European Integration In The 21st Century: Unity In Diversity

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Background

The beginning of “European integration” journey, after the Second War World, was characterized by powerful sentiment, that lead to the creation of the “European Coal and Steel Community” in 1951, such as trust, enthusiasm, optimism, hope; unfortunately, today seems that distrust, doubt, scepticism and disappointment toward EU are increasing.

This situation is also visible in the words of President of the Commission Junker that during the annual speech “Address on the State of the Union” in 2015 highlighted “There is not enough Europe in this Union. And there is not enough Union in this Union.”, in 2016 he stated “Our European Union is, at least in part, in an existential crisis. […] Never before have I seen so much fragmentation, and so little commonality in our Union.” while in 2017 referring to the previous year he claimed “We only had two choices. Either come together around a positive European agenda or each retreat into our own corners. Faced with this choice, I argued for unity.” As a result, Brexit is the clear outcome of a problem of credibility of European Union as a lot of citizens thinks being EU member imply more disadvantages, mainly related to money transfers, immigration and transfer of sovereign power to EU, than advantages.

Brexit

The United Kingdom is part of the EU since 1 January 1973, but on 23th June 2016 UK population was asked to vote between the remnant of the Country in the EU or the exit; most citizens 51.9% (out of more than 30 million of voters, 71.8% of the total population) voted to leave while 48.1% voted to remain. The referendum was an advisory one, but the English Parliament regarded at it as “the will of people” and began the procedure to withdraw its participation in the EU. The effective exit is schedule on 29 March 2019. An Agreement on the withdrawal of the United Kingdom and Northern Ireland from the European Union was endorsed by leaders at a special meeting of the European Council on 25 November 2018. The main issue included are the transition period, access to networks, information systems and databases, the living right of European citizens living in the UK and the UK citizens living in a EU member, a method to avoid a physical border in North Ireland, professional qualification recognition, rights of workers, social security system, administrative cooperation, ongoing value added tax and excise duty matters, intellectual properties, polices and judicial cooperation, other issues relating to the functioning of the Institutions, bodies, offices and agencies of the Union. Obviously, Brexit would have positive and negatives effects on, both, UK and EU, but the effects of Brexit could paradoxically lead to more unity in the EU?

It’s seems so since if the negatives effects for UK would outcome the positive ones, citizens would increase their support for EU. In fact, human beings are characterized by negativity bias, this means human brain reacts more strongly to negative stimulus rather than positives ones, electrical brain activity increases more hearing bad news. Thus, the attitude of people is influenced more by negative news (Ito TA1, Larsen JT, Smith NK, Cacioppo JT).

The possible scenarios

As said before, after months of negotiation EU and UK got a deal resulting in a withdrawal agreement draft and in a statement of future relation although these two documents set the general rights, rules and path to follow in different sectors that’s why still the UK parliament wants reassurance from European institutions on the future. In general, the two parties have agreed that every decision must be taken before 1 July 2020 since the transition period begins on 29 March 2019 until 31 December 2020. In January 2019 European Parliament and UK’s one must ratify the Agreement to convert it in law, but if the British parliament don’t approve it, Brexit could happen without a formal deal or the details of the deal should be discussed again.

So, in theory all the scenarios imaginable are still possible even if they reached an agreement. On one hand the most discussed scenarios are “Hard Brexit” type and “Soft Brexit”. The first is the case in which the two parties don’t reach a final agreement, that is the case if European Parliament or British Parliament don’t convert it in law. In this case for EU, United Kingdom would be like any other WTO country, EU would impose imports and exports tariff to UK and vice versa, but on the other hand UK would be responsible of its own trade policy. The Soft Brexit follow the European Economic Area for which UK would be still part of the Single Market and it would have to contribute to the European Cohesion fund, but UK would not be part of the Custom Union, there would be a grant for advanced free trade conditions for goods and services, but UK would not have a say in the decision-making process. Other possible scenarios include a custom union that would allow the two parties to have a common trade policy and common external tariffs, so UK would lose the opportunity to create its own trade policy, furthermore would not participate in EU trade decisions; a simple suppression of tariffs as in a simple free trade agreement. EU and UK could also agree on swiss model as UK would became as Switzerland part of EFTA (European Free Trade Association), not being a European Economic Area member could still be part of single market through bilateral agreements.

