Category: economics | 經濟學 | 경제학 | 経済

I was prompted to write Brexit part 2 based on the many questions from friends living outside the UK – who are trying to make sense of what is going on.

Brexit is a portmanteau of ‘Britain’ and ‘exit’. The exit being from the European Union. In 2013, David Cameron announced that a conservative government would hold an in-out referendum. The referendum would take place before 2017.

Cameron is campaigning to stay in why did he call for a referendum?

David Cameron had two main reasons for calling the referendum.

The Conservative party has members in both camps. This has been a fault line in the party for a long while. The reasons for this split in the party boils down to two factors.

In order for the EU to be more powerful on the world stage, it has to speak with one voice. The process of consensus that it uses to get there means the UK is part of the consensus not a lone actor on many issues. This has an impact on how sovereignty is perceived. The full name of the Conservative party is actually the Conservative and Unionist party. It has members who view that sovereignty argument is an attack on the sanctity of the state. The second argument is having a completely deregulated market will benefit business. This would annul workers rights and make government much smaller. Taxes would be lower since the government would be responsible for much less activity.

The economic argument for remaining in the EU is that it provides access to an internal market. This has some ancillary benefits: as an English speaking country the UK is ideal for international investment. The EU provides a wider pool of workers to draw on. In knowledge economy work this is important. It is easier to do business across Europe with common laws and regulations.

The second reason is that before 2009 if you wanted a right-of-centre party you only had one choice. Under the leadership of Nicholas Farage the UK Independence Party (UKIP) rose. This was down to his personality and right-wing populist policies. On the surface of it the Conservative party had to adapt to the reality of competition.

Calling a referendum at a time of Mr Cameron’s choosing was a way of dealing with the bleed of support to UKIP and the split within his own party. I think it would be fair to speculate that Mr Cameron’s team underestimated the Leave campaign and the sentiment of the general public.

 What are the key issues for the electorate?
The issues break down into what I will term surface issues and shadow issues. The surface issues are those issues that connect to the referendum in a rational, logical way. The shadow issues are issues that aren’t connected to the referendum. It is a bit like having an argument with a loved one, often the subject is an excuse to raise everything else that has led to this moment. Essentially the surface issues are rational, the shadow issues are emotive in nature.

The Surface issues

For leaving:

• The UK would get to save the money that it currently contributes to the EU. The numbers talked about this vary. Much of the money that is sent to the EU is spent in the UK. Many leave campaigners argue that this notional pot of money would be better spent on the NHS. There is no guarantee that this would take place and it assumes that the economy performs at least as well in the future.
• The UK is the fifth biggest economy in the world, people would still want to trade with the country. The UK could do a better job negotiating trade unencumbered by the EU. At the present time, the UK is part of a trading bloc of 26 countries. The EU is the world’s largest trading bloc and that gives it a helpful position in negotiations. The other EU states remain the UK’s largest trading partner. For political and business reasons the UK may not get particularly good trading terms out of the EU, beyond what it already has. It is speculative and we just don’t know.
• The UK can take back control of its borders to limit immigration. There is some evidence to suggest that uncontrolled migration from the European Union affected wages. This impact was biggest on wages in unskilled or semi-skilled work. Whilst this impact is considered to be small, it affects voters living hand to mouth. They will perceive this impact as big. The government data on net EU migration has contrasting sets of figures which can give rise to concerns of under-accounting or a cover-up depending on your paranoia level.
• Britain can take back control of its laws, cut red tape and become more competitive. This is largely conjecture. Once the vote goes through Britain’s position won’t change until it negotiates its exit from the EU. It’s not like dropping your subscription to Netflix. Future legislation would depend on the kind of trade deals that Britain negotiates. Depending who you believe, a reduction in EU legislation would stop further erosion of workers rights or remove restrictive workers rights from businesses.

For staying:

