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Brexit and European Union primer

A primer on Brexit, the European Union and the Eurozone.

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Video transcript

- [Voiceover] 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 what exactly is the European Union? This is gonna be a high level primer, the topic can get quite complex, quite fast. But to understand what the European Union even is, I will draw a little lines to represent the spectrum of, I guess you could say national organizations, or organizations of nations. So at this end right over here, I'll draw, this is a trade block, this is when a group of nations get together and say, "Hey, let's have free trade "between our countries". Let's make it, if we make something in one country, we want to sell in the next, that there's no tariff on them. And it might include things like, it's easy to move money between one country to another, and sometimes it will even include it's easy to move people between one country to another, and a good example of a trade block, 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, you don't have to have, you don't have any tariffs, it makes it reasonably easy to transport goods from one country to another. There's even some provisions around investments and the movement of people. Why would a country ant to do this? There's many economic arguments and theories that it increases the prosperities of all of the parties. Now some folks will disagree with that, but they might say on average it might, but there's definitely going to be some losers in different countries depending on which industries go where, but that's the rational for why free trade agreements exist. That it would increase the economic growth of all involved and it'll make them all be able to participate in a larger economic shared market. Now at this side of the spectrum, I'm gonna 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, especially from an American point-of-view would be the United States. United States of America, it is made up of 50 state. It literally stands for United States of America. 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 legislator, their own courts their own laws, but they... There's also a federal government, there's a federal army, federal courts, there's a president, there is a federal legislature. They are so integrated as to be one country. Now in between you'll sometimes hear words like confederation, or confederacy, con-fed, confederation. And this is more of a lose term, there's not a strict, this is a confederation, or that is not a confederation, but it's generally viewed as looser than federation. That the states, or the countries that are members of a confederation can opt-in or opt-out. That they might be integrated in some ways, and not integrated in other ways. When we think about the European Union, which involves, which for sure involves aspects of a trade block. 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 block, it goes further than something like NAFTA. It has, in Brussels, 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 have their own military, and they are independent states in there own right, but there is more integration than you would see in something like NAFTA. So the European Union, I would put it some place in this spectrum right over here, and depending on whom you talk to you will get different options, and different people will debate, some people say, "It's more about trade, "and having a large shared common market, and maybe being "able to have a little more clout on the world, "even from a foreign policy point-of-view." While some people will say, "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." And the people who think it's more on the right hand side, they'll point things like, look its got its own flag. It's got it's own 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 is it about trade, it's also about currency. That's where I'm going to introduce this other concept, called the Eurozone, which is often confused with the European Union, that's because there's a lot of overlap between the two. The Eurozone is a subset of the European Union that uses the same currency, and then that currency is called the Euro. This is about currency, and this is, about the Euro. 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 has a shared currency, which of course facilitates 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. What this map shows us is both the total, 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, that 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, so Spain, and France, and Germany and Italy, and the Republic of Ireland. The are members of both the European Union and the Eurozone. While countries like the United Kingdom, and Denmark, and Sweden, and Poland, and I could keep going on and on. They do not currently have the Euro as their currency. They have their own currency, they have their own central banks. The UK, which is where we started this conversation, they have the British Pound sterling. Now in terms of whether, or how, or whether they're gonna move to the Euro, it's different from country to country. Countries like, countries like the UK and Denmark have official opt-outs. They've never had any intention, they've opt-outs 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 of them meeting certain economic and fiscal thresholds so that they can enter into the Eurozone. Once again, why would you want to become part of the Eurozone? 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 free trade and all that, "but the currency makes it even a stronger thing." Why would you not want to do it? Well you say, "I have a strong enough current, I don't want "to give monetary policy to folks in Frankfurt." Once again, good people can argue very good arguments on either side of that. When you look at this map here, you might also notice that Kosovo and Montenegro are colored in in this little pink color, and 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. 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, and the future of their currency is, 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. That's kind of a no-brainer and the Brexit doesn't impact that. Same currency. They're 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. It doesn't mean that there won't be free trade, or there won't be free movement, or that regulations will change dramatically. 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.