The latest vote by citizens of the UK to leave the European Union seems to have resulted in a lot of twisted panties, but I can’t figure out why an exit would have a big economic impact.
As I noted in a previous posting, if membership in the European Union is a sure path to economic prosperity, why don’t countries such as the U.S. seek to join? Telecommunications, shipping, and air travel costs have never been lower. Why wouldn’t Korea, Taiwan, Singapore, Canada, et al. seek to join? Or Switzerland, for that matter? If EU membership is not a surefire way to boost a country’s economic performance then why are people sure that leaving the EU will hurt the UK economically?
Can someone explain why there should be a big economic impact? The UK has two years to negotiate trade agreements with the EU. What would stop them from negotiating a tariff-free arrangement similar to what the U.S. has with Mexico and Canada?
As far as regulation is concerned, when there is a perceived need for uniformity, what stops the UK from adopting European regulations? Switzerland and Norway are not EU members, yet both participate in EASA, the over-arching European aviation regulators (each member country still has its full complement of FAA-style bureaucrats, but then EASA adds another layer of bureaucracy on top).
I can see that there would be a potentially significant impact on some individuals. The homeowner in the UK who wants to get repairs done will have a harder time finding skilled immigrant labor. The UK citizen who wants to work in Paris might encounter a wall of bureaucracy (though perhaps in the next two years the UK could negotiate streamlined reciprocal work permits). Workers who do jobs that can’t be outsourced electronically may get higher wages due to reduced competition from immigrants (e.g., women in the UK trying to earn money through legal prostitution or the unlimited child support that is available following out-of-wedlock pregnancies will enjoy reduced competition from attractive foreign women).
UK citizens should be happier, if we are to believe A Pattern Language:
. . . just as there is a best size for every animal, so the same is
true for every human institution. In the Greek type of democracy
all the citizens could listen to a series of orators and vote directly on
questions of legislation. Hence their philosophers held that a small
city was the largest possible democratic state. . . . (J. B. S Haldane,
“On Being the Right Size,” The World of Mathematics, Vol. II,
J. R. Newman, ed. New York: Simon and Schuster, 1956, pp. 962-
67).It is not hard to see why the government of a region becomes
less and less manageable with size. In a population of N persons,
there are of the order of N 2 person-to-person links needed to keep
channels of communication open. Naturally, when N goes beyond
a certain limit, the channels of communication needed for de-
mocracy and justice and information are simply too clogged, and
too complex; bureaucracy overwhelms human processes.And, of course, as N grows the number of levels in the hier-
archy of government increases too. In small countries like Den-
mark there are so few levels, that any private citizen can have
access to the Minister of Education. But this kind of direct access
is quite impossible in larger countries like England or the United
States.We believe the limits are reached when the population of a
region reaches some 2 to 10 million. Beyond this size, people be-
come remote from the large-scale processes of government. Our
estimate may seem extraordinary in the light of modern history:
the nation-states have grown mightily and their governments hold
power over tens of millions, sometimes hundreds of millions, of
people. But these huge powers cannot claim to have a natural size.They cannot claim to have struck the balance between the needs
of towns and communities, and the needs of the world community
as a whole. Indeed, their tendency has been to override local
needs and repress local culture, and at the same time aggrandize
themselves to the point where they are out of reach, their power
barely conceivable to the average citizen.
(emphasis added)
What am I missing? I don’t feel that a British-made Mini car has a different value today compared to yesterday. Nor do I see how the experience of watching a show in London has changed. And would investment banking move from London to Spain, for example?
Related:
This doesn’t just affect trade with the EU. All international trade from the UK is done through treaties made with the EU. The UK will likely get a favorable trade deals with the EU relatively easily, but who knows about the rest of the world.
Well said. I am not seeing the big economic impact, either. Ultimately, if people want to buy British products, it won’t matter much whether they are part of the EU or not. And if they don’t want to buy British products, being a member of the EU won’t help. As you mentioned, Britain can negotiate as many trade agreements as they want.
