A cliché—“Expect the Unexpected”—has happened. As I noted in “The Divisive Brexit Vote”, though I favoured Brexit, I took the opinion polls at face value, and expected that Britain as a whole would vote to remain in the EU. Instead, in the largest electoral turnout in twenty years, the UK voted 52:48 in favour of leaving the EU.
I’ll leave a post-mortem of the vote itself for later; the main interest now is what will happen because of it. Many pundits from the Center, Left and Right opposed Brexit in the belief that economic Armageddon for Britain and the globe would flow from it; we’ll now see how realistic their fears were. I regard them as seriously overblown, for a number of reasons.
The trade consequence of Brexit is termination of the “no tariffs between member states” rule, but the alternative isn’t sky-high barriers to UK-EU trade. The average tariff rate between the EU and the USA right now is a trivial 2%—with many products (like laptops) having no tariff at all, others about 10% (like cars), and a handful facing significant barriers like clothing (at 30%). So if the UK faced the same trade conditions as the USA after Brexit, it might see its goods facing an average 2% increase in tariffs.
It certainly can’t see much more than that—whatever political price Schauble and Co. might wish to impose—because overt discrimination would breach WTO rules. It would also backfire against the EU, since it has a substantial trade surplus with the UK. I’m not about to argue that international bodies negotiate rationally, but the odds of serious trade access problems for the UK from Brexit are slim.
Brexit has also caused the value of the pound to fall by several percent against the Euro over its average for the last year (see Figure 1). In net terms, this makes UK goods more competitive with EU goods than they were prior to Brexit. The drama of the one-day fall exaggerates the significance of this devaluation: it may end up being no big deal either way. The Pound has fallen far more against the Euro over the year before Brexit than it did on the day of Brexit, and the Pound has been far higher and far lower against the Euro in the recent past: it was as low as 1.05 Euro to the Pound in mid-2008 after the financial crisis began, and as high as 1.5 Euro to the Pound in mid-2006.
Figure 1: XE Converter's UK to EU chart (10 year range linked here)
My fellow unconventional monetary economist Richard Werner also supported Brexit, and gave a good counter-argument to the economic scare campaign for Remain in his blog last week. The racism that has characterised much of the Leave campaign can be traced to the economic failures largely caused by the Neoliberal economic agenda that the EU has championed:
The central planners in Brussels and at the ECB in Frankfurt are not unaware that under their command, a historically unprecedented economic dislocation has taken place in the EU during the past ten years, including massive asset and property bubbles, banking crises and large-scale unemployment in all the periphery countries – with over 50% youth unemployment in Greece, Spain and Portugal, as well as the lack of any serious controls of the EU external borders to prevent an influx of unparalleled numbers of illegal immigrants and economic migrants.
However, the EU central planners are in denial about the fact that these problems have been caused entirely by their own misguided and disastrous policies. As a result, they argue that the solution to such problems can only be further concentration of powers into their hands … This United States of Europe, an undemocratic leviathan that the European peoples never wanted, is the culmination of the much repeated mantra of “ever closer union”.
Richard relies more on econometrics than I do, and having done the numbers, he’s sceptical about the claims that Brexit would trigger an economic collapse:
I have also recently tested, using advanced quantitative techniques, the question of the size of impact on GDP from entry to or exit from the EU or the eurozone. The conclusion is that this makes no difference to economic growth, and everyone who claims the opposite is not guided by the facts.
The reason is that economic growth and national income are almost entirely determined by a factor that is decided at home, namely the amount of bank credit created for productive purposes. This has sadly been very small in the UK in recent decades, thus much greater economic growth is possible as soon as steps are taken to boost bank credit for productive purposes…
The argument of dire economic consequences of Brexit is bogus.
Much of the economic argument against Brexit rested on the possibility that a substantial slab of the financial sector might decamp to Frankfurt, or some other European financial center. If it happens on a large scale, this would make the UK finance sector smaller (see “Firms plan to quit UK as City braces for more post-Brexit losses”).
But will it? That argument presumes that the UK got its pre-eminent position in finance out of the easy access it offered to Europe. I think there are three other stronger foundations for the UK’s huge financial sector, none of which are weakened because one leg has now been taken away.
Firstly, the UK has a respected legal system based on a system of contract law and impartial enforcement via the courts. Many international financial contracts are declared to be covered by UK law, and I can’t see this suddenly being usurped by German law—especially if the EU would play a major role via its regulators.
Secondly, the UK speaks English, which is the “Lingua Franca” of business. That’s not going to change either.
