European countries. One possibility is that the UK will follow Norway’s model, in which it participates in the EU’s single market but nothing else associated with the EU. Another possibility is for Britain to work with other countries through the World Trade Organization, just as the US., Japan, and China currently do.

Now, suppose that you are a Minnesota company and your European headquarters is located in the UK. Brexit will probably lead you, and other U.S. companies, to consider moving to an EU member country. That’s a hassle and a cost to doing business, not to mention a dose of uncertainty that you don’t need in an already volatile world economy.

Another note of uncertainty tied to Brexit concerns the international financial market centered in London. It’s not clear how the negotiations over Brexit would affect this important part of the British economy. For example, would the French and/or Germans take this opportunity to put up barriers that favor Paris and Frankfurt as financial markets vis-a-vis London? How would that affect Minnesota companies’ ability to finance their European operations? Would this push Minnesota companies to alter their financial arrangements in costly ways? No one knows for sure.

More broadly, Minnesotans could be caught up in a financial storm created by Brexit. According to Reuters, “The European Central Bank would publicly pledge to backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union,” but that only means that the two central banks would try to minimize the damage, not prevent it.

Fed Chair Janet Yellen alluded to these concerns yesterday when she noted, “Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate.” Clearly the Fed didn’t want to add to an already uncertain financial situation by raising interest rates.

It’s easy to think that a British referendum won’t matter much to Minnesota. Don’t be fooled: It could make a big difference, and you should pay attention to what happens next Thursday.

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Comments (6)

  1. Submitted by Jim Million on 06/16/2016 - 03:56 pm.

    A little more:

    I’ve followed this “Leave/Remain” campaign fairly closely, especially for a Minnesota American. After months of fear mongering and supposition by the Tory leadership and others who wish to remain, the most recent polling indicates “Leave” has its largest margin to date over “Remain”: 6 pts. with a week to go.

    In the meantime, PM David Cameron’s fear mongering has lost him support of many of his more conservative members as well as many average Brits. He is in a hole right now, it seems, even to the depth of concern for his own political survival. Given residual problems with some British banks and general recent economic slippage, it is no longer quite so accurate to focus on London as Europe’s financial center; although, it certainly is most closely tied to the U.S. and our Fed. London certainly remains a key global center along with New York, Tokyo and others. Germany has been more the EU economic engine, now suffering its own slippage and political repercussions from recent heavy-handed bailout programs, specifically with regard to Greece.

    Terrorism has become a significant driving force behind the “Leave” campaign, as well. Many Brits bristle at the increasing EU immigration quotas forcing distribution of Middle East refugees. The “Leave” vote is increasingly more focused on the events of Brussels and Paris not coming to London or Manchester. That makes sense, given clear memories of the NAZI blitz and more recent escapades of the IRA, directed mainly at England, its Midlands as well as London.

    One significant fact of UK political life few Americans likely understand is the full understanding that UK is the Unitied Kingdom of Great Britain (England, Scotland & Wales) and Northern Ireland. Not the Irish Republic for those who aren’t sure. UK unity has been under stress for decades, actually centuries.

    Much of the “Leave” vote is coming from England with a bit from Wales, not so much from Scotland, where the “Remain” vote holds margin. Scotland recently came very close to devolving into full sovereignty. It is also fair to believe large % of Scots who voted for independence also understand they need to remain in the EU for any chance of economic success, especially since oil prices plummeted, leaving Scotland without requisite revenue to pay the bills of independence.

    It’s very complicated over there. The simple fact that UK polls have recently turned toward “Leave” should inform all readers that America’s interests mean very little there. What’s more, even Janet Yellen knows the UK recognizes the Euro in trade….but, retains its own sovereign currency, the stalwart British Pound. That makes a big difference no matter the outcome next week, even to Minnesota.

    [By the way, David Cameron is on prior record of promising to “Leave” immediately, should that be the voting preference next week. I personally doubt he will keep his word on that; but, then, I’ve always felt he sees his political destiny to be in Brussels. Right now, he’s in serious trouble in Westminster.]