The idea of a country willingly giving up sovereignty over important functions (taxation, currency, regulations, immigration, taxes, defense, gov’t spending, etc) is hard for me to understand. Sometimes this happens by force, but willingly? I can’t imagine the benefits would outweigh the negatives, nor can I think of any recent examples, outside the EU.
They aren’t “British” products any more. The EU has allowed highly distributed supply chains, with manufacturers and assemblers from all over the continent.
I think in the short-to-medium term the risks will be >perceived< as too high for companies to expand, and thus…
There may be benefit for companies in the NAFTA region, provided you don't elect Trump and go into turtle mode.
It probably doesn’t matter in the intermediate term, but in a matter of some years I don’t see how Europe does without a unified military command and a unified border and immigration policy.
USA can’t afford to be the global policeman anymore. We can’t afford to be in NATO. The Brits and Euros are going to have to actually spend some money and build up a military and Navy of some sort, and have a political structure in place where they agree about its missions.
The “migrant crisis” of last summer was just a taste of what’s coming. Millions and millions of desperately poor people from the “global south” will be making a run for Europe and North America. Forever. I don’t see how this can be dealt with lacking a unified front. Something like an EU will have to deal with the situation on that side of the atlantic.
“The UK has two years to negotiate trade agreements with the EU. What would stop them from negotiating a tariff-free arrangement similar to what the U.S. has with Mexico and Canada?”
Politics and protectionism. You make it sound like NAFTA was easy– it barely passed, even between three nations bordering each other. (Even now, Trump is has called NAFTA a “disaster” and promising to withdraw).
Negotiating free trade agreements with 28 nations is a monumental task, and protectionist sentiment is strong in the UK (and within many of the 28 nations). UK steelworkers, French farmers, Spanish developers, Italian everything –good luck with that. Not to mention it complicates trade from outside exporters, who now have to deal with a different set of rules between continental Europe and England. But the trade lawyers will get rich, so there’s that.
Everything has to now have “paper or electronic approvals” to be moved between separate countries. Money and hardware and software and people can no longer move from Britain to the EU without tons of paper and the associated “approvals”. Someone has to now check these approvals FOR EVERYTHING since it is now subject to treaty and separate country approval. Think about it for a moment.
You are in England and want to buy some German software on the internet. You used to just buy it and the order was completed in Germany and recorded and you downloaded it. Totally done is a few minutes. Soon you will need state approval on some form to allow you to buy foreign software. You will need some English gov’t person to approve you can import it. Does it cost over $X, then other special forms are required. You will need some German gov’t guy to say they can sell it to England. You will need some German tax gov’t guy to say the right tax is being collected. Then after all this is done maybe next week or next month you can download it. So cost go up and sales slip. So yes it gums up free enterprise. And forget it if one of these gov’t guys says this “software might be defense weapon related”. If that happens you may never get to buy the stuff.
My dear spouse,
as you know, we’ve signed a marriage contract 10 years ago and during that time our relationship had its ups and downs. Recently, however, you made some new friends that I don’t really like – and my lawyer says as long as we are married, you’ll be even be able to let them into ou house!
That’s why I decided to exercise the unilateral divorce option (see page 6 of our contract). You’ll get the papers in the mail. Now you may think this is a surprise, but you should have known that I was very unhappy as in the last month I’ve been trying to raise the grocery budget topic at least 5 times – look, I am putting 5% more than you into the common budget. You haven’t even got the time to look at the spreadsheet that proves it, much less to reimburse me. Well, too bad for you – I won’t have to do that after the court divides our assets, haha!
Now my friends tried to talk me out of “the D word”, but they aren’t really good at economics – they don’t understand that sharing is always beneficial and rational partners will always be able to get to a compromise. For example, I want to have sex often, and you don’t own a car – let’s just continue with the household arrangements as we currently do. In fact, I will be also able to have as much sex with new partners as I like – great to be me! Probably sucks for you, with the bad economy and all, but hey, that’s life. We cool?
P. S. You know, I decided I don’t really want to send the divorce letter now, cause my laywer mumbles something about tax rates and the importance of the start of the fiscal year. So, we good for today’s movie, right?