• Better the devil you know. At the present time, the UK economy is ok. It is part of the EU trading bloc. Leaving the EU brings with it uncertainty. How will the country trade? Will the UK have free access to the markets of its largest trading partners? How will this affect UK ex-pats currently living in other EU countries like pensioners in Spain? There would be uncertainty whilst the UK negotiates trading agreements around the world. The government hasn’t outlined a clear plan B for life after Brexit.
• UK residents also have rights to freedom of movement in the EU. If you have your passport, a British citizen can go to work freely in any EU country. For young people and professionals, that is an attractive proposition. Leave campaigners would argue that Norway has managed to negotiate similar freedoms for its citizens and isn’t an EU member.
• The impact of the UK leaving the EU is likely to be felt beyond the UK. This is based on conjecture, but a Brexit vote may trigger similar votes elsewhere in the EU. The EU has been something that has bound European countries together. Prior to the EU, mainland Europe was responsible for two world wars. Since all economies have a high degree of interconnection, the effects will reverberate around Europe and the UK for a long time. A leave campaign response would be to think about Britain first and focus on higher growth non-EU markets.
• The UK outside the EU is likely to have a negative economic impact on the country. Economic predictions aren’t certain to happen but make sobering reading. The following international organisations think that it will be bad for Britain including: OECD, the US government, IMF, The World Bank and the Chinese government. This is probably the area that the leave campaigner have been least effective in countering.
• British consumers will lose out from participation in the EU. A wide range of benefits such as anti-terrorism security co-operation, having their holiday mobile phone bill reduced through EU regulation or being able to study abroad. However, these issues won’t matter to many of the poorest voters who are behind the leave campaign.
• A vote for Brexit may increase pressures for a break-up of the United Kingdom. A Scottish referendum on independence was recently defeated, but Brexit would re-open the debate in a pro-Europe Scotland. Northern Ireland currently benefits from the EU, Brexit could ramp up simmering tensions and possible bring a return to The Troubles. The Good Friday agreement currently revolves around an open border and North-South economic codependency. Leaving the EU would break this and require a more heavily regulated border to keep out immigrants and smuggling.  A leave campaigner would argue that this is speculation and nothing more.

The Shadow Issues: a working class insurrection through the ballot box?

Modern Britain as an economic power house has left behind wide swathes of the country outside London and the Southeast of England. These left-behind people are the engine driving the vote to leave.

The UK was the industrial beating heart of the world in 19th century and it began a long slow decline due to a number of factors:

• Much of the manufacturing was in relatively low value products
• Much of the manufacturing base didn’t have a hard-to-replicate core competence. By contrast German industry is built around high value specialisation and niches
• Favourable trading environments in former colonies dried up
• Globalisation brought more competitors to the table. Though many of those competitors like Toyota and Nissan then went on to build factories in the UK
• Structural issues:
  • A national banking and business finance system based on short-termism rather than the regional banking system with a longer term focus that drove German competitiveness.
  • The asset stripping ‘shareholder value’ approach pioneered by Slater Walker, James Goldsmith and James Hanson.
  • An adversarial worker – management relationship rather than the German worker-management councils
• A short term attitude to the dividend of North Sea oil (by comparison, the Norwegian government have invested part of this money for the future)
• A decision by the government to ‘bet the farm’ on financial services in the 1980s
• A succession of debt fuelled consumer boom and bust cycles
• Poor decisions made on worker training. UK apprenticeship schemes have lagged the quality of similar schemes in Germany and other European countries
• Unfettered worker migration from Eastern Europe, which the Labour party has admitted was a mistake

This has left Britain in a curious state:

• For a country with a famous education system, you have unskilled workers who need to be supplemented by better skilled migrants
• Their wages are stagnant or may have dropped in real terms due to increased job competition due to short-term or temporary migrant workers
• A large amount of working poor who have an uncertain future
• Large amount of consumer debt, often tied up in home ownership and distorted prices for rental and home purchase. When you can barely make the rent, an economic depression and housing crash looks quite attractive
• Social mobility is in decline for many
• University education is no longer a guaranteed entry ticket into the middle class – but it now comes with a vast amount of consumer debt

The elephant in the room for Brexit is the rise of the poorest people in society as an important voter bloc. The UK political system is comprised of major parties who have not reflected the views of poorer people for the past 30 years. You have generations of frustrated angry people and the Brexit referendum gives them an outlet. Many of them know that life will not improve; but it gives them the opportunity to screw the people who haven’t listened over the decades.

Their concern and anger is not new but has lacked focus. Prior to Brexit, it drew some of these people to the likes of the English Defence League and Britain First – alongside the usual collection of people with racially motivated agendas. The UK Independence Party tapped into that zeitgeist and the referendum has brought it to the fore.
Both the main parties have been ill-equipped to deal with it. Immigration is a loaded term as it has been a historic touchstone for racial hatred and intolerance. My Dad faced the classic attitude of landlords with signs saying ‘No blacks, no Irish, no dogs‘.

The impact isn’t only economic, older residents are seeing their neighbourhoods change beyond their comprehension.

Voter concern about immigration is not bounded by race, creed or colour in the UK – which moves it away from being ‘politically incorrect’ to a subject of legitimate debate.

