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PROFspectives: Brexit

News Story

Members of Pace's expert faculty weigh in on the impacts—both long- and short-term—that Britain’s withdrawal will have on the country and people there, as well as on the global stage.

On June 23, in a historic referendum, the people of Britain voted for a British exit from the European Union (EU). This British exit, or Brexit, of the EU set off a chain of events that followed swiftly after the results of the referendum were announced. Within hours a petition calling for second referendum to be held was discussed in Parliament, though it never came to pass. In the days following, Prime Minister David Cameron tendered his resignation from the office and the British pound sunk to lower than it has been in 30 years. By the second week in July, the Queen had appointed Theresa May to the role of Prime Minister.

The decision whether to leave or stay within the European Union hinged on several factors: Britain’s relationship with other members of the EU, immigration and the rights of asylum seekers, and the economic outcomes. Pace expert faculty weigh in on the impacts—both long- and short-term—that Britain’s withdrawal will have on the country and people there, as well as on the global stage.

Larry Bridwell, PhD
Professor of International Business
Lubin School of Business

Two days after the Brexit vote, an MSNBC commentator described it as a “Global Horror.” The limited economic role of the European Union (EU) challenges that statement. To begin with, only 1.2% of the EU GDP is accounted for by its institutions in Brussels and elsewhere. This critical reality can be compared to the United States, where the federal government accounts for roughly 25% of the GDP. This means that Washington is 20 times more important to the American economy than the EU is to that of Europe. The other main feature of the EU is its single market in which goods and services are sold without tariffs. Britain outside the EU, under the most favored nation rules of the World Trade Organization, would pay tariffs similar to that of the US, about 4%. If the recent 10% devaluation of the British Pound continues, Britain would be able to export more to the EU, while imports would decline. In analyzing the EU, broad psychological factors and specific economic realities need to be examined calmly.

The major psychological theme of the European Union since World War II has been “peace and prosperity” anchored by the Treaty of Rome in 1957, which established the European Economic Community (EEC). The treaty had the famous phrase: “An ever closer union of the peoples of Europe” and its common market led to economic miracles in Italy, Germany, and elsewhere in Western Europe. Moreover, after the fall of the Berlin Wall in 1989, European peace and prosperity was offered to the former communist countries in Central Europe as they prepared to join the EU in 2005. 

Although the EU has been important to the continent of Europe, Britain is different. The working class, which outside London voted 70% for Brexit, believes they have been subsidizing the rest of Europe with a net annual payment to Brussels of $13 billion, and that they have absorbed far too many migrants from the rest of the EU, especially workers from Poland, Hungary, and Romania.  

To better compete against the United States, the elite of Europe enacted the Single European Act of 1987 to create a single EU market of 500 million people compared to 330 million in the US. The act also launched social cohesion funds for low-income regions, which within 20 years transformed Spain, Portugal, Greece, and Ireland from poor to middle class countries. Those funds, in 2005, moved to help the former communist countries grow economically. The vision of the elites was that a united EU with a strong Euro currency would lead the world culturally, economically, and politically. The Euro led to great EU optimism from 2001 to 2007. But then the Great Recession came, and in Greece, Portugal, Spain, and Italy, the Euro developed serious problems which persist in 2016. The Great Recession also raised the issue that with the bailout of large, primarily French and German banks which held Greek government debt, the primary beneficiaries of the EU are now large financial services and manufacturing multinationals. The latest example of Brussels pursuing a corporate agenda is the proposed Transatlantic Trade and Investment Partnership with the United States, which is currently being negotiated.

Psychologically, Brexit is a setback, because it contradicts the vision of an ascendant Europe, especially at a time of a migrant crisis, high youth unemployment in Southern Europe and the problems of the Euro. The paradox of the EU is that while roughly two-thirds of business transactions are governed by Brussels under the rules of the single market, the EU spends only 1.2% of the European GDP, primarily on social cohesion funds and the Common Agricultural Policy. The EU budget does not provide unemployment insurance, food stamps, and other continent-wide programs comparable to what Washington funds nationally, especially in economic downturns. During the recent American recession, many who lost jobs received unemployment compensation and food stamps funded largely by richer states such as California and New York, whereas Greece with unemployment of 25%, encountered great suffering including widespread hunger and received no direct Brussels assistance to the unemployed. The EU appears to have evolved into a situation where each of its current 28 members insists on its own national interest, instead of committing to the original vision of “an ever closer union of the peoples of Europe.” European Commission President Jean-Claude Juncker has complained that many countries are full-time takers from Brussels, but in fulfilling EU responsibilities, are only part-time givers. Juncker has raised the issue of whether Europe still has the psychological energy to pursue a common destiny.  The first post-World War II Chancellor of Germany (1949-1961), Konrad Adenauer, said before his death in 1967: “European Unity was the dream of a few, it became a hope for many, and now it is a necessity for all of us.”

 Is his statement 50 years ago still relevant? What Europe does now will provide an answer.  

