Monday, May 23, 2016

The Brexit: Should the United Kingdom Leave the European Union?

While the success of the European Union, or the lack thereof, has been under scrutiny for quite some time, the United Kingdom is going to put that success to the test. One month from now, the British people are going to vote via referendum on what has been dubbed with the portmanteau of the "Brexit." Essentially, the referendum is going to determine whether Britain will leave or stay in the European Union. With the economic issues, political turmoil, and mass absorption of migrants into Europe, it is more than feasible that the British people could vote to make this a reality. Since Britain has entered the European Union, it has relinquished a considerable amount of power to European Union delegates in Brussels, including complete control of its borders or being able to negotiate its own trade agreements. Once a mighty empire, I can only imagine the extent to which the United Kingdom would like to more unambiguously exercise sovereignty over its land. The question I want to answer here is not whether the Brexit will happen or how each scenario would play out, but determining the pros and cons for whether it should happen.

The good news about a Brexit is that the British are not in a monetary union with the European Union. Much like I explained a couple of years ago with the Scottish referendum for independence, a monetary union complicates secession. The United Kingdom has the pound today, and regardless of outcome, it will still use the pound as its currency. The issue is that 45 percent of British exports go to countries in the European Union.

Will exchange rate fluctuations create inflation issues for Great Britain? What is worrisome is the political uncertainty that the referendum will cause. If there is anything businesses cannot stand more than regulations, it is uncertainty. A country that has a largest, post-WWII current account deficit and seems to be on shaky terms can make investors think twice before purchasing British assets. Plus, consider that there is going to be an eighteen-month negotiation process. And why shouldn't investors be worried? If the United Kingdom leaves the EU, odds are that the EU is not going to give favorable terms because they don't want to encourage other countries to leave. Creating financial instability are not just a concern from me, but also comes from the Bank of England itself. On the other hand, this argument assumes that the European Union is some beacon of economic, political, and regulatory stability, which it isn't.  This line of thinking also assumes that European Union member countries would cease or greatly reduce trade with the United Kingdom, which is not necessarily the case. Plus, given the large trade deficit the United Kingdom has with the EU, wouldn't it be in the EU's interest to keep trading with the UK?

What does the research have to say on the issue? There are many economists that think that the Brexit would be a bad idea. Oxford Economics ran economic scenarios, and they do not view the economic outcome favorable. Their worst-case scenario was a GDP that was 3.9 percent smaller by 2030 with a Brexit versus without, while their best-case scenario was a 0.1 percent loss of GDP by 2030. The Organization for Economic Cooperation and Development (OECD) is even more pessimistic in its estimates, saying that the British economy will be 5 percent smaller in 2030 without the European Union than it would be with the European Union.  The April 2016 HM Treasury Report from the British government adversely reports that annual loss of GDP per household would range from £2,600 to £5,200 (≈$3,700-$7,500USD), depending on the type of trade agreement settled upon by the UK and the EU. The London School of Economics is not any more positive, showing that it would cause a loss of GDP ranging from 1.13 to 3.09 percent, as well as a loss of UK income up to 3.1 percent (Dhingra et al., 2015Ottaviano et al., 2014).

Now for some studies that are less pessimistic. The Institute of Economic Affairs published a 2015 report showing the claim that "3-4 million British jobs 'depend on' or are 'greatly associated with' EU membership" is exaggerated, thereby suggesting that it would not greatly reduce trade between British businesses and European consumers. Additionally, import substitution and having the WTO's "most favored nation" (MFN) status would help minimize loss for the United Kingdom. Investment company Woodford reviewed other studies in its study, and after looking at various economic metrics, concluded that the Brexit would have insignificant changes in net terms. European think-tank Open Europe published a study in 2015, and also does not think there will be significant changes: its "more realistic range" is that of a 0.8 percent GDP loss to a 0.6 GDP gain by 2030 in comparison to status quo.

Chatham House also published some interesting research earlier this month regarding the myth of how the EU erodes British sovereignty. Aside from the fact that the British government still has control of 98 percent of public expenditures and most regulatory functions (see below), the study argues that it would be difficult for the United Kingdom to argue for better trade agreements than what they currently have under EU membership.

