The result of the Brexit referendum on 24 June 2016 shows that Leave beat Remain by 51.9% to 48.1%. Soon, Mr. Cameron announced to resign from his post as of 13 July, succeeded by Theresa May as the new Prime Minister. The referendum is only a prelude to a series of dramas. The issue of Brexit can be analyzed and studied from three aspects, i.e., its reasons, possible paths and influence on the UK itself, the EU, European integration, China and the world as a whole. 

 

1. Analysis of the reasons for Brexit

 

The conclusions and predictions of Brexit are different seen from different aspects. Although there are various predictions, most scholars are disappointed at the result of Brexit.

 

1) The failure of the game between the UK and EU. The result of Brexit can be attributed to traditional EU-skeptic sentiments in the UK as well as the struggles between different groups within parties. In the EU, the representatives have negotiated an ad hoc agreement; and in the UK, the voters hold a referendum on whether to leave the EU or not. In the first place, it is a game of various domestic forces. The EU-skeptic group of the Conservatives and the Independent strongly insist on leaving the EU, while the pro-EU group, the Liberal Democrats and the Labour prefer remaining. All these groups have tried to press the Cameron administration to adopt policies to their own interest. Second, it is a game between the UK and the EU, not only EU institutions, but also other EU members. In order to secure its validity, the Cameron administration unleashed its inner pressure to the EU level to seek the initiative in economic regulation, social welfare of non-UK citizens, competitiveness and sovereignty, and tried its best to maximize profits. After receiving requests for reform at the EU level, the Cameron administration took the negotiation results back to the UK, and then the British citizens held a referendum on whether to leave the EU. The double-layered game brings about external effect of the validity of the UK to the EU, and the validity crisis of the EU then works negatively on the UK.

 

2) The rebellion of the ordinary people against the elites. The results and breakdown of the referendum show trends of rural areas besieging urban areas, blue collars protesting against white collars, the retired supporting Brexit, the elites preferring remaining, the traditional industrial areas supporting Brexit, while Scotland preferring remaining. It also shows that this referendum is an important illustration of the rebellion of the ordinary people against the elites. Domestically, there is strong dissatisfaction in the UK. On the one hand, the recognition of EU is low among British citizens. Influenced by the historical recount of the British Empire and UK exceptionalism, the UK has regarded the EU as a tool for interest since the very beginning, and adopts a pragmatic approach to joining the EU, unlike France or Germany which has a blueprint for European integration. On the other hand, the Gini coefficient of the UK is high, revealing increasing unfairness in income distribution. People at the bottom level of the social structure are increasingly dissatisfied with their own economic situation, and the elites are separated from the ordinary people. The current western democracy is a representative system, so the referendum is not a wise choice. In other words, the result of the referendum is beyond expectation, seen from the random behavior of the British people in handling the referendum. When irresponsible people meet the misjudgment of elites, it’s like an unpredictable gamble to resort to referendum.

 

3) The misjudgment of Cameron and other political elites, and the separation of the elites from the ordinary people. Since the Cameron administration provided an opportunity window for direct democracy, populism had a legitimate institutional foundation. The political concept of the British citizens emphasizes freedom and individualism, while that of the Continent citizens emphasizes corporatism with higher tolerance of control. Mr. Cameron tried to address the confrontation and gap between elite politics and populism. However, instead of completely resolving the issue, he made the existent domestic confrontation even worse. About 7% pro-Brexit people feel regretful and 4% anti-Brexit people feel regretful. The representativeness of the referendum is also questioned because many people did not cast their vote due to bad weather. However, chances are not high that a second referendum will be held. 

 

4) Institutional defect and lack of recognition in the EU. The institutional structure of the EU is questioned in the UK and among the British people with poorer recognition. The UK and its common people do not regard the EU as a reasonable and effective system to meet their demand. For example, the quantitative easing policy is in fact “sacrificing the poor for the rich”, which has encouraged the confrontation between growing economic powers (such as the UK) and depressing powers, as well as the confrontation between the elites and ordinary people. The institutional defect and recognition crisis have already shaken the legitimacy of the EU.