I agree. If you stand back and assess it rationally, the entire breathless fearmongering campaign — and now the morning-after clutching of pearls — makes zero sense, unless one’s goal is to sell newspapers or promote an agenda.
It’s in everyone’s interests to negotiate trade agreements (and numerous others) as part of the exit, and so I predict that business will continue exactly as it always has.
One need only look to Switzerland for an example of a country existing perfectly well outside the EU. Despite its size, it’s the EU’s fourth-largest trading partner, and everyone wins.
Australian newspapers are acting like all business, cultural, and family ties with the UK will be irrevocably severed on Monday morning. Why people automatically assume that the UK would impose ruinous tariffs, torpedo international relationships, and so on, I have no idea. There is literally no reason to expect that.
I predict that in five years, people will look back on these past few months and say “what was everyone so worked up about?”
My daughter and her husband are American expats in London with dual US/UK citizenship and the brexit is a huge problem to them because her startup uses eastern Europeans in “STEM” jobs rather like the H-1b’s here except no visas. They have rental real estate in Italy and Germany as well, plus family in Austria. The EU has been a modest success for them and it will take huge adjustments to the new friction in travel, labor and capital. They also aspire to someday join millions of UK citizens already retired in the South (Spain, Portugal, Italy).
The fuel that started this fire is the hordes of low skill assimilation-averse immigrants from Africa and the ME, and the spark that set it off was Chancellor Merkel’s unilateral opening of the EU to this immigration, along with Tony Blair’s blindness to the problem when it could have been abated years ago. There are many additional culpable elites, but these two are familiar. Many recognized the tension but did little to relieve it. The electorate used a blunt instrument to get their attention.
The macro economics are manageable; central banks can muddle around in almost any regime, but the personal tensions and adjustments at the household level are very real.
The lid is off now (and maybe would have come off later anyway) and there is no real predicting where it will stabilize. 2016 will be long remembered in Europe.
Probably more of a shock to Americans to discover when 1 group of people has to subsidize another group, they just bail out. If it wasn’t for quantitative easing, this would would mean Greece had 1 less source of cash.
Many companies have been choosing to put their European headquarters in London, as it has been the English-speaking gateway to the EU. That will be much less attractive now, as companies will have to deal with two sets of laws, plus uncertainty. It will be simpler and cheaper to choose a location in an EU state, one with an international, English-speaking workforce. Tech companies will find cities like Dublin and Berlin more appealing, for example. Just this year Berlin surpassed London as Europe’s startup capital; expect that shift to accelerate now.
Also, much of the trading in euros has been happening in London. This has been tolerated despite England’s non-embrace of the euro as its currency because of London’s status as the financial capital of Europe and being an EU state. I expect the Germans to seize this opportunity to move as much of that business to Frankfurt as they can, and likewise the French with Paris.
European leaders are kind of fed up with the British. Keeping them happy within the EU has been annoying. That pent up frustration won’t serve the British well in the coming negotiations. Worse, the EU leadership will want to make an example of the UK, and make leaving appear as uninviting as possible to other nations considering the same move. I don’t think the trade and immigration policy negotiations are going to be pretty.
> Why does Brexit have a big economic impact?
My theory is that it’s a symptom of the declining importance of competition and markets versus regulations and the whims of bureaucrats and politicians. The UK having given the bureaucrats and politicians a rebuke, it’s to be expected they will be punished for it.
For example http://www.bbc.co.uk/news/uk-politics-eu-referendum-36534192
(Yes, I appreciate the irony that measures to start putting the country’s finances in order are interpreted as punishment in our topsy-turvy world).
Phil, you’re either are joking or naïve by thinking that the UK has two years to negotiate trade agreements with the EU… it will take a decade (of turmoil and uncertainty at different levels) to untangle the one from the other; crassly put an elongated coitus interruptus. Add to that Scotland seceding from the United, and there’s no end in sight to negotiations (the UK’s main naval base in Scapa Flow there will take ~25 years alone to move down the border).
David Anderson #11 is right; and yesterday’s referendumb signals the beginning of a shift in EU political and financial center eastwards.