As for regulatory burden, the Centre for European Reform (CER) released a study in 2014 shows that the United Kingdom already is relatively free from regulations, and that EU regulations are not as burdensome as believed. It also goes into how the immigration into the United Kingdom since the UK's entry into the EU has been beneficial for the UK. The British government (Ch. 3) even conceded that the benefits of being in a single market outweighed additional regulatory burden. On the other hand, European think-tank Open Europe published a 2010 study showing that domestic regulations are 2.5 times more cost effective, and that from 1998-2010, EU regulations have cost each UK household an average of an additional £4,912.

Given all this information, what is my take on the Brexit? As a libertarian, I already have mixed feelings on the matter. On the one hand, leaving the European Union would mean less regulatory headache. On the other hand, even though the EU has its flaws, leaving the Euro Zone would probably mean reducing the freedom to trade and migrate since the European Union functions as a free trade bloc. If you want me to give a prediction, it is very difficult. So much of the outcome would depend on how the European Union reacts, the sort of regulations and policies the British government implements in lieu of European Union regulations, the trade agreements that the United Kingdom is able to enact, and how the global economy responds to the considerably high uncertainty of a Brexit.

But let's go with exuding a bit more certainty. If I had to make an educated guess, would I assume there would be a positive or negative outcome with a Brexit? I can get skeptical about how much of a representative democracy the European Union is, or ask whether how much freedom regarding trade and immigration really exist in Europe. With such basket cases as Greece and dealing with negative interest rates, I have to wonder whether the British government should continue to align itself with an institution that may or may not survive. How long can a monetary union without a fiscal union survive? This is even more true given that the United Kingdom has not and continues to not show any sign of abandoning the pound and joining the Euro Zone. Conversely, I can get skeptical as to whether a Brexit would mean freer trade and immigration, as well as less regulation. If I had to take a stance, I would tentatively do so against the Brexit. Aside from an overly optimistic projection from the far-Right UKIP (UK Independence Party), there really aren't projections that show that a Brexit would be significantly positive for Britain, Europe, or the global economy. If anything, the bulk of economic literature on the topic signals a costly endeavor with modest to severe contraction of British GDP, not to mention the negative effects on the economy of the European Union (Global Counsel). Plus, there is a feasible possibility of either unwind European integration or a sterling crisis, both of which would be catastrophic on a global level. I also have to say that given that a) the United Kingdom is not in the Euro Zone, and b) the United Kingdom has a relatively strong economy, I could see how the adverse effects of a Brexit could be mitigated. Nevertheless, there is still enough to be uncertain about, even with economic studies and educated guesses. At this point, I will play the "wait and see what happens on June 23rd" approach.

6-20-2016 Addendum: I'm still not convinced that Britain should leave the European Union, but this article is well-cited and well-informed as the pro-Brexit side can get, at least from what I have seen.

12-17-2017 Addendum: The Rand Corporation recently released a report on Brexit scenarios. Most of the plausible scenarios do not work in favor of a Brexit.

1 comment:

  1. Well, as they say, it's all over but the shouting.

    And there's been plenty of shouting. Personally, I think that given the realities of global trade and global migration, we can't rely, any of us, on archaic concepts of nationalism anymore. I believe the Brexit will be bad economically, especially for trade and migration. The EU has a much larger budget, and a much better policy, for the disabled, and budgets for the disabled in Britain are now being ruthlessly slashed.

    Also, I am one-quarter Lithuanian, and it's an unfortunate truth that migration is the lifeblood of Lithuania. A consequence of the EU's formation is that many eastern European people, who would have formerly gone to America or elsewhere overseas, have now simply been able to migrate from east to west. Many, many, many Lithuanians found safe haven in the U.K. and better lives: the UK was their preferred destination. Now they also, like the disabled, face an uncertain future.

    I blame the Brexit on a certain snobbish insularity within the English character. They're island people, not all that fond of foreigners, especially Europeans, and given their past global/ imperial role, they don't want to be part of any coalition organization unless they can be the head of it. LOL. Just my opinion.