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28 June 2016 K2_CATEGORY IAS Blog

BACKGROUND

  • European Union was originally formed with six nations in 1957. Today, it is a gigantic transnational entity of 28 countries, including the U.K., which joined only in 1973.
  • UK has a peculiar history with EU. Though part of EU, Britain has traditionally had a 'eurosceptic' stand. It continues to use the Pound as its currency, while most EU nations have moved to Euro. Neither does it participate in the Schengen border-free zone, which allows passport-free travel in EU.
  • On June 23rd, UK voted to leave the EU. The following article examines the various aspects of this Brexit.

Sequence of Events

  • In January 2013, Prime Minister Cameron announced that a Conservative government would hold an in-out referendum on EU membership before the end of 2017, on a renegotiated package, if elected in 2015
  • The Conservative Party won the 2015 general election with a majority. Soon afterwards the European Union Referendum Act 2015 was introduced into Parliament to enable the referendum.
    • Despite being in favour of remaining in a reformed European Union himself, Cameron announced that Conservative Ministers and MPs were free to campaign in favour of remaining in the EU or leaving it, according to their conscience.
  • This decision came after mounting pressure for a free vote for ministers. In an exception to the usual rule of cabinet collective responsibility, Cameron allowed cabinet ministers to publicly campaign for EU withdrawal
  • A referendum was scheduled on June 23rd 2016. Registered voters in UK were to voice their opinions on whether the nation should 'Remain' in or 'Leave' the European Union
  • UK voted to leave the European Union. The ‘Leave’ side won decisively with 52 per cent of the vote in the high-turnout vote, which overturned opinion polls that predicted a slender margin for ‘Remain’.
  • PM David Cameroon was the architect of the referendum. He supported “Remain”. As a result of the “Leave” verdict, he will be stepping down as PM.
  • A stunned EU urged Britain to leave as "soon as possible" amid fears the devastating blow to European unity could spark a chain reaction of further referendum

Reasons behind the result

  • The various people campaigning for “Leave” used the following issues to stress on the need for Brexit
    • Economy and austerity measures- There was public anger in Britain towards the status quo. Ordinary Britons, hit hard by the economic crisis, feel betrayed by their political leadership. The Conservative government’s austerity policies have further alienated these sections
    • Immigration- As EU's membership expanded, more Europeans, especially from poorer EU nations, started migrating to U.K. using the “freedom of movement” clause. The anti-immigration parties argue this puts a severe strain on national resources and add up to welfare expenditure. The pro-EU members argue that EU migrants contribute more to the national economy than they take out.
    • Security- The Remain side argues that in the era of international terrorism and criminality, cooperating with the EU will make the U.K. safer, while the other side says that the security risk will in fact increase if the U.K. does not have control over its borders.
    • Trade- On trade, the Remain side says that access to the single European market, free of tariffs and border controls, is critical for the U.K. as 45 per cent of its trade is with the EU. The Leave side says that the EU needs British markets and individual trade deals with European countries can be easily negotiated.
    • Employment- The Remain side argues that as three million jobs are tied to the EU there could be a jobs crisis if the U.K. leaves the EU; Brexiteers claim that there will be a jobs boom without the fetters that EU regulations impose.
  • Negative strategy- The Remain campaign focussed mainly on the dangers of leaving the EU rather than making a case reasons for staying in EU and present a future vision. This alienated the people further, rather than convincing them

Possible implications

For UK

  • UK is currently in a situation of deep uncertainty post-leave vote. It remains to be seen whether the propositions of how the leave would benefit UK would materialise.
  • Turmoil in currency markets- Pound dived to its lowest since 1985; Euro suffered its worst fall against the dollar
  • Second Scottish referendum likely- Scotland voted by a margin of 62 per cent to 38 per cent to remain in the EU in the referendum. Scotland sees its future in the European Union despite Britain’s vote to leave. Hence, a second Scottish independence referendum is likely.
  • Exports- 45% of UKs exports are to the Eurozone. Hence, the need to negotiate the relationship with EU is immediate.
  • Less influence in world politics- The collective bargaining benefits enjoyed by Britain as a part of EU would no longer exist.
  • Hamper Joint efforts- May hamper joint counter-terrorism, information sharing especially in context of instability in middle east

For European Union and rest of the world

  • The members of EU make monetary contributions towards EU and UK is one the largest contributors.
  • A British exit from the European Union would rock the Union — already shaken by differences over migration and the future of the Eurozone — by ripping away its second-largest economy, one of its top two military powers and by far its richest financial centre
  • Brexit would give rise more and more nations contemplating to exit the EU. Greece, last year held a referendum in which its citizens overwhelmingly rejected EU's bailout norms.
  • World economy- World stocks saw more than $2 trillion wiped off their value as Britain's vote to leave the European Union triggered 5-10 per cent falls across Europe's biggest bourses and a record plunge for sterling.
    • Such a body blow to global confidence could prevent the Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from all the major central banks.