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The effects of Brexit

During “Address of the Union” 2018 President of Commission Junker asserted “Another issue where I see a strong need for the Union for leadership is Brexit. […] First of all, we respect the British decision to leave our Union, even though we continue to regret it deeply. But we also ask the British government to understand that someone who leaves the Union cannot be in the same privileged position as a Member State. If you leave the Union, you are of course no longer part of our single market, and certainly not only in the parts of it you choose.” From these words it was evident that EU wouldn’t have facilitate and wouldn’t easily have grant rights to UK. The major reason is that with the Populism increasing in other European countries threatening their European membership is important for EU Institution demonstrate that European membership add values to single States, so Brexit can be an opportunity to increase unity in the Union. This theory is confirmed by studies on negative bias as research papers on “behavioural and brain science” assert that human behaviour is influenced strongly by negative rather than positive news (Ito TA1, Larsen JT, Smith NK, Cacioppo JT). Moreover, a correlated study indicates how negatives bias caused variation in political ideology, but liberals and conservatives are likely to respond to threats similarly when involves same information, situations and people( Mark J. Brandt, Geoffrey Wetherell, and Christine Reyna).

The negative effect of Brexit began for UK right after the referendum when in the following week the pound dropped by 10.4%, overall the loss was around 19%. Such events and forecast on future negative disadvantages for UK from English experts influenced people with the same path expected by the authors of the research papers. In fact on September 2018 research bodies NatCen published, on an academic report, a survey in which British people were asked what they would choose if given the option of a second referendum about EU membership and 59% of voter would have voted to remain, 41% would have opted to leave. A more recent poll made by YouGov shows how in December 2018 46% of Britons are in favour of remain in EU, 39% want to leave and 15% refused to vote or didn’t know what to answer. 

The ending of Brexit even with a written agreement is still uncertain even International trade secretary of UK in late December 2018 claimed that the possibility to actual exit European Union are 50% if MPs vote against the deal. What’s sure is Brexit already create consequences and future political actions would have effect on UK, EU and citizens. For example, according to a research paper on diversity Brexit firstly could lead to more unity in a peculiar way since UK would exit the EU the English language could became less relevant and this gave an opportunity to other European languages and European cultures to solidify their identities and self-knowledge using them as resources giving value to the European motto “unity in diversity”. On the other hand, negatives effects on trade in goods and services, labour market and capital market could increase unity and believes in European membership.

Impact on trade in goods

Looking at the transaction of good between Britain and EU only the 51.4% of British exported good go to EU countries, while EU good exported to UK represents the 6,6% of EU exports. UK imports from Germany, Netherlands, France, Belgium, Italy; while exports mainly to Germany, France, Netherlands, Ireland, Belgium. The total of Britain exports in 2016 was valued around $374 billion and the value of export to EU valued $206 billion, for imports the total was around $610 billion and the imports from EU accounted for $363 billion. Moreover, if we look at trade in specific countries Belgium, Netherland and Germany export more than imports from UK, so the effect on trade after Brexit for these countries could be more relevant than for others. Looking at the size of their economy country Ireland, Cyprus, Belgium and Netherland would be affected more. Germany will suffer more on import side but since in general it has a low dependency on trade it would be affected less than other countries. In term of volumes and proportion of transaction in goods Netherlands is one of UK’s most important trading partners since top destination of English investment is Netherlands and vice versa. As we know in trade distance matters and so also Ireland would be very much affected by Brexit since 14% of its exports goes to UK and imports for 34%. In Ireland is particularly important the question of borders in the North, because it could significantly increase the cost of transaction, custom costs and time loss, in fact Irish exports are expected to fall by 4%. It’s also true that Ireland could benefits as an alternative location for investments. With both “hard Brexit” or free trade area agreement the costs would increase. In the first scenario cost would include tariffs, quotas, increased administrative costs such as taxes and other formalities such as the respect of environmental, safety and health standards. In this case the overall export of EU to UK would fall only by 30%, while UK exports to EU by 22%, but in absolute terms it can be considered only as a 2% decline in the total of EU trade flows, while for UK the impact is a more considerable around 10%. With a free trade agreement, the two parties must negotiate in detail the measure to apply in which sectors or UK would have to accept the EU standards. Moreover, it’s easy to say to reach a final agreement post Brexit it would require a lot of time, for example in other cases previously multilateral agreements required 5-10 years. In general UK exporters would find costly sell their product in EU, moreover there would be a cost for setting up the custom borders and comply with EU standards. UK would renegotiate all agreement with other countries as exiting the Union would mean relinquish the EU trade policy and regulations. There is also the problem of fiscal policies as companies must pay taxes for transporting and selling goods in other countries and there is a risk of double taxation which is avoided by EU arbitration convention, but for this matter the solutions is not so clear as the convention is not part of the remit of EU. In the end some EU countries would be affected more than other, and EU could be considered as less attractive trade partners with loss in political negotiation power, but in general the loss for EU seems to be lower than the one of UK.

