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Section 12. Economics and management
Vovchenko Natalia Gennadievna, Dr Sci (Econ), Finance Department E-mail: nat.vovchenko@gmail.com Epifanova Tatiana Vladimirovna, Dr Sci (Econ), Civil Low Department E-mail: rostovshell@mail.ru Pogorelenko Nikita Sergeevich, Student, University College London (UCL) E-mail: nikpogorelenko@gmail.com
Current situation and future potential of further integration between UK and EU
Abstract: The article analyses potential consequences of Brexit as well as the current costs and benefits of UK’s membership in the EU, furthermore focusing on alternative agreements that may result between the members.
Keywords: financial and economic integration, economical and political institutions, European Union.
In 2013, David Cameron, British prime minister delivered a speech on Britain and Europe. He offered the British public a referendum concerning the United Kingdom being part of the European Union [1; 4]. The “Brexit” is a very structural reform that will have a substantial impact both for the UK and the EU. The UK is one of the largest members with big contributions both in economical and political spheres of the EU.
Both countries will come across the challenge of managing the process of separation. Despite the fact, that there is an article that informs the process of the separation included in the Treaty of the European Union, there has been no practical experience since the EU emerged [1; 6].
Secondly, it may change the ongoing cooperation of the European Union after the loss of one of its most influential states [2; 12].
Last but not least, it is hard to predict the relationships of the UK and the EU after the withdrawal [3, 44].
The essay is structured in the following way: first section explains what happens in the UK and its “value” for the EU. It is crucial to understand the implications of the separation to in order to have a full understanding of the situation in Europe. Hence, the first section will explain why the UK may benefit without being a member state of the EU. To keep the chronology, the second section concentrates on the procedural actions towards the withdrawal and institutional changes necessary for the separation. It will take a look on the core economical and political institutions of the EU and analyse their changes after the UK withdrawal. Third section will be focused on the post-withdrawal operations of the EU and relationships between United Kingdom and the European Union.
David Cameron has announced committing a future Conservative government to renegotiating Brittan’s relationship with the EU, to then be put to a referendum, widely expected to be around 2017 [1; 7].
The Euro crisis made a crucial impact on the British publics’ faith in the European Union. Stepping forward further integration is not something the Britons are comfortable with. The past experience of Portugal, Italy, Greece and Spain made both the UK government and the UK citizens to understand that it will be harmful to use EURO as a currency. Therefore, we can see that the efficiency of Single Currency Area Theory is not applicable for the United Kingdom at the current stage of development of the Euro Zone [4].
The UK will also be benefiting from less migration, no EU budget payments, better opportunities with emerging markets and less regulation from the EU [2; 14]. The last argument explains the actions of Cameron towards “Brexit”. The big controversies between the UK and the union appeared during the EU summit in December 2011 [5]. David Cameron put a veto on the EU fiscal treaty 2011 for two reasons. Firstly, the UK did not want further European Integration; secondly, the following changes in Growth and Stability Pact may lead to economic downturn of the UK [6].
In the Article 3 of Fiscal Compact there were made some changes in Stability and Growth Pact. The main idea of the pact is that the ratio of the general government debt to gross domestic product should be significantly below 60 % in order to keep the risks of default relatively low and the structural deficit should not accumulate more than 0.5 % of nominal GDP [7]. The new fiscal treaty contained the information about stricter sanctions for the countries that accumulate higher level of debt. A country can be funded up to 0.1 % of GDP [6].
The change of pact helps Europe to minimize the risk of a default of its member states because it does not allow the country to get heavily indebted. The changes in the fiscal treaty are made to prevent a country such as Greece getting heavily indebted [6].
It is possible to look on this situation through the prism of Fiscal Fatigue theory.
