The Economic Impact of Brexit

It’s been four months since the Britons decided to leave the EU and the reactionary sentiment in Europe couldn’t have been more mixed. While many aspects of the vote have been contested, one thing remains sure – the EU has lost an important free-trade advocate, whose voice will be missed in a future, which looms with rising protectionism and nationalism. But the focus of Downing Street has now shifted from the EU’s concerns toward Britain itself and its future. The new prime minister, Theresa May, plans to turn Britain into “the Great Meritocracy” together with her Conservative “party of workers”. Her initially pro-EU rhetoric has changed in order to reflect the will of the people of UK, which they manifested in the Brexit referendum.

“We applaud success. We want people to get on. But we also value something else: the spirit of citizenship. A commitment to the men and women around you who provide a service. A social contract which says you take on local people before cheap labour from overseas. But today too many people in positions of power behave as if they have more in common with international elites rather than the people they employ, the people they pass in the street.”

Even though the referendum has not yet had a markable negative impact on the British economy, the economic projections after its leaving the EU remain unpromising. Officials like Theresa May believe that the success of Brexit will be judged based on more than just GDP and trade figures, but also on the extent to which Britain regains its sovereignty and sustains its national identity. This does not mean, however, that Britain’s economy, especially its future trade-relations, won’t play a significant role in determining the success of Brexit. Let’s look, therefore, at the prospect of these trade relations by examining the effect of the referendum, and of Brexit itself, on Britain’s closest trading partners.

Although the result of the referendum spurred concern and uncertainty in, for example, the automobile industry of the EU, the 14% drop in sterling in about 4 months after the vote caused a rise in foreign direct investment in the EU, as investors fled the sterling. “The referendum has cut off one of the EU’s wings, but the EU keeps flying,” says Jean-Claude Juncker. But Britain keeps flying too – and much swifter than expected for that matter. In fact, its GDP figures in the quarter following the Brexit referendum have seen a growth of 0.5% – higher than the 0.3% growth predicted by many economists. The expansion, nearly exclusively in the services sector and fueled by a higher consumer spending, has been made possible by a weaker sterling. Even though the devaluation of the pound has, surprisingly, failed to stimulate British exports, it may yet bring about a slump in British imports as foreign, mostly primary products become less affordable for Britons. Such a vision is especially gloomy for Britain’s closest neighbour, Ireland.

“The figures show the cost of Brexit to Ireland will be significant, possibly in some areas even worse than in Britain itself.” That is hardly surprising when one considers the tariffs that could be imposed on, e.g., Irish exports of meat and dairy products, were Britain to leave the EU Single Market. These could possibly climb as high as 20-30% and compromise the Irish barrierless cross-border trade with Britain, on which farmers heavily depend.

The imposition of all future tariffs and nontariff barriers depends on the outcome of the negotiations between the British government and foreign economies. Theresa May has already initiated some of these negotiations, not surprisingly, by a visit to India, where she discussed the possibilities of a future trade relationship for the two countries with its prime minister, Narendra Modi.

Not all countries, however, are as welcoming to Britain as India. Britain’s leave of the EU will hugely detract from its lucrativeness as a trading partner. Its most important one, the EU, has signaled that the negotiations between the two actors won’t be initiated until Britain triggers Article 50. As the EU’s Commissioner for Trade, Cecilia Malmstrom, put it, “First you exit, then you negotiate.” The problem is that once Britain triggers Article 50, it will only have 2 years to negotiate a deal with the EU, unless it wants to start operating according to the rules of the WTO and risk the imposition of more than 20% tariffs on certain products. Some pundits say that this time is insufficient to prepare an acceptable trade agreement between the two polities.

This is hardly surprising when one considers Britain’s likely requirements in these trade negotiations: a continuation of the free trade of capital, goods and services; and the abolition of the freedom of movement. In other words, the UK would like to rip out the “four freedoms” of the EU – its most fundamental tenet – and only pick three of them. But EU bureaucrats have never granted such an opt-out, and they are highly unlikely to do so in Britain’s case. Will they let Britain both have its cake and eat it?