You ask about the nominally negligible macroeconomic effects, but the lower-class Brexiters, who, now that the EU migrants will soon be gone (hardly) expect lots of microeconomic benefits to come their way, will discover that there is no Instant Brexgasm in sight, in fact nowhere near and never. The reason the UK was able to absorb ~2M of East Europeans since the gates opened in 2004 (and these were not people of the “unassimilable” kind), is that they had ~600,000 vacancies in jobs that the very same now-Brexiters deemed to be below their working-ethic dignity. Those workers need to be replenished with some frequency – so where are the local employers to find alternative/ native British (or, at worst, Commonwealth-born) workers to replace these EU migrants with, rhetorical question. In a sense, this referendumb was all about the aging natives expressing their displeasure to their leaders at the prospect of there only being foreigners around to wipe their future Golden Age bums in retirement homes.
“It’s not the end, it’s not even the beginning of the end, but it’s the end of the beginning.” ––pace Winston Churchill
I agree on most of what you say, but Scapa Flow is no longer a Royal Navy Base. These days the RN is in Devonport, Portsmouth and Clyde.
Note that Clyde is actually in Scotland, and is in fact the home port for the UK’s entire SSBN force, so I’m sure alternative arrangements would have to be made.
@ Andrea, fair enough, my naval intel is grounded in WWII history, thus outdated, so it’s probably Clyde I referred to. The “25 years” timeframe to replace such a major British Navy base in the independent (if still allied) Scotland was not conjured up by me, however: it came from a TV debate on the consequences and practicalities of Scottish Independence referendumb last year, which now looms even larger than ever (only the Scottish PM needs to make sure that—unlike David Cameron now[*]—this time she doesn’t lose the vote (again)). Your assumption that an alternative arrangement for what is basically a small town full of service personnel families, infrastructure, Oxford comma, AND a retreat naval base for submarines has already been envisioned, doesn’t sound true (unless it’s in the deepest fjords of Norway, whicch supposedly are a wartime alt.shelter for the few Danish and Southwest Swedish Baltic subs).
[^*] BTW. the best Brexit summary quote this far comed from John Crace, him of the Digested Reads fame, who wrote: [David Cameron] had gambled the future of the country for an internal party squabble and he’d lost..
By me thus far best overall, not-mincing-words, historically grounded analysis is by Philip Pullman: https://www.theguardian.com/books/2016/jun/25/philip-pullman-on-the-1000-causes-of-brexit
Re: BTW. above: URL to source article from which I quoted:
http://www.theguardian.com/politics/2016/jun/24/over-to-you-says-puffy-eyed-cameron-as-brexit-vultures-circle
@G C: For an example of a country voluntarily surrendering its sovereignty to be part of a union of nations, look no further than the UK, itself a mostly-voluntary union of England and Scotland (Wales and Northern Ireland may not have joined voluntarily, regardless of whether they want to remain today).
@jack crossfire: If the UK contributed to the Greek bailout, it was through the IMF. The EU didn’t collect a penny.
The EU is mostly a number of trade agreements
The UK needs new trade agreements.
The solution seems obvious: leave the existing ones in place, while renegotiating the absolute minimum number required to give the public the impression that Britain is leaving the EU. That means no more British MEPs and no formal representation of Britain on the Council. And possibly restrictions on immigration.
Like Switzerland, the UK will still have to comply with the directives for the internal market if it wants to trade with the EU.
If it wants to restrict the movements of citizens of EU member nations, then Britons will face similar restrictions if they travel to the EU. It’s only fair.
It’s hard to see an economic upside for Britain in this scenario.
The economic issue is GDP growth (which benefits the finance sector + real estate speculators) vs wage growth (which benefits the working class), and both of these boil down to a fight over immigration.
GDP has been pumped up by importing millions (unlimited, say the unelected EU commissioners) of low wage immigrants willing to live 3 families in a counsel flat, or sending UK child benefits to their 6 kids back in Romania. The flip side has given the working class citizens declining wages, increasing crime, and unaffordable housing.