Finally, the UK achieved its dominance of global finance thanks to the deregulatory fever that Maggie Thatcher brought to the UK well before the Euro was born. The UK became the best place for money laundering, and it still is. The growth in UK private debt tells this story very starkly. Before Thatcher, there was no trend to private debt; after her, it skyrocketed, and it grew even more in the expansion phase of the Euro. Now it is contracting, and this debt overburdened and generally contracting private credit system is the main threat to the UK’s economic prosperity, not Brexit.
Figure 1: The UK's private debt level exploded under Thatcher
The finance sector around the world is also far bigger than a productive economy needs, and nowhere more so than the UK. If it declines, then the UK may realise that its dream of having a “Post-Industrial Society” dominated by services rather than manufacturing was a pipe dream.
Away from the strictly economic concerns, a major issue for Remain was that Brexit would end the easy access to employment in the EU for UK professionals, and vice versa. But that may also not change all that much either.
As with trade, this is one side of EU-UK relations that benefits the EU more than the UK, simply because far more Europeans speak English than UK residents speak any given European tongue, and they want work experience in an English-language country. If the EU makes it difficult to continue the current arrangements with the UK, the next best choice for EU professionals is to apply for Green Card entry into the USA. Good luck with that! The EU will be under pressure from its own young professionals to maintain as good an arrangement with the UK as possible, and such arrangements again have to be reciprocal in nature.
My own base of the UK university sector is threatened by the potential loss of income from students from EU countries, and of EU research funding it relied upon to counter austerity-driven cutbacks to research funding in the UK.
But EU students also benefit from easy access to Higher Education in English in the UK, and again the nearest alternative is the USA. While I expect US universities (and their Irish, Canadian and Australia counterparts) will now campaign for that business, they can’t compete with the UK’s geographic location (or size, in Ireland's case). The UK will lose some business, but not all of it. Special exchange programs would also be threatened, but again the UK’s geographic location makes it much easier to renegotiate similar deals with it, rather than to forego the English-language educational experience completely, or try to develop a similar one with the USA.
The fact that EU research funds do exist also helped Cameron and Osborne maintain their cavalier approach to properly funding university research. Researchers will certainly suffer with the loss of EU funds. But it might also help galvanise serious opposition to the austerity-inspired cuts that are crippling the UK’s chances to reverse the bad decision it made, under Thatcher and Blair, to back financial services rather than industry.
Politically, there is fear that this vote will lead to the breakup of the United Kingdom, since Northern Ireland and in particular Scotland voted for Remain. But if they do, what currency will they use? Will they continue with the Pound, or will they take up the Euro? If they declared themselves to be independent nations, they could only do the former with the agreement of Westminster. If they did the latter, they would have to succumb to the Euro and the Maastricht Treaty that governs that. I’m going to forego niceties here and describe that option as a choice of rank insanity.
While declaring political independence is easy, achieving economic independence requires forming your own currency and establishing your own Treasury. I could be wrong, but I think any Scottish or Irish independence would stop at a more pronounced form of devolution rather than a genuine political divorce.
Migration will obviously change, both because the internal EU rules on mobility will no longer apply, and because mass emigration from Europe is a symptom of the EU’s failure that itself led to the Brexit vote succeeding. Here the UK has made the problem worse by cutting back on basic public services at the same time as it absorbed the enormous intake of economic refugees from the EU’s Euro catastrophe. I can’t count the number of young Spanish, French, Italian and Greek workers I’ve met here in London, who are here because there are no jobs in Euroland. In that sense, the UK has given Brussels a safety valve for its own policies that have led to 50% youth unemployment.
This was an inevitable consequence of the Euro, as Wynne Godley foresaw in 1992, in one of the most prophetic articles ever written:
If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation. (Wynne Godley, “Maastricht and All That”, London Review of Books, October 1992)
The main changes I do expect from Brexit are a long overdue material shift in the power balance away from London and its elite and back to the once working class regions of the UK. These have been the victims of a globalisation that, when it was first championed by Thatcher and then Blair, was supposed to have either no victims at all, or “losers” who could be easily compensated by the “winners”.
However, as even the IMF has recently admitted, globalisation under the banner of Neoliberalism was certainly not a victimless crime (see “Neoliberalism: Oversold?”), and compensations to losers have remained theoretical constructs rather than actual policy. The losers have now struck back politically. Their blow may have been messy—mixing jingoism and xenophobia with a justified frustration of an economic system that humiliates them, and a political system that ignores them—but political leaders need to understand the root causes behind that blow, rather than simply denigrating its wielders as reactionaries and racists.