After the referendum, EU officials have redirected their attention to a further integration of the EU. They have pushed for policies which are the least common denominator of all its constituents, specifically the establishment of a border-control agency and a push for a closer military cooperation. Furthermore, because it is in their interest to discourage other countries from leaving, they now have an incentive to “punish” Britain for Brexit. The German finance minister signaled what has now become a widespread stance toward granting any opt-out or “special agreement” for Britain: “[Such an opt-out] would require the country to abide by the rules of a club from which it currently wants to withdraw. In is in. Out is out. One has to respect the sovereignty of the British people.”

But the EU also has an interest in keeping the one major global financial center, London, on its continent. If its officials become too obstinate in their negotiations with Britain, they could disrupt London’s prominent status in the world of finance. And even if London’s financial institutions were to resettle in other EU cities like Frankfurt, Paris, or Dublin, these cities lack the potential to fully substitute for London.

As complex and negative as its effect on foreign countries may seem, Britain will not leave the EU for the sake of other countries, but for the sake of its own populace. Brexit will and should be judged by the extent to which it accomplishes to deliver to the British people what they placed before the ideal of a supranational, European identity – British identity and the independence from Brussels. Even though such an aspiration has recently become viewed as a wayward contradiction to prosperity, it is often forgotten what Britain managed to accomplish when it last upheld a very similar worldview during the reign of Margaret Thatcher. Repudiating the concept of a “European reality,” she said: “Europe’ in anything other than a geographical sense is a wholly artificial construct. It makes no sense at all to lump together Beethoven and Debussy, Voltaire and Burke, Vermeer and Picasso, Notre Dame and St Paul’s, boiled beef and bouillabaisse, and portray them as elements of a ‘European’ musical, philosophical, artistic, architectural or gastronomic reality. If Europe charms us, as it has so often charmed me, it is precisely because of its contrasts and contradictions, not its coherence and continuity.” It looks like we’ll be hearing such statements much more often in the upcoming months, as Britain prepares to trigger Article 50.

Why Are Finnish Students Smarter Than Us?

Many countries have looked toward Finland when their education systems need improvement. Researchers have found that Finland produces the second-highest performing graduates, outperformed only by Japanese graduates. In 2009, Finnish students placed sixth in math, second in science, and third in reading according to the Program for International Student Assessment. American students, on the other hand, placed 30th, 27th, and 17th in the same categories. Leaders of other countries seek to import Finnish techniques in order to achieve the same success, but soon find that it is not quite that simple. Much of the success of the Finnish educational system is connected to the culture itself, deeply rooted in the ideals of the people, and cannot be replicated in another country, leaving the Finnish system out of reach.

The methods used in Finnish schooling are unique, based on an innovative philosophy which places emphasis on the importance of education and progress. In Finland, education is viewed as crucial to the success of the country as a whole, and therefore the government invests heavily in schooling. Teachers in Finnish schools are required to hold a Bachelor’s degree, but often have a Master’s degree as well. Those admitted into teaching education programs are carefully selected, and if they do become teachers, are required to participate in in-service training each year to ensure that they are well-prepared. The great amount of effort that goes into selecting and training teachers and that the teachers put into preparing leads to a great respect for the career and professional wages. All schools are well-equipped not only with well-educated teachers, but also with all the supplies needed – no school is insufficiently supplied, and the government provides for each school equally. As there is an immense amount of money that goes into the educational system, Finnish students never have to pay for their schooling, even in college, because their tax dollars provide for it all. Most importantly, the educational methods used in schools are some of the most effective in the world. Instead of yearly standardized tests, Finnish students only take one test at the end of their education: a holistic exam that tests students on aptitude and skills rather than memorized information. This leaves teachers with more freedom to teach a unique, creative curriculum not limited by government regulations or required courses. Given this freedom, teachers are able to better engage students in the subject material, which is covered in a shorter school day than almost any other country’s. This philosophy of creativity and freedom that allows for progress and innovative thinking have delivered excellent results.

This success is not due simply to the methods employed by teachers and the government funds, however. Finland is a country with an extremely homogeneous population: 98.3% of the population consists of Finns, meaning only 1.7% of people in the country come from a different ethnicity. This uniformity among the people leads to a great degree of cooperation and trust between citizens and the government, and therefore the school system as well. The Finnish culture places great emphasis on the group rather than the individual, and this is reflected in high taxes, which have kept the Finnish economy stable and contribute funds for important government programs, as well as this high-functioning education system. The solid Finnish economy also ensures that there are low poverty rates, meaning that most Finnish families are well off, protecting the stability of the educational system as well. The ample educational funding and high level of trust between the people and the government found in the Finnish culture have created an environment in which schooling has flourished.