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Fig. 1. Primary balance and fiscal space
The graph shows the situation that is protected by the pact. When a country’s primary balance deficit affects the debt (to GDP) to accumulate faster than d* Conditionality Stable Long-Run Public Debt Ratio, the country may be faced the increasing interest rates on the debt. When the country’s GBP/Debt ratio is too high, the interest rate goes to infinity. The lenders know about the borrowing country risks and ask for higher premium. A borrower cannot pay its debt and has to default on its debt [8].
The UK had over 80 % of debt/GDP by 2012 that time and their fiscal approach diverged [9]. British model of social-economical development is different from other EU members. It always had Anglo-Saxon model, where the level of government intervention is lower, so the tax revenue is lower than in many countries [3]. Therefore, country’s Primary Balance may be negative as well. Moreover, after the financial crisis in 2007, the UK had to use its expansionary fiscal policy in order to ameliorate the process of recovery by stimulating the economy [10]. Keeping the primary balance deficit takes place even now for the UK. The UK has one of the strongest financial sector and its economy is much more flexible comparing to such countries as Greece, Portugal and most of the countries in CEE (Central and Eastern Europe). This explains why David Cameron was so tactless about the new regulations coming from Brussels.
Since 1977 Ipsos MORI has periodically asked the public: “Should the UK remain in the European Union?" In November 2012, 48 % of Britons said that they wanted the United Kingdom to leave the European Union, 44 % believed that it should stay and others were not sure. While similar results have have been seen in the past in 1980, when around 65 % of people in the UK polled for “getting out” [11]. That also
influenced the growth of popularity of the ideas brought by UK Independence Party (UKIP) that is comonly known to be a right-wing political party in the United Kingdom that was founded in 1993 with the primary objective of UK’s withdrawal from the European Union [12]. Furthermore, the ideas of the UKIP gained the popularity even among some of the Conservatives [13].
Q If there were a referendum now on whether Britain should stay in or get out of the European Union, how would you vote?
Such pressures pushed David Cameron into making his speech. His speech and commitment failed to give a rise of popularity of UKIP. It helped to use the support of the Eurosceptics in order to get elected in 2015 by promoting the idea of the referendum “soon after coming into office” [14].
In order to proceed to the next part, it is needed to understand the scale the UK contributes to the EU. After the withdrawal of the UK, the EU will lose nearly 12.5 % of its population and almost 14.8 % of its economy. Britain’s economy is the world’s sixth largest and approaches the value of to € 2 trillion. It also represents 19.4 % of the EU exports (not including the trade within the European Union) [15]. The City of London is the world’s pre-eminent financial service center that is both beneficial to the EU and the UK. A lot of investment in EU institutions constantly takes place there. Being one of the best and rapidly developing economies, the UK is a big contributor to the EU budget. In 2011 it was the sixth largest net contributor per capita and the UK gross contribution was € 7.255 bn [16]. This is a relatively big proportion of the EU budget as such countries as Austria, Sweden and Finland have contributed € 2.6 bn, € 3.3 bn and € 2 bn respectively [17].
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Fig. 2. Statistics of Voters on the
Initially, the treaties of the European Union did not include any instructions upon withdrawal of any member state. Hence, there is nothing that can stop the UK from quitting the EU from the legal perspective. Primarily, such an action will involve the British Parliament to repeal the European Communities Act of 1972, which is an Act of the Parliament of the United Kingdom providing the incorporation of the EU into the domestic law of the UK [18]. However, that will trigger some clashes of the institutions representing the sovereignty both in the EU and the UK. The UK will have to negotiate with the union regarding its economical and political transformations in order to manage the process ofwithdrawal. If any of the parties fail to negotiate that will definitely result in numerous legal, political, economical and social problems [19].
In 2007, the member states have signed the Treaty of Lisbon. The new treaty had the article that illustrates the process of the withdrawal to the certain extend. Article 50 states: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements” [20]. Under the article the British Government will inform the European Council about its desire to be separated from the EU. The European Commission will appoint the EU negotiator that should be approved by the Council [2].