ADMINISTRIVIA @ Moderator: could you please remove the hard carriage returns inside the block-quoted paragraphs in the post? Thanks.
@ Prince Harry,
funny thing though, the near-consensus among various journalists discussing Brexit/Bremain questions on the BBC seems to be that those “benefit tourists” that everybody warns against are largely a fable, sort of a modern urban legend. In any event existing mainly inside the sphere of the Daily Mail, The Sun, and similar sensationalist papers. And the idea that, with the EU migrants somehow(how?) gone, the wages for ordinary Britons will go up, is a make-believe pipe dream. Because those that are supposed to pay these higher wages are other ordinary Britons, and so incurred higher costs will have to be borne by – yes, the same, if other groups of, ordinary Britons.
All your other “supposedly reasons” for why the Brits voted how they did are preposterous bunkum unworthy of further discussion… as if Britons were governed by reason instead of a tendency to run amok in packs (vide the nation-wide hair-pulling-out sorrow that gripped the Albion following the death of Princess Di-Hard-With-A-Vengeance in 1997. A mourner who took a small teddy bear as a souvenir from the flower mound outside the Kensington Palace gates was practically lynched by fellow grief-emitters there. Too bad wasn’t done wholly to death, he could have been buried with Di in a tandem coffin, the fallen heroine and the human offer together, as in Inca times).
It’s likely that there will be costs for the UK to keep trading fairly freely with the EU. The negotiation with the EU will be centralised, and not the UK dealing with with individual countries (point 7 of this article):
https://www.theguardian.com/business/2016/jun/26/how-will-brexit-affect-britains-trade-with-europe
The cost of retaining trade benefits is likely to be the continuation of freedom of movement with the EU (or a similar bargain). If, as seems likely, Leavers dominate the government during negotiations, the appearance of restrictions on freedom of movement will be sought, but perhaps not achieved (i.e. http://www.theguardian.com/politics/video/2016/jun/25/tory-mep-daniel-hannan-tells-bbc-free-movement-of-labour-might-not-end-video). Additional payments to the EU are likely as per Norway: http://www.eu-norway.org/eu/Financial-contribution/ (5.6 bn Euros per year if the UK pays in proportion to population as Norway does).
From an economic point of view, if free trade with the EU is reduced, there will be huge extra costs for consumers according to the UK (as quoted in the pro-remain site: http://www.strongerin.co.uk/the_economy). The financial services industry is at risk of possibly losing their EU ‘passport’ to sell services (see the Guardian’s “How will Brexit affect Britain’s trade with Europe?” article above).
The UK currently gives 8.5 bn GBP per year (net) to the EU (10.32 bn Euros at current exchange rates) or about 161 Euros per person per year:
https://fullfact.org/europe/our-eu-membership-fee-55-million/
Negotiations will probably try to continue trade on the current basis as it doesn’t make sense for the UK to lose the EU trade, or increase the costs of goods into the UK. Despite this, the recent depreciation of the GBP against the Euro (not to mention other currencies) has added 5% to the cost of goods from the EU.
There will be dismantling/reerecting of laws from the EU as disliked/liked by future governments over time (e.g. the Human Rights Act http://www.theguardian.com/law/2013/dec/22/britain-european-court-human-rights).
I liked this “reasons for people voting leave” article for their disparate, but clearly enunciated reasons for leaving:
http://www.theguardian.com/politics/2016/jun/25/meet-10-britons-who-voted-to-leave-the-eu
The informed and intellectual discussions about Brexit are interesting but miss the point. I don’t know how I would have voted, were I were a brit, but I’m irrelevant in any country.
The fact of the matter is Trumpism. Brexit win was total Trumpism. And this is brewing globally.
“The Hamptons is not a defensible position. It’s a low-lying beach. Eventually people will come for you”
Huge numbers of Englishmen said “The current state of affairs isn’t working for me. I will blow up the system and hurt the elites. I’ve much less to lose.” You can talk about GDP and trade deals all you like. It’s the hordes of Englishmen displeased about the direction of the society that ultimately matter.