Impact on trade in services

The huge impact on UK will be in the service sector that not only accounts for 80% of UK economy but also since this sector represents the 45% of the country exports. UK exports financial services and management and consulting services and the latter is also one of his more consistent imports with travel services. In 2017 UK balance in Intra EU and Extra EU trade in services as percentage of the total trade were around 38% - 62%. Taking in consideration EU Member States in international trade in services with non-EU members in export side, as percentage of the total EU-28 trade, UK is the top trader with 22% while in import is the third country with 13%. On intra-EU side in, both, imports and exports, UK is the third European country as accounts for 10% in the two cases. So, it seems from data that United Kingdom is not going to lo lose a lot in trade in services exiting the EU, but some evaluation made by the British National Institute of Economic and Social Research, in case of exclusion from the single market, forecast a decrease in UK services exports by 65% as EU helps the functioning and development of hub of services activities that was established in the Country. In case of “soft Brexit” remaining in the Single Market with the same condition as before the cost increase would be minimum. In case of Free Trade Agreement the UK should met the different requirements demanded by EU legislation such as licensing or the establishment of a subsidiary. For certain types of professions would be more costly and difficult transfer the personnel in another country. The more concerning loss is the passporting rights in case of exclusion of EEA, in fact British firms would need an authorization in each member states to do business in another EEA country. This situation could influence multinational companies to move their business in another EU state to have easily access to the Single Market. This regards obviously also financial services as banks and financial institution or non-EU firms could decide to move their financial centre and offices in another EU country (the major candidates are Paris, Amsterdam, Frankfurt and Dublin) creating a loss between 7 and 12% in gross value added. The increase in non-tariff barriers in financial sector would cause an ulterior loss between 6 and 9.5%. As result Brexit would create consequences for both EU and UK, in particular for the second one it would lead to negative ones in job market and in intake of taxes. Financial sector alone provides 3.9% of jobs (1,2million) in the UK. Due to Brexit London, as financial centre would become less competitive, but still it would benefits form its international prestige. To sum up the negative effect in the services sector are still significant, even if they are more mitigate than in the good sector and it could act as a dissuasion for other European members to leave the Union, and citizens to believe it would be a great opportunity exiting.

Impact on labour market

First of all, it’s important to remember that labour market is closely related to Immigration phenomena. Currently, taking in consideration the criteria country of birth, only 6% of UK population comes from the rest of EU and the number of European population living in the EU has increased over time, even after the referendum they increase by 7%; before the value was around 13% so it’s obvious that the decision to leave EU had an impact on the prospective of potential immigrants. Most of intra-Eu immigrant went there to look for a job as the 83% of Immigrants are employed, mostly on elementary professions. In 2018 the employment rate of Eu nationals was higher by 6.3% than the one of UK nationals. The highest number of immigrant comes from Poland, Ireland and Germany. One of the reasons of Brexit vote is immigration as there is a hostile perception that the advantages and disadvantages are not equally distributed and foreigners “steal” jobs to natives. In reality not only Eu immigrants increase the net contribution to public finance but they help to resolve two issues skills shortage and aging population. A reduction in immigration could lead to a decrease in UK competitiveness since Brexit would affect sector in which migrant are concentrated (manufacturing, construction. Private households and clearing jobs). Brexit would not only affect the permanent migration flows but also the one of posted worker. This category includes workers that are sent by their employers for short period of time, less than two years, to another member country of EEA for a project. In 2016 57,226 workers were posted to the UK while 49,910 were posted from the UK. The main countries sending workers in UK are France, Germany and Spain. In case of “soft Brexit” the impact on labour market would be very small, while the impact in case of “hard Brexit” would be greater since the UK could reduce the rights of posted workers, asking companies to prefer UK citizens. EU citizens could be provided with a visa only for a limited time or to prove that they received a job offer, or they could decide to ask for more costly sponsorship, another option could be a completely ban on unskilled workers. So, in case of “hard Brexit” it would be more difficult not only for employers and employees, but also for the UK in general since public authorities must be more involved in a control process with an increase of legal and administrative costs. Moreover, the UK labour growth would decrease. Estimation foresee that without migration UK debt in less than 50 years would increase at 175%, also a reduction of incoming student from EU countries will cause a loss around 28 billion euro. In the end we can’t denied that UK could be negatively influenced by the effect of Brexit on labour market, while on the EU side a reduction of immigration in UK could increase immigration somewhere else like in France, Germany or Ireland, considering that the language is also English, and this could raise immigration hostility in such countries. In any case if nothing would change politically the UK government has already set up a “Settled and pre-settled status for EU citizens and their families” that would allow Europeans that already live in UK to apply for the possibility to continue to live in UK after 30 June 2021.