That is needed in order to set up EU and UK negotiation teams that will come to the certain arrangements upon the separation of the institutions. Such arrangements on the large number of shared projects are the priority for the longterm relationships. [2]. Some people think that it will be possible to make the second Swiss-EU relationship model, but in this case, the UK-EU need to think over: the free movement of capital and people, technical barriers to trade, education, taxation pensions and etc [21]. Although, these factors
UK separation (1978 to 2012)
are very important for the legal background of the “divorce”, I will be focusing more on the major political and economical institutions that are subjected to change.
Britain has 73 seats in the EU Parliament and these seats need to be redistributed. It is very hard to allocate the seats in the fairest way as this action is “subject to a lot of formulas, solutions and political horse-trading”. The British seats can be given to different countries. Alternatively, European Parliament, which is of the size 751, may reduce the size by 73 members. The political party grouping will also notice the disappearance of its members [22].
Another institutional change is the removal ofBritish European Commissioner, the loss of British judges from the European Court ofJustice and changes in quotas specifying the employment for British representation of the EU as an example — EU Military Staff. Some questions will be raised concerning English as the working language in the EU because only Ireland and Malta would remain states with English as an official language [2].
Finally, the EU budget will need to be restructured. The UK is one of the most important member states also in terms of the budgetary side of the EU. It is one of the largest net contributors. According to the pie chart of Official Journal of European Union, UK contribution was counted 12.40 % in 2013, comparing to 12.58 % in Italy and 16.69 % in France [23]. The UK withdrawal will mean that the UK will not be funding such spheres as agriculture, regional development and research. The UK net contribution of these spheres was € 4,703.4 ml. It was quite similar to the contributions from France and Italy, € 4,888.5 ml and € 4,750.3 ml. [24]. The «Brexit» will mean that such countries as France, Germany and Italy will be required to mail larger budgetary contributions to replace the disappearance of the important contributor. However, it
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Current situation and future potential of further integration between UK and EU
cannot be clear to anyone for the moment, only post-withdrawal framework that would be agreed with the UK will contain the exact information upon the budget restructuration. If the UK adopts similar relationship with the EU as Norway and Switzerland have, it will still need to make certain contributions in order to keep a good relationship with the EU. Using
Switzerland as an example, it has contributed around € 1.4 bn in 2011. However, the difference is that Norway and Switzerland have larger degree of control on how their money is spent. Being in the same situation, the UK could theoretically opt to arrange bilaterally for parts of its contribution to be spent in states in Eastern and South Eastern Europe [2].
Bulgaria
UK Belgium 0.33%
Fig. 3. EU Budget revenue 2013, % of member states [24] (Source: Official Journal of the European Union, “Definitive adoption of the European Union’s general Budget for the financial year 2016” and HM Treasury calculations)
EU operation without the UK cannot be predicted at the current stage with certainty. The conclusion of the withdrawal agreement and the framework for future relationships is just the beginning of much longer relationship between the UK and the EU. So as, it is only possible to make the assumptions how the withdrawal affects the other member states.
The separation raises the uncertainty in the balance of power and leadership in the European Union. There is a belief that the withdrawal will lead to the boost of Franco-German axis. “Paris and Berlin have always used London to balance the other” [2]. Even with such states as Italy and Poland it is impossible to fill the UK space. So, the disappearance of such an important member may cause France and Germany to take
the dominant position in all the policy making and the EU related issues.
On the other hand, some economists as Mats Persson believe in a scenario, where Germany and France can be hurt. The loss of the UK may cause a shift of power further eastwards. Germany and other Northern European sates are concerned with the fact that “Brexit” may lead to less liberal-minded policies in trade and economics that are inherited in Anglo-Saxon socially-economical approach. “Eastwood power concentration” may lead EU to protectionism [25].
Suppose that every member state imposes tariffs on imported goods or services from other member states. It will decrease the welfare of EU citizens.