  2. Submitted by Logan Foreman on 06/16/2016 - 05:06 pm.

    I find the the idea of the “United Kingdom” leaving

    The EU to be rather a stupid one. The present GDP of the U.K. Is far behind the US, China, Japan and Germany. What status will the UK have in the WTO? When Scotland leaves, the status of the U.K. drops further. If Americans want to travel through Europe without multiple visas, there is no difficulty in flying to France or Germany instead of the U.K. And if the change causes major negative events in the international financial market in London, the economy of U.K. will be further damaged. Does England think its empire still exists?

  3. Submitted by Jim Million on 06/21/2016 - 08:59 am.

    Another Weekend Gone

    After last week’s polling showed “Leave” had gained a majority view, this past and final weekend of polling shows “Remain” has regained the edge. This after incredible statements of demise from very many sources with something to lose. The Pound has regained strength to a 6-month high, while the London markets have been up from down and now again down a bit today.

    One wonders how much gamesmanship from vested interests has obscured fundamental issues all around. The polling swings in one week have been so extreme, one also wonders about their validity.
    The voters get to decide their reality in 2 short days.

  4. Submitted by Jim Million on 06/22/2016 - 09:46 am.

    Last Day of Discussion

    It’s now Wednesday afternoon in London as this long campaign comes to voters tomorrow.
    Today the Telegraph published letters that may help us understand that “Leave” is not all about anti-progressive notions. Inset are a few video snips, as well.

    These letters seem to cover some thoughtful, albeit more conservative, views on “Leave.” The polling needle remains slightly to the “Remain” side going into tomorrow’s vote.

    I have no particular side to favor in all of this British drama. I do wonder why the Cameron government mounted such a vicious “Remain” campaign, however. When rhetoric focuses on fear, I always assume supporting facts are limited.


    [I’ll see what the Guardian has to say this final day.]

  5. Submitted by Jim Million on 06/24/2016 - 01:28 am.

    Brex It Is

    “Leave” us to ourselves, do not “Remain” in EU. That’s the voice of the majority at the end of this day, indeed, at the end of this seven-year campaign.

    With 99% counted: Leave 52% Remain 48%

    Nobody got this right coming into today’s reality. The final results are a direct flip of the latest poll projections. Even the vaunted London bookmakers (generally spot on) got this one entirely wrong today, giving large odds on “Remain,” causing both London and New York markets to surge unrealistically into their closing levels. The Futures markets are now drastically down from yesterdays levels.

    Interesting notes:

    Greater London (where the money lives and works) backed “Remain,” as did Scotland.
    England’s Midlands and the North backed “Leave.” (bolstered by a strong Labour turnout)
    Wales backed “Leave.”

    PM David Cameron is expected to speak from #10 Downing Street in a few minutes.
    Conservative Party likely will see some realignment, perhaps pressure on Cameron to resign.
    Labour Party seems to have come back to its core values somewhat in refuting Jeremy Corbyns backing of “Remain” this week.

    Personal conclusion: The typical UK citizens decided today they have had enough of others telling them what is best and what to do. Knowing they had this one (likely only) chance to change their course, they sat over their ballots and took that chance. Given Europe’s general state of recent decline in several sectors, the Brits also likely figured there probably will be further EU re-organization in coming years, giving Britain later options, as well. Regardless of whatever official pronouncements we hear from Brussels in coming days, Germany and France must be rather shaken in these early hours of Friday morning.

  6. Submitted by Jim Million on 06/25/2016 - 10:01 am.

    Final Observation

    Rhetoric does not assure reality: EU destruction, UK isolation, World-wide recession, etc., etc.

    Most of this comes from those with tightly vested interests. Yes, from the guys who no longer wear ties, let alone three-piece suits. Makes me wonder even more about lots of stuff they haven’t been telling us for several years.

    und so weiter…

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