Anna Shostya, PhD
Assistant Chair and Assistant Professor, Economics
Dyson College of Arts and Sciences

On September 17, 1946, Winston Churchill gave a speech in Switzerland, calling for a “kind of United States of Europe.” Thus began one of the greatest experiments in the history of human civilization—an attempt to build an economic and political cooperation among the nations that had fought against each other for centuries. It is true that one of the main objectives of the European Coal and Steel Community, the precursor of the European Union that was formed in 1951, was economic efficiency. The club of six countries that has later expanded to 28 members had an opportunity to put Adam Smith’s free market principles into practice—specializations leads to greater efficiency and greater efficiency leads to a higher economic growth. The European Union’s goal was to establish common market and thus reach a greater degree of efficiency through specialization and elimination or reduction of transaction costs.

Yet, the primary reason behind this unusual and very ambitious integration was not an economic one. The idea was to establish a “point of no return” and to make war between the European countries simply unimaginable. This “never again” reason was a leitmotif of the Learning Community course that I co-taught for 10 years. I had a privilege to have as a partner Professor Johnson, a terrific instructor and a remarkable person. Although we came from different backgrounds and had different political positions, we truly enjoyed our partnership and our friendship. Donna Johnson passed away this summer, a few weeks before Britain voted to leave the European Union, and although I did not have a chance to discuss with her the ramifications of Britain’s decision, I know exactly what she would have said—“Economic catastrophes lead to political extremism.” And then it would be my job to talk about economics behind the rise of nationalism that led to Brexit.

Economics teaches us that everything has its cost. Common markets create economies of scale and lead to greater specialization. At the same time, there is a redistribution of income—some gain from the trade creation, others lose. Theoretically speaking, gains to winners exceed losses to losers. Most economists, therefore, support free trade and mobility of labor, which can lead to greater economic growth and prosperity. In a process, however, some people may lose jobs and others may see their wages go down. In the times of prosperity, cooperation is an asset. In the times of distress, every country tries to protect its own interests. This fuels anger and nationalism. British voters were angry because they felt that being part of the European Union was detrimental for their economy and thus jeopardized their standard of living. This is because British economy has not fully recovered from the recession triggered by the Global Financial Crisis of 2007-2009. Leaving the EU would discontinue Britain’s payments to the EU budget and would stop an unwanted migration. In short, for Britain, the costs of being a EU member exceeded the benefits. Economic catastrophes lead to political extremism.

The European Union can and must be perceived as a symbol of human hopes for peace, a dream for economic friendship, and an aspiration for the highest form of human civilization. Brexit is a serious setback and it will be difficult to reverse this nationalistic trend. The title of the course that I co-taught with Professor Johnson was “A United States of Europe?”, with a question mark at the end. The idea came from Churchill who was uncertain about the future of Europe, yet, was dreaming about peace and capitalist prosperity. The question mark still remains and perhaps is larger than ever.   ​

Robert G. Vambery, PhD
Professor of International Business and Marketing
Lubin School of Business

While the first reaction to Brexit was panic in financial markets followed by expressions of concerns about the possible disintegration of the European Union and of other international cooperative arrangements, there are also renewed discussions about America’s predisposition toward the rest of the world. Terms such as isolationist, unilateralist, empire, and super power are bandied about freely and inaccurately. In actuality there is no American empire, no Pax Americana, and the US is only the superior rather than the super power of the world. Nonetheless, both the people of the US and the peoples of other countries may continue to examine the question of the degree to which the US is isolationist or unilateralist. The answer is that over the previous century, as well as now, America is neither. America is internationalist.

Isolationist would imply an America withdrawn into itself, contributing little to the rest of the world and taking a posture of self-defense, while staying out of the affairs of others, providing neither support nor protection. Unilateralist would imply that actions and policy implementations across national borders take place without the approval of or even significant consultations with the affected countries or other interested nations.

However, for nearly a century American internationalist intervention was necessary, because no one or no group of nations could do or would do what needed to be done. America has been and remains internationalist on the military, economic, and humanitarian fronts.

On the military front, the “US to the rescue” of Europe cases illustrate the point. Europe needed to be saved by the US in WWI and WWII. Then for the next 45 years, the US had to counter-balance Soviet and communist expansionary threats.

Meritorious or not, recently the US did and continues to receive far reaching cooperation from its allies and friends in the Afghan and Iraqi undertakings but is carrying far more than its share of the requirements in both resources and lives.

US contributions to the world economy are also omnipresent. American imports to a degree support the economic wellbeing of high-income nations such as many of the countries of the European Union and of Japan. Similarly, China’s high yearly economic growth has been and continues to be to a great extent financed by the revenues from its sales of products to the US.

The humanitarian contributions of the US to the world are enormous also with as many as two million foreigners choosing to stay in the US in some years after entering the country legally and well over 10 million illegal immigrants being gainfully employed in the economy.

In conclusion, it is not realistic for Americans to hope to be loved by other peoples. But it is reasonable to expect acknowledgement of the nation’s past and present contributions and sacrifices. Perhaps the world should not be expected to weep for the rich, but the world should not dislike the American people, because some of them are less handsome or just dusty cowboys or dying soldiers.

But as Brexit wobbles Europe and other parts of the world, Internationalist America stands committed and is here to stay.

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