I know this is little last minute but told a friend that I’d send him some analysis on the Brexit, which combined with my determination to kick-start blogging again, has led to this post. Enjoy!

 

Brexit: The opportunity but not a guarantee to make constructive change

 

On Thursday 23 June the United Kingdom (UK) will decide whether or not they want to remain in the European Union (EU). The outcome is critical because it will have a bearing on the political futures of both the UK and greater Europe. The referendum also provides a key yardstick in the power struggle between political centralization and decentralisation in the globe. Governments inherently desire greater centralization and expansion of their power base, while individuals usually desire self-determination. There are a number of complexities that make the referendum a close call. I identify the economy, immigration and sovereignty as the key issues and use these as tools to highlight some of the misunderstandings in the debate. Significance of the vote has led to a lot of misinformation in order to try and influence voters in various directions, which readers should be aware of by the end of this piece.

 

3 Key pillars surrounding the Brexit vote

 

1. Economy: Outcome depends on post decision economic policies, not the Brexit vote

 

In the fragile post Global Financial Crisis (GFC) world with weak economic growth and increasing reliance on central bank monetary policy as the driver for economic growth, the Brexit certainly presents an economic danger. However the same could be said about any important economic, political or social decision. Change inherently brings with it costs - does this mean it is the wrong choice?

 

The “remain campaign” warns of an economic catastrophe if the UK leaves based on forecasts from HM Treasury. The Treasury goes as far as to say that the decision could cost GBP4300 per household each year over the next 10 to 15 years. This is misleading on many different levels and the lack of credibility of the forecasts significantly damages the “remain campaign.”

The best piece of evidence to refute the Treasury’s claim can be found here: http://www.cass.city.ac.uk/__data/assets/pdf_file/0007/320758/BlakeReviewsTreasuryModels.pdf

 

4 misinformation examples:

• Assumption to fit the desired outcome? Despite the government’s desire to remain separate from the EU, the model used assumes that the economy would hypothetically benefit the closer the integration with the EU. As a result, the hypothesis of Brexit generates negative economic outcomes.
• Economic catastrophe? The Treasury assumes that voting to leave the EU will constitute an economic shock equivalent to 50% of the shock of the Global Financial Crisis (GFC). They then assume that this will last two years (longer than the financial crisis recession) and that the UK will lose 50% of its trade with the EU. The last portion of this forecast is particularly questionable. Even if the UK leaves the EU, its trade treaties will still remain intact over the subsequent two years so there will be no impact on the prices of goods and services from a trade policy perspective. In fact if the GBP were to depreciate if the UK leaves, as the leave campaign suggests, UK goods and services could actually become less expensive for EU buyers. It is difficult to believe that under these conditions there will be a dramatic drop in UK-EU trade in the first two years
• No population growth assumption lowers the growth expectations? Included in this long term macroeconomic forecast, the Treasury assumes that the UK’s population will not change between 2016 and 2030, despite the Office for National Statistics prediction that up to 4 million more people will move to the UK over this period
• Can the forecast make specific implications for each UK household? To take a broad long-term macroeconomic forecast (which are notoriously unreliable at the best of times) and drill it down to individual households is irresponsible to say the least. Economic decisions and the costs of those decisions are spread unequally across society. This tactic is an electioneering strategy, which merely results in emotive rather than logical debate and detracts from the real issues at hand. Unfortunately the tactic has been used by both campaigns, which has led to a broader degeneration of the debate.

 

While a decision to exit the EU obviously brings with it risks, the post decision economic conditions, of Brexit/Remain, will depend much more on the economic policies that are instituted than whether the UK is in the EU or out. If the UK government were to implement constructive policies after leaving the EU (sound monetary policy, lower trade barriers, incentives to save/invest, less government intervention, lower levels of government debt, etc.) the UK economy could experience a boom. However implementation of these policies is not easy. The broader economy benefits from constructive economic policies but there is always pain along the way as the economy is restructured towards faster growing, more productive and value adding areas. Politicians would have to make tough decisions and take a stand against the status quo while they wait for the fruits of the constructive economic policies to be realized.

 

Has the EU stopped the UK from implementing constructive economic policies?

To highlight the European Union as the only factor restraining the UK’s ability to implement constructive economic policies is false. Many of the constructive economic policies mentioned earlier (sound monetary policy, lower trade barriers, incentives to save/invest, less government intervention, lower levels of government debt, etc.) could easily be implemented while the UK was within the EU. Estonia is a good example of the country within the EU that has had constructive economic policies and high rates of economic growth over the past 10 years.

It is true that EU legislation makes policy independence difficult for the UK. Free from the shackles of EU legislation the UK could press its own economic agenda. But the EU in of itself doesn’t prevent the UK from implementing constructive economic policies. Outside of the EU, the UK would still need to take tough decisions to reform the economy and deal with the frictional costs inflicted on certain special interest groups.

 

Short term uncertainty shouldn’t dictate long term policies

While the leave campaigners are misleading voters over the potential costs of the Brexit, it would be imprudent to suggest that a Brexit is riskless, even if constructive and reformist policies were implemented. Financial markets do not appreciate uncertainty. The decision to leave the EU would create short term uncertainty, while the UK gets its house in order, renegotiates trade deals and decides on its economic policy direction. Negative economic consequences could easily take place during this period of uncertainty. However long term outcomes should be the key determinant of policies rather than short term risks.