Fig. 4. Demand and supply of a traded good X and the tariff
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Effect of Placing Tariffs
Domestic demand is D; domestic supply is S. Imported Price in free-trade area is Pw so as Supply of imported goods (horizontal curve from Pw). In free-trade area, a member state will supply quantity of good:
0 - Q1.
The state will import:
Q1 - Q 4,
because of the more competitive price.
Protetionism measures by imposing a tariff will cause in decrease of export and increase of domestic product sales. With such measures of protectionism, the new price will be Pt and the domestic products will be supplied on the quantity of: 0 - Q 2.
Imported goods will be supplied on the quantity of:
Q 2 - Q 3.
Overall quantity supplied will be lower and the price will be higher. Such a restriction of trade creates a sizable consumer surplus loss and the deadweight losses to society, where the market fails to allocate the goods efficiently [26].
The UK withdrawal should not have a significant direct impact on EU institutions, especially for the European Commission or European Parliament. While UK does not have the lowest voter turnout rates in the whole Europe, the proportion of people involved in election of European Parliament is quite low. If the UK got deducted from the 2009 European Parliament elections, then the turnout across the EU would have increased from 43.24 % to 44.39 % [27]. Hence, the UK separation will not be a key to solution of the EU’s democratic deficit.
Last but not least, it is important to mention the relationships between the EU and UK after the withdrawal. Both of them will need to develop the method of cooperation in order to manage their common problems. One of the good examples is Swiss-EU relationship. It is the one that is most preferred by British Eurosceptics [28]. Switzerland is within EFTA but outside of EEA. Switzerland has free trade with the
EU, which is greatly desired by the UK. Therefore, Switzerland has no obligation to accept new legislation. However, being dependent on the EU in terms of free trade, Swiss policy making barely clashes with the EU. There are a number of bilateral agreements drawn by Switzerland and EU in order to facilitate their trade. Also, Switzerland has no obligation to accept further European legislation implemented after agreements come into force. Hence, Switzerland may pick the most benefiting laws to its national interests. Furthermore, Switzerland does not have a supranational oversight of the agreements such as the one in Norway. It means that disputes may stay unresolved [29]. The UK will be benefiting most from the Swiss-EU relationship model but it is very unlikely that the EU will agree upon it. Knowing that UK has 56 % of trade with the EU [30]. and Switzerland has only 45 % [17]. The relationships will be highly complex, presenting more political and economical conflicts of interests.
In conclusion, it is impossible to figure out the certain scenario the EU and the UK will follow in case of “Brexit”. According to most of the references I used, neither of the countries will benefit, especially in the short run. Moreover, the divorce will not help in eliminating the problems that have accumulated in England and in the European Union such as high level of democratic deficit. Europe will experience a period of uncertainty in restructuring its budgetary and policy-making institutions. The EU will face the possibility of a power shift: either a minor one as a redistribution of parliament seats, or a more significant one, a shift of power to Franco-German axis that gives France and Germany the most influence the EU. However, the power may also shift to the Central and Eastern Europe countries making the future even more unpredictable. Concerning the relationships between the EU and the UK, it will also be hard to find a Pareto efficient point, where both of them will be satisfied. So, the question is, whether the ambitions of politicians or the fleeting decisions of citizens will be more important than the certainty of future. The answer will take place in 2017.
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Features of the development of unemployment in the Krasnodar region and its analysis
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Grubich Tatiana Yurievna, Kuban State Agrarian University, senior lecturer, chair of the system analysis and information processing
E-mail: tgrubich@mail.ru
Malchenko Darya Alexandrovna, Kuban state agricultural University, 3th year student of the faculty applied Informatics
Features of the development of unemployment in the Krasnodar region and its analysis
Abstract: the article considers the problems of the labour market of Krasnodar region. Determination of the characteristics of the development of unemployment in the Krasnodar region and its statistical change in the next few years, as well as the definition of the main reasons that most significantly affect its aggravation.
Keywords: unemployment, statistics, analysis ofcauses, economic analysis, analysis of variance, two-factor analysis.
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