I think the obvious thing here is for the “business as usual” posters to buy some sterling, or at least shares in some basket of companies based in the UK. If right, this is a rare buying opportunity, and a really great way to demonstrate your confidence in your opinion!
I agree that the rational thing is for some kind of free-trade deal to be worked out; like other commenters, I worry that the voters are not quite so rational, and that the protectionists will seize the day. I mean, we are talking about votes who ask reports what the EU ever did for them, while standing in front of big shiny buildings built with EU money, having driven there on roads paid for by EU money (the same voters think the Leave campaign will step up with an EU-sized cheque book).
Probably the immediate reaction is over-done; still, I’ll be (pleasantly) surprised if the eventual outcome is as cost-free as you say – 1% of GDP in exchange for free trade with 500M people wasn’t a terrible deal (all the less so, since some of that spending probably lead to better infrastructure, rising prosperity, more trade, etc., etc. – see pre-crash Ireland, for example).
Ed: Wasn’t there already a tariff-free “Common Market” prior to the European Union? Why does Brexit from the political union mean withdrawal from this common market? https://en.wikipedia.org/wiki/European_Economic_Community says that the UK joined the common market in 1973. Is the tariff-free market somehow tied to the political union of the EU?
@philg: If you don’t mind me answering your question: the common market exists by the virtue of trade agreements. They govern food safety guidelines, emission standards, etc. They also govern government subsidies, so that competition between countries doesn’t turn into a race between the countries that are willing to subsidize their agriculture or car manufacturers the most.
All countries in the common market have to participate in these agreements. non-EU member nations like Switzerland and Norway do too.
This is essentially what the EU is, and what people talk about when they mention ‘stupid EU regulations’.
In the past, you’ve expressed frustration with FAA regulations, but I doubt you’d like it if Massachusetts decided to “leave” the FAA and their stupid “safety standards”, because the FAA would, quite likely, consider banning planes and pilots from your state from landing elsewhere.
Michiel: There is already a mechanism for airplanes to operate across regulatory jurisdictions. A Canadian-registered airplane can operate anywhere in the U.S. and a U.S.-registered airplane can operate anywhere in Canada despite the fact that the regulations for certification/pilot licensing/operation are different in the two countries. See https://en.wikipedia.org/wiki/International_Civil_Aviation_Organization for how this is organized more generally.
bobbybobbob #22 is right; whether informed, or (my take: by and large groping in the dark), the “intellectual discussions about Brexit miss the point”… The eggheads and elites can talk about GDP and trade deals all day long, but it’s the disaffected Britons who had their say a week ago.
While I don’t see how Britain can better be off outside, than in the EU, complete with the loss of English as an official EU language (Ireland has chosen Gaelic, and Malta Maltese to be their preferred tongues), to be supplanted by French and German, I do see the advantage of the British people, if only for a moment, upending their own Tory and Labour elites’ political “cart,” and sending a clear signal of potential further unrest to come (think Brixton riots of 2014 by a magnitude). What is not clear to me is whether a society built up on capitalism in its purest only-profit-matters form, can be reformed peacefully, or made to change priorities from unbridled individual enrichment to more equal redistribution of the growth. Which seems to be at the core of the people’s dissatisfaction, because, no matter how one looks at it, while the rich bastards are getting richer all the time, the working wo|man’s wages have barely moved forward in the past 40 years or so.
Reading various pundits’ always oh-so-sophisticated take on why people voted the way they did, and what will be the outcome of that, I felt a sense of déjà-vu, of having heard it all before. Took me a couple of days to pinpoint that previous memorable occasion: it’s the dinner table exchange scene between greasy joint waitress Nora Baker (Susan Sarandon), and master of the house Sol Horowitz (Steven Hill) in the 1990 movie “White Palace.” The only clip of it that I’ve found online is of atrocious webcam no-quality, appears to be a surreptitious video uptake off the silver screen, but I’m not asking you to view the entire full length movie, only this time-tagged 2 minute segment of it: https://youtube.com/watch?v=JIkBInet2J0#t=1h35m30s