 

2. Possible Paths of Brexit

 

The possible paths of Brexit. If Brexit is politically confirmed, according to the Law of Referendum of 2015, the UK and EU can negotiate with each other on Brexit in procedure. There are several possible paths in the negotiation process. 

 

1) A complete Brexit. That is, the UK will completely leave the EU. Although this idea was mentioned during the interview of a member of the EU Trade Committee, it has not been realistic by now. As everyone knows, the UK is closely connected with the EU.

 

2) An incomplete Brexit. That is, the UK retains some priviledges, such as the four factors of a single market (commodities, people, service and capital), shared agricultural policies and trade policies. In that case, the UK and the EU will co-exist in the European economic zone. This path has been followed by the Norwegian model (The weak point is that Norway cannot take part in the decision-making of EU), the Swiss model (Switzerland is member of the European Free Trade Association), the Turkish model and even the Canadian model.  

 

3) A British model. The UK will further negotiate with the EU based on the Norwegian model. At present, before implementing article 50 of the Lisbon Treaty, the UK will need to contact the EU to work out the above-mentioned models. However, if the UK does not submit its Brexit application, the EU can possibly impose sanction on the UK according to Article 7 of the Lisbon Treaty, so as to press the UK into negotiation with the EU on Brexit.

 

3. The Influence of Brexit

 

1) The influence on the world economy and international finance. In the short term, Brexit has increased the uncertainty of the world economy, which has caused a rapid devaluation of the pound and turbulence in the international financial market. However, in the medium and long term, the ties between the British financial industry and the Continent are close but not indispensable, and the financial industry of London is vibrant and strong. One point worth noticing is what kind of agreement will be signed by the UK and the EU.  Therefore, Brexit has limited influence on the EU and global economy and finance.

 

2) The influence on the UK itself and EU economy and finance. When Brexit was announced, the British pound quickly dropped by over 10% against US dollars and RMB, which also caused a significant fall of the euro against dollar. According to IMF predictions, Brexit will result in a drop of 1.9% of GBP, and also weaken the role of the UK as the global financial center. In the future, the EU financial center will possibly move to Frankfurt of Germany, Paris of France or other central cities in the European continent. However, in the medium and long term, since the UK has not been a member of the Euro Zone, it does not have to implement the regulation articles of the EU banking industry as stated in the Basel Treaty. In the financial circle, the UK has never allowed the interference of the European Central Bank or European Commission, so the influence of Brexit on its financial industry should not be exaggerated. Although the continuous growth of populism and the uncertainty of the path of Brexit can lead to the shorting of GBP in the international financial market, it requires further observation whether the role of the UK as the international financial center will be affected. The export industry of countries in the European continent, especially those export-oriented countries (such as Germany) will be affected. But what kind of influence Brexit will bring to those countries will depend on factors such as the new trade agreement to be signed by the UK and the EU.

 

3) Influence on European integration. In the short term, Brexit will impose huge pressure and challenges on European integration. However, in the medium and long term, Brexit can help EU political elites to reflect on the integration process. Maybe the exit of the UK which is highly skeptical of the EU can increase the possibility of EU’s united actions.

 

Recent years have witnessed several crises in the EU. The European debt crisis and refugee crisis have encouraged populism inside the EU and separated political and business elites from the ordinary people. The blueprint for European integration and social policies bolstered by the elites in the EU have not fully accommodated the interest and feelings of the ordinary people. The protesters are expelled to the camp of EU skeptics which results in social divisions and even political crisis. Besides, the European integration and democratization processes are also hindered by the rapid eastward expansion of the EU, unsynchronized economic policies between the new and old member states, poor recognition of Europe and the opacity of EU decision-making. However, Brexit is a double-edged sword since it offers valuable experience to European integration. EU institutional reform and the advocate of a multi-speed Europe will add momentum to European integration. Finally, Brexit has created negative influence on the political, economic and financial sectors of the UK, setting off an alert to other EU skeptics. As a result, the popularity of EU skeptics and right-wing populists dropped in the European continent, while the ratio of pro-EU citizens rose up significantly. So it is unlikely that other EU members would follow suit to have a referendum or vote to exit.

