Fenomena Brexit and Lessons for Regional Cooperation

Kiki Verico*

23-24 June 2016 became history for the UK and the European Union (EU) because this was the first time the EU lost a member due to a referendum in a member country. The UK leaves the EU after more than 40 years of joining. These events create exchange rates British pound weakened sharply against the US$ and Euro. Prime Minister David Cameron declared his resignation and the UK public seemed shocked by the speed and magnitude of the impact Brexit this is on financial markets and UK domestic politics. Now the situation is so uncertain that it is not yet known how long it will last and how big the impact will be Brexit to the UK, EU and the world because this is the first time a member country has left the EU.

There were two interesting phenomena immediately after the referendum. Firstly, many internet users in the UK are looking to find out what the EU is. Second, the emergence of a petition asking for the referendum to be repeated. Economist Kenneth Arrow through impossibility theory (impossibility theorem) once warned about the unexpected consequences of making decisions using the majority vote method on choices that require knowledge considering the information gap between voters. It could be that the above phenomenon shows that not all voters understand the EU in relation to Brexit.

The Important Role of the UK

In terms of economic size, the UK is the third largest country in the EU after Germany and France. The UK is the largest recipient of EU investment with half of the UK's total investment coming from the EU. Around 60 percent of the total investment is allocated to the services sector. This is related to the UK's strength in the financial sector where London is one of the world's three largest financial centers alongside New York and Tokyo. Even though the UK is not a member euro zone The relationship between the UK and EU economies is not only in the real sector but also in the financial sector. It is not surprising that the UK's fiscal stability is also needed by the EU to ensure the region's monetary stability.

The Mundell-Fleming theory, which was born at the same time as the idea of ​​establishing a single European currency in the early 1970s, concluded that monetary stability required fiscal stability. In 1992, this theory was used by the EU in an agreement Maastricht which became known as criteria Maastricht. One of the criteria is member countries euro zone must maintain a maximum annual fiscal deficit of three percent per GDP and a maximum proportion of public debt of 60 percent per GDP. Now this fiscal stability pact is increasingly needed by the EU because since 2008 this region has been affected by the world financial crisis. Data shows that the UK's level of fiscal stability is quite low because the government budget deficit reaches more than six percent per GDP per year with total public debt of more than 80 percent per GDP per year. The EU needs the UK's fiscal stability but is not a member Eurozone, The UK needs to maintain its fiscal freedom as a manifestation of its domestic political sovereignty. When the EU asked the UK to sign a fiscal stability pact in December 2011, Prime Minister David Cameron refused especially after other member states also rejected his request for safeguards City of London (CER, June 2014). This was the beginning of the dissonance that was later followed by a domestic political push for a referendum.

Incident Brexit provides valuable lessons for regional cooperation, not only the EU but also Southeast Asia which is now entering the ASEAN economic community.

Southeast Asian Economic Cooperation

Since 1967, Southeast Asia has developed regional cooperation and since 1992 has committed to establishing a free trade area (ASEAN Free Trade Area). Twenty-three years later, to be precise in early 2016, this region began to enter the era of the ASEAN Economic Community (AEC). When viewed from regional economic theory, Southeast Asia has moved from a free trade area to an economic community that includes freedom of trade in goods, services and mobility of people. One day ASEAN will achieve a single real sector market (Common Market) and can further unify monetary policy (Single Monetary Union) and establish a single money market (Single Currency) like what the EU has achieved since 2002.

Although it is still a long time away, when the time comes, the issue of unifying monetary policy between member countries and creating a single currency could become a dilemma for ASEAN because this policy requires fiscal discipline from each member country while fiscal is the essence of domestic political sovereignty. Regulating a member country's fiscal affairs is the same as regulating that country's politics. In the future, Southeast Asia has two choices so as not to fall into this dilemma. First, persist in achieving a single real sector market that includes goods, services and people. Achievement  level This is actually quite good for the region. Just look at the cooperation in the North American region consisting of the United States, Canada and Mexico, which since its founding in 1994 until now has remained at the level of free trade (NAFTA). Second, try to unify monetary policy and create a single Southeast Asian currency. If it succeeds in surviving, it is not impossible that the 'ASEAN way' will become an alternative theory of regional cooperation which has so far referred to the EU's empirical experience. Could it be effective?

There are at least two reasons why the ASEAN method can be effective. First, ASEAN cooperation is more soft because every decision-making process uses deliberation and consensus (consultation & consensus) considering the law and treaty agreements. This form of cooperation has the potential to be a solution to the rigid monetary and fiscal cooperation in the region. The strength is 'safe' but the weakness is the process is 'slow'. Second, Southeast Asian economic cooperation is more nuanced market driven rather than government driven so it is more reactionary to the prevailing economic conditions. For example, when the regional economic crisis occurred in 1997, ASEAN increasingly showed seriousness in creating a free trade area. Without the pressure of the crisis, the ASEAN free trade area is likely to run in place. As a result of being more dependent on market conditions than government targets, Southeast Asian economic cooperation is more natural and stable even though the movement cannot be fast.

Closing Event

There are at least three valuable lessons for regional cooperation from Brexit. First, regional economic integration does not have to reach the level of unifying monetary policy and creating a single currency. Two, monetary integration requires member countries' fiscal discipline which is not easy to achieve because it will reduce the political authority of the budget and domestic freedom in carrying out political promises. Three, although a single currency is not mandatory, if there are member countries with strong financial markets but still choose to be outside the single currency area then a dilemma like what happened in the UK and EU could also occur in other regions. Now is the right time for every region to learn to fully understand the dynamics of economic integration from the experience of the EU, the only region in the world that has a single monetary and currency policy.

*Deputy Head of Research Division LPEM FEB UI