Therefore, though many educational concerns could be solved by recreating the Finnish educational system in other countries, the real problems rest in the societal issues underlying the failing school systems. Until other countries find a way to form a cohesive, trusting culture, an educational system on the same level as Finland’s will most likely remain out of reach.

Pole-arization in Europe

Across the Western world, from Hungary to France, and even to the United States, 2016 has been a year of triumph for nationalist conservatives. Spurred on by the massive influx of Muslim immigrants to the West, the fear of terrorism and otherness has risen to the forefront of both American and European politics. Among these nations is Poland, the former Soviet Republic which has long been a beacon of hope in Eastern Europe. As a leading NATO ally, a growing economy, and the first republic to peacefully unburden themselves of Moscow’s chains, Poland has demonstrated to the rest of the Slavic peoples that it is possible to move on from Communist oppression and join in the prosperity of the West.
Many Polish citizens, however, have been left behind by the rapid growth brought on by Poland’s admittance to the EU in 2004. As may be familiar to European and American readers alike, most of the government and EU development programs went toward cities and the surrounding areas, leaving the countryside in its original dilapidated state. Rural Poland is by no means a third-world country, and yet the unemployment in Podkarpacie, one of Poland’s most conservative provinces, is at 13.2 percent compared to the 9.8 percent national average. As young workers leave their ancestral homes to find work in the cities, they bring with them their labor potential and their progressive views. The result is an increasingly impoverished countryside, with increasingly conservative views.
Jaroslaw Kaczinski’s “Law and Justice Party” promises to solve the nation’s problems. How? By barring immigrants, of course!
It is perhaps easiest to understand Poland’s conservative streak in terms of its southern neighbor, Hungary, whose Fidesz party has gone in much the same direction, though earlier and more dramatically. At its conception, Fidesz represented Hungary’s liberal, anti-communist youth. Eager, like Poland, to join the European community after the Soviet collapse, a sizeable portion of Hungarians put their support in the pro-integration, pro-trade Fidesz, and its leader, Victor Orban. Over the years, however, the stance of Fidesz has taken a sour turn. In 2010 Victor Orban became Prime Minister, after having served a term in 1998-2002. In that time his liberal, global agenda reversed, and Orban became an advocate for closed borders and limited EU meddling in national affairs. He voiced a sentiment that many Europeans had felt afraid to suggest: that immigration was a plague, not just on Europe’s growing economies, but on its mosaic of unique, age-old cultures. In 2015, Orban’s administration succeeded in erecting a double-layered barbed-wire fence along the southern border, complete with guards and water cannons to drive off any refugees who would come expecting to find prosperity in their country.
Kaczinski is among a host of European leaders to draw from Orban’s example, though in this case he controls an economy four times that of Hungary, in a location that is strategically imperative for NATO’s control of Eastern Europe and the Baltic Sea. Speaking no language besides Polish and obsessed with the memory of his dead twin, Lech, Kaczinski took over the leadership of what was his brother’s party, clamping his grip on Parliament and molding the image of a quiet but fiercely nationalist eccentric. He has scarcely ever left his country, and relies entirely on cabinet reports to acquire information about the world outside Poland. Both the president and prime minister of Poland are widely recognized as Kaczinski’s pawns, though he himself bears only a middling political office. This party-boss approach has officials within and outside his country fearing for the future of genuine democracy in Poland.
Kaczinski has used his power to reconstitute the branches of government, effectively neutering the Judicial branch while purging the public TV and radio stations of any non-conservative messages. Though private stations do exist and claim a majority of the nation’s non-internet media consumption, Kaczinski’s use of public infrastructure to spread PiS propaganda is troublingly reminiscent of the USSR’s complete control over its public’s access to information. Coverage of liberal protests has almost vanished; the emphasis now lies on programs relating to Polish identity, like the Pope’s visit to the dominantly Catholic country this year.
Whatever the future may hold, it is certain that Europe, and, indeed, the world, faces an unprecedented dilemma: do we, as one world, come together to build connections, trade, and diversity on all levels, or do we remain, as the human race always has, in a scattering of isolated tribes?

