Brexit

Based on a referendum from last Thursday, voters in the United Kingdom have chosen to leave the European Union. The referendum campaign got the portmanteau of “Brexit” as a combination of the words “Britain” and “Exit.” Now that we have got those basic facts out of the way, let’s move on to the sexier details like what is going to happen and why I think it’s a bad idea.

What Brexit means

No one really knows at this point. The referendum asked “Should the United Kingdom remain a member of the European Union or leave the European Union?” and the “Leave” vote won. This does not mean Brits will not be able to travel or work in the European Union – America and Canada are not in the EU but their citizens are able to – it just means it’s much more likely they’ll face difficulty. The UK will still be more integrated into the happenings of Europe than a country like Australia or Indonesia by virtue of its history and geographical proximity. But it will now make separate laws regarding regulation, trade, immigration, and other hot-button issues. The European divorce could be gradual, and it’s not clear what politicians on both the UK side and European side will negotiate in the future. The end result could be a very isolated Britain or it could be a very still-integrated Britain. People on both sides have made promises about what each result will entail, but the fact is that there is still a lot of uncertainty. In a larger symbolic sense, this vote reverses a consistent post-WW2 momentum of more European integration. The fact that there was even a referendum goes against a main ethos of the EU: This was meant to be a permanent thing!

Why did it happen

Just like any polity that has to live with a supranational power, a chunk of British people felt membership in the European Union was not working out so well. Popular reasons ranged from its immigration policies, its arguably undemocratic nature, or expensive costs that don’t seem to produce many benefits. In the last national election, Conservative Prime Minister David Cameron feared that his party was losing too many voters to the UK Independence Party. In an effort to woo UKIP voters to vote Conservative, he promised more autonomy and an eventual referendum on EU membership. The Conservatives won their first outright parliamentary majority since 1992, but Cameron had to follow through on his promise.

Why Brexit will be bad economically

When barriers to trade and migration are removed, efficiency goes up and economies grow. Creating a common market in Europe to remove frictions and allow flexibility in the overall labor market was one of the great successes of Project Europe. The integration of these countries provided substantial economic benefits overall, though gains and losses were experienced heterogeneously across the population. More on this later. Removing itself from this common market, at least formally, will have some costs to the UK, though it remains to be seen what the magnitude will be.

There are two major costs to Brexit economically, and both could cause a deep deep recession in the near future. The first is a loss of trade of goods and people. Half of British exports are to the European Union. If barriers go up and trade is made more difficult for these exporters, they will have less of a demand to buy their goods and Brits will be poorer. Like most European countries, the UK has a social welfare system built at a time where workers vastly outnumbered retirees/dependents. As birth rates went down and people got older, these pension systems found it difficult to finance themselves. But immigrants come in with money to spend and wanting to work (despite xenophobic conventional wisdom). In many ways, low-wage immigrants from elsewhere in the EU have been a lifeline to Britain’s public fiscus that are inevitably under-appreciated. With less European integration, labor mobility in the UK will decrease and these benefits from migration will shrink. The corollaries aren’t perfect, but look at a country like Japan where a rapidly aging population combined with a hard-line stance on immigration has caused their economy to stall for nearly three decades.

The second is a massive shock of financial outflows. Britain’s current account is a huge deficit. What this means is that they are consuming a lot more than they are producing. By virtue of an accounting identity, this means money from outside the country is coming in to make up for that shortfall. London has become a major financial hub for a variety of reasons, but it has almost certainty retained this position under the assumption that investors – from inside and outside the EU – can move this money seamlessly around Europe. If Continental Europe has different rules and shifting financial assets from the UK to Europe involves burdensome regulation, London is no longer an attractive place to invest. For many years, the UK was being supported by investors in commodity-producing countries. When commodity prices crashed in the middle of 2014, a lot of this money dried up, hurting Brits. With Brexit, even more money will move out of London…and quickly. Major banks have already announced future shifts of main headquarters to Amsterdam, Frankfurt, and Paris. If London can no longer get the financial resources to make up for Britain’s current account deficit, it will come at the expense of consuming less. In everyday people’s terms, this means that Britons will have much less disposable income, also known as a recession.