In some respects, it is easy to understand why immigration was such a difficult issue for politicians. Enoch Powell was famous for a speech given in Birmingham in 1968 regarding immigration from Commonwealth countries. Powell’s speech touched on immigration issues that many would recognise now: strain on resources, the degree of change in neighbourhoods and society, issues with societal integration. His speech was also tied to anti-discrimation laws. In a country that had only recently recovered from the second world war, Powell objected to a law advocated by writers from newspapers which had been soft on the rise of Hitler, yet now wanted to impinge on the freedoms of the native British. He quoted from the latin epic poem Aeneid as a graphic way of illustrating his concern about possible conflict.

Like the Roman, I seem to see “the River Tiber foaming with much blood”.

This was allusion to his own foreboding about the future of Britain, partly driven by the riots that had racked US cities including in the 1960s including Watts (Los Angeles), Hough (Cleveland), Detroit, Chicago, Washington DC and Baltimore.

From then on Powell was forever linked to his ‘river of blood’ speech. He lost his seat in Edward Heath’s shadow cabinet and his speech was roundly criticised as racist. Powell did seem to have his finger on the pulse of voter sentiment at the time. Just two weeks after the speech The Gallup Organisation released poll results showing 74% of respondents agreed with Powell’s speech versus 15% who disagreed. Powell was the unacceptable face of right wing populism.

It was only with the rise of UKIP in 2009 that immigration was put on the ‘serious’ political agenda of the mainland UK again.

The main political party members campaigning of remain don’t have easy answers for the intractable problems facing these people. Trying to control immigration is only a small part of any realistic solution. Back in 1981, members of Margaret Thatcher’s government talked about the difficulty in dealing with the economic issues:

“I fear that Merseyside is going to be much the hardest nut to crack,” he cautioned. “We do not want to find ourselves concentrating all the limited cash that may have to be made available into Liverpool and having nothing left for possibly more promising areas such as the West Midlands or, even, the North East.

“It would be even more regrettable if some of the brighter ideas for renewing economic activity were to be sown only on relatively stony ground on the banks of the Mersey.

“I cannot help feeling that the option of managed decline is one which we should not forget altogether. We must not expend all our limited resources in trying to make water flow uphill.”

The referendum has highlighted the distance between working class people and the Labour Party. This is especially striking; working class people are Labour’s traditional natural constituency.

Will Britain Leave The EU?

I don’t know, but at the time of writing the FT’s poll of polls gives the leave camp a 4% lead over remain, with just 10% of respondents undecided. If the polling data reflects voter turnout accurately then Brexit is likely.  We don’t know what the voter turnout will be, it could be affected by a number of factors:

• Wet weather adversely affects voter turnout
• Young people, who are generally more favourable towards remaining in the EU; but tend to do a worse job at getting along to the polling station. This referendum may change that dynamic
• People in lower socio-economic groups tend to have lower voter turnout
• Older people tend to be more diligent. For senior citizens, if either side of the debate has a better grassroots machine for giving their supporters to the polling booth that could make a difference

Despite much of the fuss about getting eligible ex-pats to vote, they are likely to consist of only 1% of the electorate.

The Euro 2016 football tournament has no matches on June 23 – a major game would have adversely affected voter turnout.

You can find Brexit part 1 here.

More information
UK government documents on Brexit
UK Independence Party – Wikipedia
Conservative Party – Wikipedia
The knowledge economy is a myth. We don’t need more universities to feed it | The Guardian
Britain is in the midst of a working-class revolt | The Guardian
Working-class Britons feel Brexity and betrayed – Labour must win them over | The Guardian
EU position in world trade | European Commission
The Great British trade-off The impact of leaving the EU on the UK’s trade and investment | The Campaign for European Reform – PDF
The impact of immigration on occupational wages: evidence from Britain | Bank of England – PDF
EU migration — the effects on UK jobs and wages | FT – Paywall
The Economic Consequences of Brexit: A Taxing Decision – OECD
Europe and Central Asia: Growth Struggles in the West, Volatility Increases in the East – The World Bank
Remarks by the President Obama and Prime Minister Cameron in Joint Press Conference | White House
Uncertainty Clouds the United Kingdom’s Economic Prospects | IMF
China: Brexit Threatens to Tip Scale in Favor of U.S. | Money Morning
The Brexit Index: a who’s who of Remain and Leave supporters | Populous
1981 files: Lord Howe rejects ‘inconsiderate’ comments on decline of Liverpool | Daily Telegraph
Analysis: the impact of turnout on the EU Referendum | YouGov
FT – Poll of Polls on Brexit

Books
Heffer, Simon (1999). Like the Roman: The Life of Enoch Powell. London