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June 22, 2016


It sounds like an unappetizing breakfast cereal. But you know it has something to do with Britain and the European Union. Immigrants are involved. Someone was assassinated. The words “market volatility” come to mind. Still, you’ve been too busy gawking at the lurid carnival of American democracy to pay much attention. Now it’s the biggest news story of the day — and you have no idea how to sound like you’re a well-informed citizen of the world.

Fear not! Learning the basics of Brexit has never been easier. Here’s a guide to the British referendum that could reshape the future of the world’s largest economy.

What is Brexit?

Brexit is a faster way of saying, “Britain’s exit from the European Union.” On Thursday, the United Kingdom will hold a referendum on whether to pursue Brexit.

What’s the European Union?


In 1952, a bunch of European nations decided they were sick of going to war with each other a few times every century. To foster non-zero-sum relationships and co-operative economic growth, the Western European powers formed a common market for the coal and steel trades, which they named, somewhat uncreatively, the European Coal and Steel Community. In 1967, this evolved into a broader free-trade zone called the European Economic Community, which the U.K. joined in 1973. By the early 2000s, these European nations had taken their relationship to the next level — establishing a system of open borders, uniform regulations, a complicated political and economic bureaucracy based in Brussels, and a common currency, the “euro.”

But even then, Britain wasn’t comfortable with that kind of commitment. It retained its own currency (the pound) and didn’t fully dismantle its border controls.

So, if the EU respected Britain’s ambivalence — and agreed to have the geopolitical equivalent of an open relationship — why would the U.K. want to break up?

The short answer is that the EU is kind of a hot mess right now. Also, a lot of British people aren’t crazy about Polish immigrants.

How about the long answer?

Britain ruled the world for a while, and many conservative Britons just don’t like the idea of their great, powerful nation submitting itself to a namby-pamby union. But Euroskepticism became more widespread when the 2008 financial crisis exposed major flaws in the EU’s design.

America’s financial crisis and slow recovery proved so damaging to the nation’s psyche that faith in our public institutions fell to historic lows, and now a proto-fascist insult comic might become our next president.  But as difficult as the past eight years have been here, they’ve been much worse on the other side of the Atlantic. Europe was hit harder by the initial crash, then recovered for only a minute before collapsing into a second recession. There are many reasons for America’s happier fortunes. 

Our government pursued Keynesian stimulus in the wake of the crisis, while the U.K. and EU opted for moralistic austerity (thanks, Obama).  But at least as important was the behavior of the European Central Bank. When the economy is in recession, a central bank is supposed to lower interest rates to encourage investment and demand. But the ECB did the opposite in 2011, raising interest rates and, thus, discouraging investment, sending the whole continent into an economic tailspin.

Why would the ECB do such a thing?


This question cuts to the heart of the EU’s problem. The EU is a monetary union, which means most of its nations share a single monetary policy. But there’s no monetary policy that will simultaneously serve the interests of Greece and Germany: Countries with high unemployment and significant debt are better served by loose money, while nations with little debt and low unemployment prefer a tight monetary policy that reduces the risk of inflation.

And Germans really hate inflation because it once led to that whole “Nazi” episode. Plus, low rates weaken the Euro, making peripheral nations’ exports more competitive with German ones. So, with its unemployment rate low and inflation steadily rising, Germany wanted to raise rates in 2011. And because Germany is the most powerful nation in the EU, it got what it wanted.

Wait. I thought the U.K. didn’t even use the euro — how is any of this relevant?


The point is: The ECB’s post-crisis monetary policy highlighted Germany’s dominance of the EU and raised doubts about whether a monetary union without a political union — in other words, without a United States of Europe — makes any practical sense. Britain wasn’t directly affected by it, but many Britons — including a portion of the nation’s previously EU-sympathetic left — were disgusted by the situation. The British became more attentive to the subtler ways that bureaucrats in Brussels encroach on U.K. sovereignty through trade regulations. Euroskepticism spread. And so did Polish migrants.

