5 Things You Should Know About a British Exit from the European Union

by Diana Drake

British citizens are just days away from deciding whether England should exit the powerful European Union. The results of the June 23 referendum known as Brexit, an abbreviation for British Exit, will have long-lasting consequences for the United Kingdom and the entire continent as Europe grapples with its changing role in the global economy. In a recent segment on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM Channel 111, Wharton management professor Mauro Guillen, also director of The Lauder Institute at the University of Pennsylvania, discussed the complex issues facing Europe. 

Knowledge@Wharton High School highlights five key takeaways below from Guillen’s radio interview.

  1. Europe in the Last Year: The economies in the south and the east have been going through more problems with economic growth that has not really been big enough or fast enough to reduce unemployment, except for in Ireland and in Spain. Even in those two countries, it’s not clear that growth is sustainable. At the same time, we have seen far more assertiveness on the part of the European Central Bank (the central bank for the euro that is charged with maintaining price stability within the eurozone), led by Mario Draghi, in terms of engaging in quantitative easing (a monetary policy used by central banks to help stimulate the economy) — that is to say, purchases of not only government bonds but also corporate bonds, much to the dismay of the central European and northern European countries that are also part of the eurozone. The euro continues to be a viable currency as long as the European Central Bank is willing to do whatever it takes. But the gap between north and south, the gap between east and west, the unemployment, all of those things continue with no end in sight. This interconnected set of economies essentially has three groups — the east, the north and the south — each with very different [economic] conditions. But the 19 countries [that use the euro] in the eurozone, unfortunately, have the same monetary policy with the same scheme in place, so it’s very hard to get anything done in that situation.
  1. The European Union: The European Union is the largest economy in the world. It’s not as rich as the U.S., but it is bigger in terms of gross domestic product if you combine those 28 countries. If there is a crisis of confidence that undermines consumer spending and business confidence, then you are going to get into maybe even a third recession. That would be devastating for Europe itself, but it would be really bad for everybody else in the world that has business with Europe, including the United States. Exporters to Europe and American companies that have investments in Europe are going to suffer. Companies such as GE or GM or Boeing, 20% to 30% of their business is in Europe, so it could have a large impact. It’s important to note that no member has ever left the E.U.
  1. A British Exit from the European Union: The idea of a possible British exit from the E.U. was seeded in a campaign promise. Prime Minister David Cameron promised the referendum should the Tory Party win No. 10 Downing Street. [Critics of E.U. membership think leaving will liberate Britain from bureaucratic red tape and political interference and enable the country’s businesses to trade more successfully with the rest of the world.] The U.K. has been in the European Union since 1973. It has always had doubts about it. We went through several re-negotiations of the relationship between the U.K. and the European Union, especially under Margaret Thatcher. From the point of view of the U.K., if I were a voter over there, I would think at the end of the day I am getting a few things that I really want, which is access to that big [European Union] market. I am also more influential as a country because I get to go to the meetings and exercise not only a vote, but also an opinion. The U.K. is one of the three largest economies in Europe, so they have some influence.
  1. More Consequences of a Brexit: Technically speaking, the nation state that is a member of the European Union is the United Kingdom (England, Scotland, Wales and Northern Ireland), but public opinion is bitterly divided there between those who want to stay and those who don’t. If you go to Scotland, you find that most of the population is in favor of staying. One of the risks of Brexit is that Scotland might want to become independent because it really wants to remain within the European Union, and this would only fuel the independence movement there. If there is a Brexit, the pound sterling (the official currency of the United Kingdom, which does not use the euro) would lose value. The euro would also lose value because there would be such an erosion of confidence. These days, although the dollar is increasingly not that strong, it is perceived as being the only safe haven. What we would be witnessing then is a strengthening of the dollar, and that would also make it harder for American companies that export to do so, and that is going to have a negative impact on the United States. All of these chains of events that I have described are quite likely if there is a Brexit…Every single analysis that I have seen concludes that it would be harmful for the U.K. to exit.
  1. A Potential Recession in Europe: Europe is facing so many more fundamental challenges than any of these things. Europe is facing a huge challenge with population and aging. In many countries across Europe now, each woman is having 1.2, 1.3 children over her lifetime. This is the current fertility rate in Europe. There is no way you can run those economies with that kind of a demography unless you have some kind of an orderly policy for bring in immigrants with a variety of skills that would help you continue having a dynamic economy. The other issue is Europe’s own diminishing importance in the world, which is from many points of view just something to be expected because other parts of the world are growing much faster. So, it’s the decline of Europe, which has been brewing for a very long time. On top of all of that, we have the divisiveness and the frictions among all of these different countries. We have multiple different kinds of countries in Europe. It is a mosaic, and what I think most people are realizing is that the old policy, the old approach of trying to integrate everything in Europe, to try to bring everything under one common standard, is a self-defeating exercise. Unless you are very careful as to how you build the institutions, how you lay the foundations for that integration, you are likely to intensify the tensions and the frictions as opposed to reduce them.

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Conversation Starters

What is the difference between the European Union and the eurozone?

What is a significant challenge of having 19 different countries in Europe using the same currency? Why has this led to problems?

Germany is the driving force in the eurozone. One important development in the E.U. is that German employees have more money in their pockets because wages have been rising in Germany, especially in the last three years. Using the “Related KWHS Stories” link, explore Germany’s role in the E.U. and why it is so influential.

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