 

Bottom Line: The post referendum economic policies are a much more important determinant of economic outcomes than being in or out of the EU. At this stage we are non-the-wiser about the specific economic direction of post Brexit government. Leaving probably gives the UK the best opportunity to implement constructive policies but it certainly does not guarantee them.

 

2. Immigration: damaging and worrying aspect to the Brexit campaign

 

Immigration has increasingly become a key pillar of the referendum. Many poorer and lesser skilled Britons are supportive of Brexit because of the fear that EU immigrants have “stolen” jobs. This relationship is not entirely true. 1) Immigrants into the UK are net tax contributors and aren’t actually necessarily plundering the welfare state. 2) Deteriorating socioeconomic conditions for the poor are more likely attributable to weak economic growth, not immigration. 3) Immigration might continue even if the UK were to leave the EU. 4) Globally immigrants often conduct the jobs that the local population don’t want to conduct.

 

Yes, the UK might desire to regain control of its boarders in order to effectively manage its social conditions. However, reactive border control in response to immigration is potentially a dangerous trend because it is regressive, doesn’t promote productivity and often finds expression in racism against foreigners. The rise of anti-immigration as a pillar of the Brexit vote is not an encouraging trend and generates fear that post-Brexit economic policies could themselves be regressive. One gets a sense that many of those who are voting in favour of the Brexit just because of the anti-immigration rhetoric are merely voting on an anti-establishment ticket - the idea that “the status quo isn’t working for me so I’ll vote for something else.” This is a rising trend in the globe at the moment that is particularly apparent in the US with Donald Trump. If economic growth remains weak over the coming years we can expect more “Donald Trumps” to arise. This class of politicians takes advantage of difficult socioeconomic conditions to pander to susceptible voters in an attempt to gain political power.

 

As I said above, there is nothing wrong with a rationalized immigration policy but to use anti-immigration as a key tenant for political gain is dangerous and it won’t solve very much. The reason for this global anti-immigration trend is weak economic growth and diminishing opportunities that arise under these conditions. If economic growth was strong, voters have strong upward mobility and they don’t care about immigration. However when economic growth is weak, competition for opportunities is heightened and people blame their neighbours for any unfortunate missed chances to climb the economic ladder. The key answer to these problems is constructive economic policies not a closed boarder anti-immigration stance.

 

Bottom Line: The UK needs constructive economic policies and better rates of economic growth to solve socioeconomic pressures not tighter immigration control.

 

3. Sovereignty – more visibly in favour of the Brexit

 

Currently the UK hands over a degree of political sovereignty to the EU parliament in Brussels. In other words, Brussels can make laws that the UK doesn’t necessarily agree with. The “remain campaign” argue that access to the common market is adequate compensation for this loss of sovereignty. The real risk going forward is that more centralization is required in order to make the Eurozone (EZ) project work and that this will inherently impact the European Union. For instance, to truly make the EZ function, the region needs to implement banking and fiscal unions to complement the monetary union. Europe is already at odds over immigration and monetary policies, just to name a few. It is difficult to foresee how the region will cope with even greater challenges on the horizon if the current policies are already divisive.

 

Broadly speaking, government centralization around the globe rarely leads to beneficial outcomes because the authorities become less accountable, more bureaucratic and they tend to overextend their powers and interfere with individual liberties.

 

Bottom Line: Britons are understandably averse to handing over more power to an organization that is dealing with significant internal struggles at the moment and could easily extend these infringements in the years ahead.

 

The three factors above highlight that the debate is not a simple one. If the UK Brexit politicians could promise constructive economic policies and positive immigration procedures perhaps the UK could flourish outside of the EU. However there are significant challenges that would need to be overcome in order to achieve this constructive outcome and the anti-immigration bias suggests a potential lack of appreciation of some of the underlying economic troubles.

 

Broader European Implications – declining confidence in the organization

Whether the UK decides to remain or exit the EU, a narrow margin at the polls confirms declining confidence in the European Union (EU). There is a risk that this trend continues in Europe and diminishes the ability of the organization to conduct continent wide policies. A less effective EU would lead to questions around the usefulness of the organization and could potentially lead to similar in/out referendums over the coming years. Already there is a wave of anti-EU political parties across Europe that have gained in popularity. The vocal nature of the Britons in 2016 might already have added fuel to this fire. Bear in mind that the central premise of the European project is centralization. A shift towards decentralization is highly destabilizing.

 

Seeing the wood for the trees

Those who value individual liberty and self-determination highly will readily cast their vote for the Brexit. Those who favour the status quo and are concerned with the short term risks will favour a vote to remain within the EU. This second group will usually include those who are in political and economic power because they have the most to lose from a change in the status quo. For the masses that fall in the middle of this debate one hopes that they will assess the true structural reasons for their decision rather than the short term benefits that either campaign is selling. The UK economy is unlikely to fall off a cliff if it leaves the EU but serious economic reform might be required to ensure positive long term consequences. On the other side of the coin, immigration control is no panacea to socioeconomic ills. Those voting on this basis stand to lose the most in the years ahead.