Beware the Bear

In 2011, the EU started investigating the Russian oil company Gazprom for anticompetitive behavior. Russia strongly objected to this investigation and the subsequent antitrust charges. Now, it would appear that a resolution is on the horizon; however, should Gazprom and the EU come to an agreement, European dependence on Russia for energy would continue and potentially increase.

The European Commission has accused Gazprom of three main anti-competitive behaviors: linking gas and oil prices, unfairly altering prices by country, and limiting cross-border trade in Europe. By linking the price of gas to the price of oil, Russia can ensure there is always a significant amount of money coming from energy export taxes. When oil prices drop, gas prices rise, putting Europeans at a significant economic disadvantage. Gazprom has been charged with manipulating the prices buyers must pay based on their country: countries with little or no other options for gas supply or unfavorable opinions about the Kremlin are charged high prices, while countries with more options and better relations with Russia are charged much lower prices. Most European countries rely on Russia for 50% or more of their natural gas, with some receiving 100% of natural gas from Russia. Unless properly regulated, this system allows Gazprom to set whatever prices it desires. Finally, to really ensure Europe does not have a competitive natural gas market, Gazprom has also used trade agreements to ban buyers from trading gas outside of their countries’ borders and in some cases even restricting trade between buyers in the same country. These three tactics have made Gazprom a very effective, very powerful monopoly in Europe.

So, you may be asking: Why does this matter? Why should Americans care? Why did the EU let the situation get this bad? It matters because there are people in Europe whose well-being depends on Russia not getting mad at Ukraine and cutting off gas supplies to Europe in the middle of winter. That couldn’t happen? Well, that’s not just an oddly specific hypothetical; in 2006 and 2009, Russia engaged in so-called “gas wars” against Ukraine. In the middle of winter, the Kremlin halted flow of natural gas through Ukraine into European countries; in 2009, 80% of the gas Europe received from Russia came through Ukraine. By 2013 that number had dropped, so only half of Europe’s supply from Russia came through Ukraine, which was about 15% of Europe’s total supply. Gazprom is a state-run company. That means it answers to the Kremlin, so it can easily be used in political disagreements, and such drastic actions can have unintended consequences.

Why should Americans care? Well, maybe we shouldn’t. In fact, maybe we should be supporting Russia’s monopoly; our President-elect almost certainly will. However, let’s first look at this from a pre-President Trump perspective. America and the EU have tried to maintain positive relations over the years, and America does have a proud history of trust-busting. On top of that, Russia and America are wont to be on opposite sides of any given argument. So, for at least the past eight years, one would expect America to take a hard stance against Russia on the antitrust issue. For the next four to eight years, however, we will have a president who wants to get in bed with Putin; this could change the dynamics of global politics. Rather than condemning the Russian monopoly, Mr. Trump could back Gazprom and the Kremlin and distance himself from the EU. Some Americans may be okay with this, but for those of us who value our freedoms and our rights, this budding alliance is concerning.

Why did the EU let the situation progress for so long? Well, until recently, Europe didn’t have much of a choice. Europe relies on Russia for about one third of its energy needs, largely because it relies heavily on natural gas. American recently started exporting liquefied natural gas, or LNG; in 2015, we exported 28.4 billion cubic feet of LNG. Now that Europe has options, they can dare to anger the bear by fighting the monopoly. Europe has never been happy with their dependence on Russia, and in fact in 2014 Lithuania fined Gazprom $35 million for anticompetitive behavior.

But now, the European Commission and Gazprom appear to be resolving the case. The two have been working on finding compromises to allow a competitive market in Europe while not radically reducing Gazprom’s revenue. By not making any drastic changes, however, Europe will continue to rely on Russia for most of its gas.

To summarize, Gazprom has effectively cornered the European natural gas market, and while the case is likely to be settled, there is no guarantee of US support of whatever compromises Russia grudgingly agrees to. The support of America, a major world power, could cause disruptions to the order that the European Commission has worked so hard to create. But for now, the European Commission has (probably) ensured a secure and competitive gas market in Europe, allowing for more ideal prices. This was the main objective of the four year long investigation, but how long it will last remains to be seen.

*No piece on Gazprom would be complete without the Gazprom Anthem. Enjoy!*