To Brexit or not to Brexit

The outcome of the Brexit referendum on June 23 2016 was a surprise to many – I would even say to almost everybody – within and without the UK borders. It is widely known that the relationships between the UK and the EU have not been exactly easy; however, to find out that the country had decided to Brexit, instead of staying in the Union, left politicians, academics and the media speechless. It is a small consolation that those who chose not to Brexit were 48%, agains 52% of pro-Brexiters.

After nine months about that disgraceful June 23, it is still hard to figure out the real reasons behind this slap in the EU’s face.

Although perhaps somehow tired by the frantic negotiations of David Cameron and the  insistent and, sometimes, far fetched demands coming from Downing Street to persuade the british to stay, I think it is safe to say that most of the EU members did not want the UK to leave. UK leaders, academics and policymakers have contributed hugely to the consolidation of the Union, bringing new ideas and fresh air in support of a more market friendly and less bureaucratic spirit in the EU. Indeed, Adam Smith’s insights about the invisible hand and the functioning of markets, Ricardo’s pioneering claims about comparative advantages and international trade, and other contributions of many prominent economists and thinkers, are part of a valuable legacy which is deeply embedded in the British society. Its citizens could still contribute immensely to the shaping of the UE in a particularly complex moment of history.

I have claimed that UE benefits from the presence of UK; however, does UK benefit from being in the EU? Obviously, 52% of britons apparently think that that is not the case. It is a legitimate claim, of course. I must admit that some time ago I was not totally sure that joining the EU was the right choice for a country. At this moment, though, the benefits of being part of the Union, for a country in general and for the UK in particular, are in my view larger than the costs.

The advantages brought about to the UK  by the status of London as one of the two or three main financial hubs in the world have also been analysed profusely, and hence I will not focus on this point now.

A huge benefit associated to the EU membership is being part of a highly integrated, rather dynamic market of more than 500 million people. For several years the EU has been  the first exporter of goods and services in the world, the first importer of services and the second importer of merchandises; these figures are not in the least trivial.

In this setting British firms have benefited from the absence of tariffs and other non tariff barriers prompted by the single market: more than 70% of firms in the Confederation of British Industry report that the single market has exerted a positive impact on their business, either by facilitating their sales of products or by providing key components to their supply chain.

No doubt trade has a direct impact on the profits and loss statements of firms. But there are also indirect effects. Trade is a channel whereby innovations and technology advances are passed on from some agents and firms to others. Moreover, some recent research has shown that, in the case of the EU, larger levels of trade are associated with bigger flows of Foreign Direct Investment, another mechanism that allows the diffusion of technology and best practices, and which impacts productivity and growth positively.

One of the main costs of belonging to the EU is the need to comply with EU regulations and principles, some of which may be perceived as especially burdensome during specific periods of time. In my view, this has been a key issue influencing the pro-Brexit vote. In particular, and due to the existence of free movement of citizens in the EU, a noticeable influx of people from EU countries have entered the country in recent years. Thus, immigration has been perceived by part of the UK population as a downside of belonging to EU. This effect, however, is very difficult to assess properly: on the one hand, when analysing migration we usually work with proxies or estimates, rather than with precise numbers. Moreover, it is difficult to estimate the impact of immigration on the economy of the host country, because it is a combination of effects of different sign. Anyhow, it is reasonable to presume that, in a country with full employment, such as the UK, it is hard to argue that foreigners are stealing jobs from the nationals. The  alleged pressure on public services or the abuse of benefits caused by immigrants is often claimed more with circumstantial evidence than with sound, rigorous numbers. In any case, the age of the people entering the UK suggests that their contribution to HMR is typically larger than their consumption of social services.

And we must not forget that, paradoxically, the number of immigrants from non EU countries is still larger than that of EU nationals, although it is true that this last category is growing faster. Hence, to leave the EU because of the potential damages that immigration may inflict on the British society, seems an overreaction:  would not have been easier to restrict the number of visas given to non EU nationals, as it was already happening, rather than to terminate a relationship that has worked since 1973?

When thinking about movement of people within the EU it is advisable to look at the flows in both directions. What is going to happen to the 700.000 Britons that, according to Behaviour Abroad, live in Spain, many of them enjoying a well deserved retirement? (and, incidentally, in a stage of life when the use of health care services gets more frequent). Needless to say that we Spaniards are immensely happy to share with others our sun, our beaches and our mild winters, and also, when necessary and with the proper financial adjustments, our health services, but there is a big issue there that can not be overlooked by british authorities.

