Yves here. This is a judicious, high level overview of the Brexit vote and its implications, the big one being that it moves Britain to the right.
By Philip Arestis, Professor of Economics at the University of the Basque Country, Spain and Malcolm Sawyer, Professor of Economics, University of Leeds. Originally published at Triple Crisis
On June 23, 2016, the UK voted by 52 per cent to 48 per cent, on a relatively high turnout of 72 per cent, to leave the European Union (EU). The UK and its EU partners will now have to enter into negotiations, which are likely to take at least two years in view of Article 50 of the Lisbon Treaty, the so-called ‘formal exit clause.” The economic impacts of UK exit from the EU will depend to a considerable extent on the outcome of those negotiations.
The coalition for “remain” ran in political terms from moderate Conservatives, through Liberal Democrats, Labour Party, and Greens. The supporters of “remain” generally covered large corporations and trade unions, universities and scientists, those in the arts and the media, and Premier League soccer teams. The “leave” campaign had more support from small businesses (though by no means universal), nationalists, and free marketers. And crucially received large electoral support from working class voters, particularly those located in the old industrial areas.
In “narrow” economic terms, the effects of Brexit are likely to be negative but not to a catastrophic extent. These come from trade effects—the UK would leave the “single market,” trade relations between UK and the EU would be somewhat more difficult, with some tariffs in place instead of tariff-free. The estimates from a wide range of official organisations (HM Treasury, IMF, OECD for example) and research organisations (National Institute for Economic and Social Research, Institute for Fiscal Studies, London School of Economics, for example) had put output and employment losses from Brexit which over time could amount to the order of 4 to 5 per cent of GDP. There would also be negative effects that would emerge from the City of London weakening in view of a number of the financial sector companies emigrating elsewhere in the EU; and volatile financial markets in more general terms.
During the referendum campaign these estimates were presented in terms of the economy crashing, falling off cliffs etc., and expressed in ways which allowed no allowance for any uncertainty of forecasting. Yet such losses of output, which means being lower than it would have been otherwise but still involving some economic growth, would be smaller than those suffered during the financial crisis. There are reasons to think that these estimates were on the high side—though it will never be known as the estimates are the difference between two alternative time paths and at the most only one of them would be followed. The estimates often build in significant effects of trade on productivity, and the fall in trade after Brexit through tariffs on EU-UK trade leading to fall (below what it would have been) in productivity. Previous experience with similar estimates such as those accompanying the formation of the “single market” in 1992 when gains of up to 6 per cent of GDP were anticipated but did not materialise may see smaller losses through Brexit. Paul Krugman in the New York Times put the loss of output at around 2 per cent of GDP. The Bank of England has eased “special capital requirements” for banks in view of fears of risks to financial stability. This implies that banks can pump into the economy up to £150bn. What is more important, though, in terms of supporting the UK economy after Brexit, is clarity on future fiscal policy, and acknowledgement and support of the view that it can help the economy in co-ordination with monetary policy.
In the first weeks after the referendum result in favour of “leave,” there has been the anticipated fall in the sterling exchange rate whereby the pound has fallen to its lowest level in 31 years against the dollar and it is at a 2-year low in relation to the euro. This should be seen against a background of a current account deficit of 5.5 per cent of GDP (expected in 2016; up from 5.2 in 2015), which has tended to worsen in recent years especially on the net income rather than the trade side. This lower sterling exchange rate may soften the blow with some stimulating effect on exports and raising the sterling value of income flows from overseas. However, the more significant impacts in the next few years could well come from uncertainty—simply delays in undertaking investment and in hiring workers until it becomes clearer what the trading relationships between the UK and the EU will become. This is overlaid by uncertainties over the status of EU nationals currently working in the UK, and the degree to which the free movement of labour enshrined in the EU will change. The economy may well tip into recession coming on the back of the uncertainties generated by the leave vote.
The negative economic effects are likely to be long-lasting. Investment not undertaken leads to a lower capital stock well into the future. But these negative economic effects are unlikely to be catastrophic in themselves—though they do add to the underlying weaknesses of the UK economy notably in terms of its current account deficit and over reliance on the financial sector.
The major catastrophic effects are political. The effective leadership of the “leave” campaign was the more right wing elements of the Conservative party and UKIP (United Kingdom Independence Party); more right wing in terms of being nationalistic and anti-immigrant, pro-“free markets,” neo-liberal, and pro-privatisation. As we write, the leadership of the Conservative Party, and thereby the person to be Prime Minister, is being contested. Whatever the outcome of that contest, it will represent a significant shift to the right in British politics. Much of the constituency, which voted “leave,” will be those who suffer from this shift. The political right would be more pro-austerity and more for privatisation of the National Health Service. The political right will have been put into power by the votes of the working class (in favour of Brexit), and then that working class will be the losers. However, if it were indeed the political right, which comes into power, attacks on workers’ rights (under the heading of de-regulation) are highly likely.
A further expectation as reported in the Financial Times (July 4, 2016) is that Brexit could very well result eventually to the collapse of the EU and to the end of the euro. This is so in view of the right-wing parties in Italy, Germany, France gaining ground; also gaining ground are the populist parties in Ireland, Portugal, Spain and Greece. All these parties are actually anti-EU as well as euro-sceptic and could be encouraged to promote these particular objectives of theirs in view of Brexit.