Answer the whole questions in an essay not more than 800 words in total.
Draw graphs in needed questions.
International Foundation Year (August 2016)
Course Module: Economics for Business
Reassessment for Coursework 2
Answer All Questions
Leaving the EU would hurt Britain—and would also deal a terrible blow to the West
David Cameron has called a referendum on Britain’s membership of the European Union for June 23rd, promising to campaign hard to stay in. What began as a gambit to hold together his divided Tory party is turning into an alarmingly close contest. Betting markets put the odds that Britain will opt to leave at two-to-one; some polls suggest the voters are evenly split; several cabinet ministers are campaigning for Brexit. There is a real chance that in four months’ time Britain could be leaving the EU.
That would be grave news—and not just for Britain. A vote to leave would damage the economy, certainly in the short term and probably in the long run. (As financial markets woke up to the prospect, the pound this week fell to its lowest level against the dollar since 2009.) It would endanger Britain’s security, when threats from terrorists and foreign powers are at their most severe in years. Far from reclaiming sovereignty, Britons would be surrendering influence, by giving up membership of a powerful group whose actions they can influence better from within than from outside.
Those outside Britain should worry for themselves, too. ‘Brexit’ would deal a heavy blow to Europe, a continent already in some difficulties. It would separate the world’s fifth-largest economy from its biggest market and the fifth-largest defence spender from its allies. Poorer, less secure and disunited, the new EU would be weaker as would NATO too.
Dreams, meet reality
Those in favour of ‘Brexit’ argue that Britain is held back by Europe: unshackled, it could prosper as an open economy that continued to trade with the EU and other countries around the world. That is possible in theory but it is not necessarily how things would work in practice. At a minimum, the EU would allow full access to its single market only if the UK agreed to follow the rules that Euro- sceptics are keen to get rid of. If Norway and Switzerland are a guide, the union would also demand the free movement of people and a big payment to its budget before allowing unrestricted access to the market.
Worse, the EU would have a strong incentive to impose a harsh settlement to discourage other countries from leaving. Those in favour of ‘Brexit’ claim that Europe needs Britain more than the other way round however the EU takes almost half of Britain’s exports, whereas Britain takes less than 10% of the EU’s. The British trade deficit is mostly with the Germans and Spanish, not with the other 25 countries that would have to agree on a new trade deal.
To some Euro-sceptics these hardships would be worth it if they meant reclaiming sovereignty from Europe, whose bureaucrats and judges interfere with everything from bankers’ bonuses to working-time limits. Yet the gain would be partly illusory. In a globalised world, power is necessarily pooled and traded. Britain gives up sovereignty in exchange for influence through its memberships of NATO, the IMF and countless other power-sharing and rule-setting institutions.
Signing up to treaties on trade, nuclear power or the environment involves submitting to regulations set jointly with other countries, in return for greater gains. Britain outside the EU would be on the side-lines. It would be independent in name only but in reality it would still be constrained by rules it had no role in formulating.
One exception is immigration, the area over which many Euro-sceptics most long for control. Half of Britain’s migrants come from the EU and there is little the government can do to stop them. If Britain left the union, it could but doing so would have a double cost. Gaining the right to stop immigration from the EU would almost certainly mean losing full access to the single market. Reducing the numbers of immigrants would hurt Britain’s businesses and public services, which rely on French bankers, Bulgarian builders and Italian doctors.
A global concern
The longer-term costs would go beyond economics. Brexit might well break up the United Kingdom itself. Scotland, more pro-Europe than England, is again agitating for separation; if Britain decides to leave Europe, then the Scots may vote to leave the UK.
Brexit could also dangerously unsettle Northern Ireland, where the peace process over two decades has depended on the fact that both Ireland and Britain are members of the EU. The Irish government is among the most vocal foreign supporters of the campaign for Britain to stay in.
Ireland is not the only country that would suffer. European leaders know Brexit would weaken a club already in deep trouble over such issues as migration and the euro crisis. Europe would be poorer without Britain’s voice: more dominated by Germany and likely to be less liberal, more protectionist and more inward-looking. Europe’s links to America would become more tenuous. Above all, the loss of its biggest military power and most significant foreign-policy actor would seriously weaken the EU in the world.
(Adapted from: The Economist. 27/02/16)
Questions
Answer the following questions as a short (no more than 800 words) essay type question. Submit your answer via turnitin no later than FRIDAY 19th AUGUST.
In total there are 100 marks available for this question. The marks for each section are given for each part. It is important to answer as fully as possible. Marks will also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.
1) Using the examples of EFTA (European Free Trade Association) and the EU (European Union) compare and contrast the features of a free trade area with those of a full economic union. (18 marks)
2) What are the likely effects of a vote to leave the EU by the UK according to the article? (20 marks)
3) What does the article mean when it says that the decision to leave the EU will lead to a more protectionist Europe? What protectionist measures might the EU adopt in relation to its trade with the UK? (20 marks)
4) Using AD/AS diagrams to help your answer, explain the likely effects of a reduction in trade between the UK and the EU. (18 marks)
5) How will ‘Brexit’ likely affect UK jobs, inflation and the exchange rate between the euro and the pound? (24 marks)