EU law requires the U.K. to welcome an unlimited number of migrants from other EU countries. Britain’s relative economic strength has drawn large numbers of Polish, Croatian, and Portuguese immigrants to its shores. Not everyone in the U.K. is thrilled about all their new Eastern European neighbors. But as long as Britain remains in the EU, there’s very little its government can do about it. This is the main political impetus behind the Brexit movement. (Imagine the political fallout if foreign bureaucrats required the United States to take in an unlimited number of South American migrants.)

Support for leaving the EU became so strong within the Conservative Party that Prime Minister David Cameron started to worry that his voters would defect to the far-right U.K. Independence Party, thus denying him reelection and putting Labour back in power. To prevent that calamity, Cameron promised that, if he were reelected, he would hold a referendum on EU membership. He was reelected. Now we’re here.

So why does anyone want to stay in the EU?


EU membership is good for the British economy. Or so says David Cameron, President Obama, the Labour Party, the Liberal Democrats, and most independent economists and large businesses.

Britain is a small island that imports a lot of stuff. Being a member of one of the world’s largest free-trade zones makes that stuff cheaper. And as Vox notes, being an EU member brings multinational companies (and thus jobs) to the U.K. This is because the EU’s common laws and regulations allow your average enormous corporation to maintain a single headquarters for the entire continent. And because English is the most widely spoken language in Europe, a lot of those headquarters end up in England.

This setup is what allows the city of London to be Europe’s financial center. Which is to say: The biggest industry in the U.K. needs access to the common market in order to thrive. And a thriving finance industry isn’t just good for the plutocrats in Kensington — it also generates tax revenues that support social services in the British countryside.

If Britain loses access to the common market, many economists predict reduced growth, a weakened pound, and a devastated city of London.

Is there a way to get the best of both worlds: access to the common market without all those immigrants?

The “leave” camp thinks so. After all, Norway isn’t an EU member, but it still has preferential access to the common market through an independent deal with the union.  But if the EU leadership cut Britain a sweetheart deal — allowing it to reap all the benefits of membership without most of the costs — other EU members might head for the exits. There may be strong pressure to make an example of Britain. Plus, certain EU members stand to gain from a weakened London: Amsterdam would love to be the new financial center of Europe.

What’s more, in order to secure its access to the market, Norway has adopted three-quarters of the EU’s rules and regulations. You can’t have your full sovereignty and your common market access, too.

What are the chances this will actually happen?

Cameron wouldn’t have proposed the referendum if he thought it would actually pass. “Remain” seemed a safe bet until the last few weeks, when the “leave” movement started gaining momentum, even taking a narrow lead in some polls. But in recent days, the stay camp appears to have regained the upper hand. Wednesday evening, the British betting market Betfair said there was only a 30 percent chance of Brexit.

But some polls predict a close vote. A YouGov survey released Wednesday showed “remain” prevailing 51 to 49 percent.

Did something profoundly awful happen last week that could ostensibly impact Thursday’s vote?

Yes. Jo Cox, a member of Parliament, was assassinated. Cox was a member of the Labour Party and wanted Britain to remain in the EU. When her killer was asked to identify himself in court, he answered, “My name is death to traitors, freedom for Britain.” No one knows how this will impact Thursday’s vote. But it seems possible that it will influence it in some way.

Why should I care whether or not this happens?

Well, the most paranoid alarmists worry that a Brexit could trigger a Frexit, which could trigger a Germexit, until the whole EU framework falls apart; and then the combination of slow-growth and ascendant right-wing nationalism could lead to the kind of zero-sum thinking that made Europe a charnel house for much of the 20th century. For all its faults, there’ve been no world wars since the EU was formed.

More immediately (and far less improbably), if a Brexit hurts European economic growth, that could be a weight on the whole global economy.

Alternatively, if the “leave” camp’s sunniest prophecies prove true, Britain will regain its sovereignty and grow just fine, and the EU will be forced to reckon with the flaws in its design and democratize control over its policies in order to keep other countries from jumping ship.

But why should I, a completely self-centered American, care about what happens?

According to the Washington Post, a Brexit would likely make your mortgage more affordable, your 401k temporarily less valuable, and the idea of spending your next vacation in Britain more appealing.