 

4) The influence on European security. In March 2014 Russia annexed Crimea. The UK’s choice of leaving the EU means that the geopolitical situation in post-WWII Europe has changed again. After the result of the referendum came out, President Obama of the US released a declaration to emphasize the role of the special US-UK relationship, as well as the security radiation range of NATO in the UK and the Continent. Then he mentioned the efforts and cooperation of the EU and US in advancing democracy and protecting human rights. This shows the significant position of the UK in American diplomatic strategy. It also reveals the rising importance of NATO in future Europe, especially regarding the (military) threat of Russia to NATO and the EU.    

 

5) The influence on the Chinese economy. In the short term, Brexit has caused considerable fluctuation in RMB exchange rate, and the medium price of RMB against US dollar has devaluated 752 BP. However, RMB can take advantage of the opportunity of Brexit to offset the overestimated exchange rate of RMB against US dollar. In the medium and long term, Brexit has little influence on the Chinese economy because: i. there are less GBP than USD in the Chinese foreign exchange reserve; ii. China has less investment in the UK than in the Continent. In recent years, China’s investment in Germany and Central and Eastern European countries has rapidly increased, exceeding its investment in the UK; iii. To some extent, Brexit will affect RMB’s offshore settlement, but the total settlement of RMB in London is about two trillion while that in the European continent is four trillion. Therefore, Brexit will work like a catalyzer in the internationalization of RMB. The enhancement of the international role of RMB depends on the success of the transformation of our domestic economy, the increase of capital fluidity and the openness of capital account.

 

6) The influence on China-UK relations. One should not be pessimistic about the influence of Brexit on political and diplomatic relations between China and the UK. Since World War II, the UK has been implementing the “three-circle diplomacy”, that is, UK-US special relationship, the European integration including the UK and European continental countries and its relationship with Commonwealth countries. Recently, the UK has found the “fourth circle” in its diplomatic relations, i.e., its relations with emerging economies represented by China. The priorities of the British development strategy is highly related to the political elites such as Prime Minister Cameron and Chancellor Osborne, who dominate the UK’s China policy to a great extent (The influence of the Foreign Office on Cameron is weaker than Osborne). This reveals the pragmatic and interest-oriented trend of the British foreign policy. It can be predicted that China-UK relations will maintain sound development after Theresa May is sworn in.

 

However, it does not mean that the Foreign Office will be willing to abandon its dominance in policy, or give higher priority to its relations with China than with the US or Europe. Besides, the UK is carrying out a “balanced diplomacy” to seek and protect its global interest, so its pragmatic diplomacy towards China is only part of it. After leaving the EU, the UK is likely to adopt some changes in its China policy, but the “pragmatic” and even “opportunistic” stance and the nature of maximizing its national interest are unlikely to change. We should keep a sober mind and take rational reactions.

 

 (The article is based on the seminar The UK Leaving the EU hosted by the Institute of European Studies of the Chinese Academy of Social Sciences. Present at the seminar are scholars from the Institute – Huang Ping, Jiang Shixue, Cheng Weidong, Tian Dewen, Chen Xin and Ye Bin, Professor Shi Zhiqin and Zhang Lihua from Tsinghua University, Professor Wang Zhanpeng from Beijing Foreign Studies University and Researcher Qu Qiang from the International Monetary Institute of Renmin University. The authors are Assistant Researchers and PhD of the Institute of European Studies of the Chinese Academy of Social Sciences.)