It is sad to imagine a EU without UK, but apparently that is where we are headed now. Nevertheless, let’s hope that, by some kind of magic produced by the British government and the EU authorities,  UK does not drift apart totally from the rest of Europe. We have a common past, a common heritage, a common set of principles in many aspects, and we should try to keep the relationship between both areas as friendly and smooth as possible, despite the gloomy episode that took place nine months ago.

 

 

 

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4 Responses to To Brexit or not to Brexit

  1. Ed George says:

    The important thing to grasp about the Brexit referendum result is that for most of the ‘leave’ voters the referendum actually had little to do with Europe and far more to do with a perceived threat of immigration (i.e., not just from EU states, but anywhere). The economics doesn’t enter into it. As for the political elite, they are now stuck with the result, and, given their assessment of the importance of anti-immigrant feeling at large, will push Brexit through, whatever the economic consequences. If it had really been about economics, the result would have gone the other way, and by a lot.

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  2. Thank you very much for your comment. You have summarised it perfectly. I can not agree with you more. But then your argument implies that the Gov. is sacrificing the UK economy for political reasons, doesn’t it?
    On the other hand, what is Theresa May exactly doing? Does she have a strategy? Does she have room for manoeuvre that, for some reason, she is not using, or is she really following the only possible path?

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  3. Ed George says:

    The latter. This is how I see it (although of course I’ve been watching it somewhat from a distance).

    This really in fact has little to do with economics or economic consequences. The referendum process was initiated by Cameron as a political manoeuvre to consolidate his position as leader against the Eurosceptic wing of the Conservative Party (which has been a permanent faction but which was by this point being headed up and given ideological focus and structure by Boris Johnson); Cameron had been promising a referendum for some time and at some point had to do it to maintain his credibility, although if he had ever thought that he wouldn’t have won it he would never have done it. Unfortunately for them, the Cameron wing miscalculated the way that the traditional working class Labour electoral base in England and Wales would react by using the referendum as an opportunity to shout out against immigration (and this part of the leave vote is disinterested in questions of Europe and sovereignty as such in my view). So they lost. Cameron then had to go, his credibility in ruins: Johnson then manoeuvred himself to replace him (which has been Johnson’s long term aim all along, in my oponion). Johnson’s bid for Conservative Party leadership was then deliberately sabotaged by Conservative Central Office (again, in my reading of events): Johnson – who is a really odious human being – is popular within the party but is seen by its apparatus as too unpredictably maverick – too ‘Trump’, if you like – leaving Theresa May, who of course opposed Brexit in the referendum, although quietly, and who is regarded as a competent technocrat and safe pair of hands for a difficult period ahead, as the only other credible candidate. So she got the job.

    And now she’s committed to Brexit, independently of the consequences. Reneging on the referendum result now is unthinkable for these people. On a personal level it would destroy their political careers; politically, it would tear the Conservative Party apart, and with Ukip lurking in one wing and Corbyn in the other that is never going to be an option. So they’re stuck with it, and if it means trashing the economy they’ll trash the economy and pick up the pieces later. Of course, no one really knows what the consequences of this will be – it’s such uncharted territory – but worst case scenarios are not optimistic. But that doesn’t matter any more; it’s not even in the equation.

    And of course the EU institutions know this; they know May and company have no control over the process any more, which explains their negotiating strategy – if you can call it negotiation – which is to screw every last euro out of the Brits as they go. And there is nothing the British side can really do about this: the EU know that if the ship goes down then May and her crew are doomed to go down with it and they intend to take maximum advantage of the situation.

    The irony of all is that, apart from one part of the Conservative electoral base, nobody else involved with this ever seriously wanted Britain to leave the EU in the first place: all the players are either indifferent to the idea, or actually against it. It’s the unintended consequence of a power political game, which blew up out of everybody’s control. But it will happen, because now – politically – the genie’s out of the bottle, and there’s no putting it back in.

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  4. Ed, thanks so much indeed for your detailed, insightful and inspired comment. Your description of the situation is splendid.
    I did not know some of the details you point out.
    Anyway, things look real bad except for….¿¿¿??? who can benefit from this conundrum? obviously what comes first to mind is the Labour party, but I wonder whether Corbyn is skillful enough to be able to make it happen. Imagine for one moment Labour had in their benches somebody along the lines of Tony Blair, then I am pretty sure we would see a Labour cabinet in the next election. And I doubt May will get away from this without receiving a lot of collateral damage, unless she is some reencarnation of Churchill.

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