Impact on capital market

Brexit could reduce UK attractiveness for investors from other European Union Member States but could also count on a more flexible regulation and it’s a country founded on capital market. Even if with time the EU direct investment in UK decrease they are still very consistent as in 2013 they accounted for 46% of the total. Brexit will not only cause the reduction of FDI due to higher trade costs but also it will reduce the willingness to invest of UK firms. As financial services sector is the major receiver of foreign direct investment the loss could be significant as EU would start to support other financial centres like Paris or Frankfurt. Also, UK is a big investor in EU since today almost half of UK’s outward FDI goes to EU countries and 12% of the total inward FDI stock to the EU comes from UK, on the contrary 15 % of EU’s outward FDI stock is in UK. The main countries from which the major direct foreign investment come from and to UK are Germany, France, the Netherlands, Spain, Italy and Belgium. According to some estimations FDI reduction could reach 22%, the economics growth would decrease and the real income per household would decline too. The most significant impact in EU will be heard by the economic growth of Ireland, by on the other side Ireland could become the new European financial centre. Even in this case anyway the consequences will depend on the type of Brexit. In 15 years a reduction in FDI for UK of 5-10% is expected in case of “soft Brexit” that become 10-15% in case of Swiss type and Free Trade Agreement; and about 20% in case of “hard Brexit”. Even analysing the effect of exiting from EU the potential loss of FDI have a greater impact on UK more than on EU. In particular the British vehicle production seems dependent on the single market and European supply chain. For supply chain is very important the reduction of cost of procurement, production and transport and obviously with Brexit companies would consider twice if remain or establish their location in UK.

Conclusion

The Brexit process has already been very long time consuming and the conclusive procedures still requires a lot of time as the formal Brexit would happen in March 2019 date in which began the transaction period until December 2020 deadline that according the withdrawal agreement could be extended by one or two years. The transaction period would be taught for UK as during that time it still be part of the Union without having the possibility to take part in the decision-making process. Has it’s been debate since the result of the referendum the negative consequences that UK will affront because of Brexit are numerous. The magnitudes of this consequence will depend on the model type of exit that will prevails and in this regard it’s very important the vote of UK parliament of January 2018. From one hand Brexit is the result of a scarce knowledge of the privileges that the countries have for being part of the European Union, but on the other hand could be an opportunity to improve the unity in the union as citizens could knowledge concretely the consequences of a withdrawal. It’s not surprising, in fact that after the vote, the media coverage of future of UK outside the union and all the academic research correlated, people claimed that if they had known all the consequences previously and if they would have the possibility of a second referendum they would have chosen differently. As described the negatives consequence affects all the aspect of UK economy from the renegotiation of the trade agreements with the countries to trade in goods and services that will became more costly and they will probably decrease; the firms with Headquarters in UK could decide to move in another Member State; a new politic strategy toward immigration could lead to a reduction of skills available and manpower in sector such as construction, manufacturing, private households and clearing jobs; the capital market could lose is “dominant” position as EU would shift the EU financial centre in another city in the European Union and investor, in particular intra-Eu, would be more attracted to invest inside the EU. All this suggest that UK would have a reduction of GDP and it would lose its competitiveness, at least in the short-run. Obviously in the long run is impossible make previsions as it will also depend on the capacity of UK authority to cope with the changes in the macroenvironment. Obviously also EU 27 will be affected by Brexit but from forecast the loss will be mitigated and they will distress principally Ireland that has ties, favoured by its geographical position, with UK, The Netherlands and Cyprus due to investment and financial ties and Belgium for trade links. As suggested by the scientific theory on negative bias unfavourable events affect people believes and political support more than in case of favourable ones, in this sense Brexit could be an opportunity to solidify the citizens consensus in the EU and it also could convince European politician that is necessary to act as a unique front, in cooperation between each other, to avoid another exist in the future because as expressed by the President of the Commission Junker during the 2018 State of the Union speech “United, as a Union, Europe is a force to be reckoned with”.

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