For India

  • Though, Finance minister Jaitley claimed that India is well-prepared to deal with the consequences of the Bexit with strong macroeconomic situation, some issues still remain.
  • Volatility in Indian markets triggered by Brexit- BSE Sensex fell by 4%
  • Indian companies in UK -There are 800 Indian companies in the UK — more than the combined number in the rest of Europe. Britain's exit from EU may affect Indian companies’ appetite for investing in the U.K., particularly those seeking access to the European market.
  • The welfare of a nearly three-million strong diaspora of Indian-origin U.K. citizens is a major concern
  • The interests of a large number of Britain bound Indian tourists, business people, professionals, students, spouses, parents and relatives is also a concern.
  • India-EU FTA- The FTA talks with EU will have to be modified in the event of Brexit. Much will depend of the future equation between EU and UK
    • If Britain gets the same treatment in terms of Free Tariff and Free Movement of persons, not much will change for India. However, if Britain gets the treatment as applicable to a non-member country, it may lead to positive impact on India’s exports to EU as well as to Britain
    • Similarly, any restriction on movement of persons from EU to Britain will open opportunity for Indian service providers in wide range of services
    • The weakness in the currencies- Pound and Euro, may also lead to increase in imports to India from these countries
  • However, the uncertainties brought about by the referendum may benefit India too in some ways-
    • The drop in the pound will benefit Indian students bound for UK and Indian tourists
    • Buying property in UK will be easier due to weaker pound

Way ahead: options for UK

  • The vote doesn’t mean that Britain will be immediately out of the EU.
    • Under the Lisbon treaty, a member state wishing to leave the EU should first notify the European Council its decision, triggering Article 50.
    • This would set in motion a process by which the member and the EU leadership will negotiate the terms of the departure and reach and agreement in two years.
    • This means even if the British government invokes the Article 50 now, the earliest exit of Britain will take place after two years.
    • The decision to invoke Article 50 would be with the PM of UK; with PM Cameroon stepping down, it will be the new Prime Minister’s prerogative to decide the same.
  • Norway model- Some economists have already suggested that one of the options Britain could follow in the wake of a Brexit vote is the Norway model.
    • Norway, along with Liechtenstein and Iceland are members of the European Economic Area (EEA). They have access to the single market while staying out of the EU. They also make contributions to the EU budget. There is separate secretariat in Brussels to manage the relationship between the EU and EEA countries.
    • If Britain chooses to leave the EU but join the EEA, it will be a half-in-and-half-out arrangement, and the long-term impact on either side will be minimal.
  • If no compromise is reached between EU and UK, then UK move towards the WTO rules under which it will have to pay tariffs for the goods it sells to the EU countries.
28 June 2016 K2_CATEGORY IAS Blog

The article focus upon the various aspects of Monetary Policy Policy and its rules which have come into force.

  • The government recently gave statutory backing to the monetary policy committee (MPC).
  • It will make way for a resetting of the monetary policy framework that will shift the responsibility of maintaining inflation targets on a six-member panel, with the Reserve Bank of India (RBI) governor getting a casting vote in case of a tie.
  • At present, the RBI governor has the final say on monetary policy decisions.
  • According to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points from next year.
  • The government has amended the RBI Act regarding constitution of MPC to give it the statutory backing. Those provisions have now come into force.
  • Composition of MPC:
    • The panel will have three members from RBI:
    • The governor as the chairperson.
    • Deputy governor of RBI.
    • One officer of RBI.
    • The other three members will be appointed by the centre based on the recommendations of a panel headed by the cabinet secretary and will be experts in the field of economics, banking, finance or monetary policy.
  • Composition of MPC:
    • Tenure: These experts will be appointed for four years and will not be reappointed.
  • The panel will meet at least four times a year and will publicize its decisions after each meeting.
  • As per rules, no member of MPC should have any financial or other interest that prejudicially affects his functions as a member.
  • Also, it will be considered that the panel failed in achieving the inflation target if the lower or the upper range of the target is breached for three consecutive quarters. The idea of setting up an MPC was mooted by an RBI-appointed committee led by deputy governor Urjit Patel in February 2014.
  • That committee had recommended a five-member committee where three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor in-charge.
  • It was also suggested that the governor would have a casting vote in case of a tie.
  • Advantages of setting up MPC:
    • It will bring transparency and predictability in inflation targeting.
    • The new framework also increases the responsibility of the government to maintain fiscal prudence.
    • Coordination between RBI and Government would be better.
    • It will bring flexible inflation targeting.
    • The new framework makes RBI more accountable as now it will have to explain to the government if it fails to meet the inflation targets.
    • This will put India on a par with other nations in terms of flexible inflation targeting.

Question:“It is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy”. Discuss.

Suggested Approach:

  1. Challenges of Indian economy.
  2. Monetary Policy Framework decided by the government.
  3. How MPC will be helpful in tackling those challenges.
  4. Negatives, if any, that MPC will bring.

Link: http://www.livemint.com/Politics/ItrJAxcpv3pCFshalSGHlL/India-initiates-process-to-set-up-monetary-policy-committee.html

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