Brexit and European Union primer

Given all of the recent talk about the United Kingdom deciding to leave the European Union, often referred to as Brexit (short for British exit from the European Union), I thought it would be interesting to do a primer on, well, what exactly is the European Union?

This is going to be a high-level primer; the actual topic can get quite complex quite fast. But to understand what the European Union even is, I will draw a little line here to represent a spectrum, a spectrum of, I guess you'd say, national organizations or organizations of nations.

So at this end, right over here, I'll draw this as a trade bloc. This is when a group of nations get together and say, and usually say, “Hey, let's have free trade between our countries. Let's make it so if we make something in one country, we want to sell it in the next that there's no tariffs.” And it might include things like it's easy to move money between one country and another, and sometimes it might even include it's easy to move people from one country to another.

A good example of a trade bloc, especially from a North American point of view, is NAFTA (North American Free Trade Agreement). This is the United States, Mexico, and Canada having a free trade agreement. You make something in one of those countries; you want to sell it in the other one, and you don't have any tariffs. It makes it reasonably easy to transport goods from one country to another, and there are even some provisions around investments and the movement of people.

Now, why would a country want to do this? Well, there are many economic arguments and theories that it increases the prosperity of all of the parties. Now, some folks will disagree with that, and they might say on average it might, but there are definitely going to be some losers in different countries depending on which industries go where. But that’s the rationale for why free trade agreements exist: that it would increase the economic growth of all involved and it will make them all be able to participate in a larger economic shared market.

Now at this end of the spectrum, I'm going to talk about when states get really close to each other to really form a meta-state, to really form a country made up of those states, and I will call this a federation. Maybe the most famous federation, from an American point of view, would be the United States (United States of America). It is made up of 50 states; it literally stands for United States of America. But those 50 states have become so integrated that they act as one country, they act as one nation, they act as one people.

Each of those states, they are semi-autonomous; they do have their own governor, their own legislature, their own courts, their own laws. But there is also a federal government; there is a federal army, federal courts. There is a president; there is a federal legislature, and so they are so integrated as to be one country.

Now in between, you'll sometimes hear words like confederation or confederacy. This is a more loose term. There's not a strict “this is a confederation” or “that is not a confederation,” but it's generally viewed as looser than a federation, that the states or the countries that are members of a confederation can opt in or opt out. They might be integrated in some ways and not integrated in other ways.

So when we think about the European Union, which involves aspects of a trade bloc, it has free trade, it involves free trade between its members, it talks about the movement of people, so free movement. But it goes further than a traditional trade bloc. It goes further than something like NAFTA. It has institutions and it has rotating leadership. It has regulations and laws that often apply to things like free trade and free movement, but it can also apply to things outside of that.

There's even some integration between militaries or, I guess, at minimum, you could say cooperation. Each of the members has their own military, and they are independent states in their own right, but there is more integration than you would see in something like NAFTA. So the European Union, I would put it someplace in this spectrum right over here.

Depending on whom you talk to, you will get different opinions, and different people will debate. Some people say, “Well, it's more about trade and having a large shared common market and maybe being able to have a little bit more clout on the world, even from a foreign policy point of view.” While some people will say, “Well, no, it seems to be moving in this direction where it's becoming a tighter confederation of some kind, albeit with still a lot of independence from each of the Member States.”

The people who think it’s more on the right-hand side will point to things like, “Well, it's got its own flag, it's got an anthem, you have some military more than cooperation.” You even have some integration. The trend seems to be moving from left to right. It's not only about trade; it's also about currency.

And that's where I'm going to introduce this other concept called the Eurozone, which is often confused with the European Union, and that's because there's a lot of overlap between the two. The Eurozone is the subset of the European Union that uses the same currency, and that currency is called the Euro. This is about currency, and this is about the Euro.

So once again, this would move it a little bit more to the right. Not only do you have free trade and free movement of people and you have some regulations, and of course the member states have representation in determining what those regulations are, but you also have most of the European Union having a shared currency, which of course facilitates things like free trade and free movement.

But this is more than what you see in NAFTA. Mexico, the United States, and Canada do not have a shared currency, but this map shows us both the total of the European Union, but it also shows that it's not exactly the same thing as the Eurozone.

Everything we see in blue and this pink color combined is the European Union. The difference between the blue and the pink is that the blue are European members that also use the Euro as their currency, so they are members of the Eurozone. Spain, France, Germany, Italy, and the Republic of Ireland are members of both the European Union and the Eurozone.

While countries like the United Kingdom, Denmark, Sweden, Poland, and I could keep going on and on, they do not currently have the Euro as their currency. They have their own currencies; they have their own central banks. The UK, which is where we started this conversation, has the British Pound Sterling.

Now in terms of whether or how they are going to move to the Euro, it's different from country to country. Countries like the UK and Denmark have official opt-outs; they never had any intention and they have opted out of going to the Euro. Countries like Sweden, it's not as official, but it doesn't look like they have any intention of going to the Euro.

While other countries, it's just a matter of time before they do go to the Euro, and it's more about them meeting certain economic and fiscal thresholds so that they can enter into the Eurozone.

And once again, why would you want to become part of the Eurozone? Well, if you're a country with a smaller economy or a smaller currency or less stable currency, you say, “Well, I could become part of a larger economic zone.” I'm already part of a free trade and all of that, but with the currency, it makes it even a stronger thing.

Why would you not want to do it? When you say, “Well, I have a strong enough currency, and I don’t want to give monetary policy to folks in Frankfurt.” And once again, good people can argue very good arguments on either side of that.

Now when you look at this map here, you might also notice that Kosovo and Montenegro are colored in this little pink color. This is interesting because they are not members of the European Union, but they have decided to use the Euro as their official currency anyway. So they're not even official members of the Eurozone, but they still use the Euro, and so that's why they get their own special color here.

So if we go back to Brexit, if we go back to the United Kingdom leaving, what are the implications here? Well, the first clear implication is that their currency is not going to change. In the future, their currency is not going to change. They were never planning; they don’t use the Euro, and they were never planning on going to the Euro, and so they are using the Pound Sterling, and they will continue to use the Pound Sterling.

So that’s kind of a no-brainer, and Brexit doesn’t impact that same currency they're using. They are using the Pound regardless of which way the Brexit vote went. What the Brexit vote does, by taking them out of the European Union, is it puts these things in question.

Things like free trade and free movement, and what regulations they will adopt or not adopt. And it doesn’t mean that there won’t be free trade, and there won’t be free movement, or that the regulations will change dramatically. And it also doesn’t mean that that’s not going to happen.

What it means is it’s all going to be called into question. These are now going to have to be separate negotiations between the United Kingdom and the rest of the European Union.