Why Brexit will be bad geopolitically

After thousands of years of fighting wars and hating each other, Europe in the last century has been moving generally in a more integrated and peaceful direction. Project Europe as it stood before Brexit was already in a very delicate equilibrium. Countries that weren’t really friends suddenly had to share laws and sometimes the same currency, and allow people to freely cross borders. It took the United States 240 years to get where we are in terms of integration – and we fought a Civil War, have a common language, and our cultural differences are not nearly as vast as those between European countries. Whatever progress America has made to make all areas more “American” took a long time. In many ways, Europe has tried to do this process in half a century.

In this delicate equilibrium, there are only two steady states. One was more Europe – countries would have to sacrifice national sovereignty to make the union stronger. The other is less Europe – more power goes to individual countries at the expense of integration.  Brexit is a step in the direction of Less Europe. Brits have effectively voted to “take care of their own” rather than try to work through difficulties of multiculturalism and foreign economic competition.

To me, this is the greatest fear. A wave of populism has swept the higher-income world and people are turning inward. The world was becoming more peaceful, more integrated, and more multicultural. This new world order had its imperfections, so understandably there was pushback and the time has come for opposing forces to become more powerful. People are blaming outsiders of all dimensions (immigrants, the Chinese, The Rich, bankers, etc) and this is a recipe for decreased prosperity, increased nationalism, and less peace.

People are speaking of Brexit as a signal of what is to come in the Western world. Other countries are calling referenda, xenophobia is running rampant, and Do I Really Need to Mention the Republican Nominee? It’s hard to tell if these warnings are overstated. But I don’t want the world to have to take the risk.

Why Brexit will be bad for Brits’ autonomy

Economics isn’t everything and the liberal global order is not everyone’s cup of tea. A lot of the slacktivism being expressed by non-Britons since the referendum never seems to consider Britons’ desire to rule themselves and determine their own future. The European Union is in many ways a clunky bureaucracy with disproportionate power given to certain countries. Its inherent undemocratic nature also bothers some people (ummm, are they also complaining about the House of Lords?). If you felt a supranational institution was unfairly dictating rules for you, wouldn’t you be pissed off? Nonetheless, the belief that Britain leaving the European Union will lead to more autonomy for Brits is incorrect.

Although it remains to be seen what direction new leadership will take Britain in the context of Europe, many Brexit politicians and activists have suggested they’ll move to be integrated into Europe’s common market without formally being in the European Union. Switzerland and Norway do it, why can’t we? This is getting the goodies with no strings attached, in theory. This is unrealistic not only because I find it overly optimistic about how Continental Europeans will treat Britain in negotiations after this messy divorce. If Britain were to commit to political and economic arrangements made by the EU, they’d be doing so without a democratic voice in the process. This reminds me of Scottish independence supporters paradoxically thinking that they could be simultaneously more independent economically and use the pound as their currency (thus be subjected to a monetary policy over which they have no control as an independent country).

Rather than being a powerful voice in the first/second/third largest economy – the EU, depending on how you measure it – Britain will on its own be barely a top 10 economy. This means that it will have even less of a voice in international negotiations and thus likely less self-rule. I admit there’s a degree of uncertainty here: Leave activists argued that Britain can now make unilateral agreements with other countries and this isn’t impossible. But my best prediction is that overall Britain will now have less of a voice in world affairs than it did before. The most powerful countries that are still in the EU are not going to treat the UK nice to try to lessen the harm to Brexit…they are more likely to punish them to give a message to other countries that they shouldn’t even consider it.

Final Thoughts

There’s a lot to say on this topic – and I know native Brits have a lot more to say from a lifetime of experience compared to my ivory tower reading into it and four short years of living in a Scottish bubble. But I truly hope this isn’t the beginning of a global populist wave. And I weep for my British friends who woke up to see their country no longer a part of Europe.

 

 

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