Monday, 25 April 2016

Brexit - A Market Economist's View

by Kay Sinden

I studied economics and worked as an economist for 15 years, starting at the Bank of England (International Division) and moving on to become a money market economist for Bankers Trust.  I specialised in Europe, primarily in analysing Bundesbank policy.  I was around in the run up to the inception of the Euro and can pinpoint the moment when German policy moved towards broadening out the Euro zone to include previously-referred-to “peripheral” countries: Spain, Portugal, Ireland, Italy.   I was always against a Euro that would extend its reach beyond the core group of countries that had already converged economically (Germany, France, Benelux) because it would inevitably impose inappropriate monetary and fiscal policy on those countries outside the core.  Without the ability to adjust with appropriate policy (including the ability to undergo a currency devaluation), it was inevitable that any economic dislocation would have to be adjusted through the real economy (note the consequences in Greece and Ireland in particular, but also Spain and Portugal, where economic booms resulted from excessively low interest rates and assessments of risk.  The Italian malaise is slightly different and probably largely still stems from the massive budget cuts imposed prior to the Euro to comply with budget deficit requirements).   
The current discussions around Brexit are very reminiscent of those at the time as to whether the UK should also adopt the Euro.  The same doom-laden warnings of the loss of trade that would ensue as a result of us being “outside” were being pedalled.  Misty-eyed pro-Euroers were promoting the benefits of using the same currency when on holiday in Carcassonne and Tuscany.  They were completely missing the point that adopting the Euro would take away the UK’s ability to set its own monetary and fiscal policy.  Few of these would now choose to recall their arguments in favour of the UK adopting the Euro (particularly since the weakness of Sterling was an essential element of the UK recovery from the last recession), but you can bet that they are the same bunch that are now spreading the same sort of warnings of Brexit.
But one of the strongest economic arguments for Brexit is the Euro itself.  The policy straitjacket that has been adopted by all countries where that policy is inappropriate for their own particular economic situation (which now includes France), will inevitably result in a permanent underperformance in the Euro area.  Of course the UK’s trade with Europe remains significant as a percentage of GDP but, because European domestic demand is so weak, our exports to Europe are in decline.  The UK must look further afield and should build on its truly global trading outlook, taking advantage of areas of growth around the world.  We represent an important market for European producers, however, particularly in the absence of strong demand in their home markets. So it is highly unlikely that European governments would risk putting up trade barriers against the UK given the extent to which European suppliers depend on UK markets.  Thus our trade with Europe is unlikely to be significantly affected once new trading arrangements are established.
Of course the other main argument for Brexit is the enormous transfers the UK makes to the EU.  The Remain camp find it difficult to argue against this but sort of make you feel guilty for begrudging Europe these transfers and point out that our farmers and fishermen benefit from the funds sent back to the UK from the EU.  Whilst it is true that the net transfers out are relatively small, it would certainly be preferable if the UK government had total control over all of these funds and there would certainly be substantial efficiency benefits of arresting the merry-go-round effects of funds going backwards and forwards via the Circumlocution Office that is the European Union.
We are being bombarded with seemingly irrefutable arguments for Remain, coming largely from the UK Government.  Of course, this gives the Remain camp a good deal of credibility.  However, their arguments are just as much conjecture as anyone’s.  Even last week’s Treasury report that households will be worse off to the tune of more than £4k per annum is not believable.  These models work in the following way: you enter your assumptions about the consequences of some event, ie Brexit.  This is highly complicated and will affect many aspects of the economy, exports, imports, capital transfers, government transfers, etc, etc.  The model will then throw out some crazy numbers.  You then fix some of the parameters so that the numbers look less wild and end up with predictions that essentially fit in with your initial assumptions.  Treasury forecasts are not particularly stable between Budgets, their reliability over the course of several years must be doubtful. Nevertheless, voters who are wavering (probably the vast majority) will be influenced by such seemingly authoritative analysis.  President Obama’s interventions could frankly go either way.  After all, the Brits don’t appreciate being told what to do.
As a firm Brexiter, all of this support for the Remain side fills me with horror. The media, particularly the BBC, are trying to appear impartial as usual.  But it is obvious that polite British middle class society is for Remain, and BBC journalists are likely to fall into this camp.  It is simply not acceptable (as I did recently) at a dinner party for example, to admit that you are for Brexit.  You will immediately be assumed to be a xenophobic little Englander who supports Nigel Farage.  Mind you, the reaction is much the same if you admit you are a Tory.  As in the last General Election which revealed “shy Tories” who were unwilling to admit their voting intentions, there must be “shy Brexiters” now. 

Voting for Brexit is definitely non-U, mainly because it has become too closely associated with being anti-immigration, anti-European or even anti-foreigner.  This is a ridiculous notion:  the UK economy has always accepted immigrants, as a means of stemming skills shortages in particular, and will continue to do so.  However, a points system would better serve our needs and would in fact open up our borders to potential new-comers from outside Europe who are currently precluded from entering/staying in the UK because our immigration numbers are so bloated by migrants from Europe.  Europeans who offer the right sort of skills will of course still be welcome.

But what do I think will be the likely out-turn?  This remains a very difficult call.  My husband yesterday helped man a Vote Leave stall in Ramsgate (Kent), where the overwhelming majority of passers-by were in favour of Brexit.  This area is undoubtedly Euro-sceptic and support for UKIP has always been robust here.  Amongst our London friends, there appears to be a majority in favour of Remain.  However, there are certainly also a lot of “shy-Brexiters” who feel they daren’t admit their actual voting intention in polite company. Moreover, those of our friends who claim to be “sitting on the fence” are probably actually in favour of Brexit but don’t want to admit it and on the day will likely either vote to leave or will not vote at all.  It seems that people who favour Leave hold their views more strongly than those who would incline towards Remain.  This will probably mean that pro-Brexit voters are more likely to turn out to vote.  On balance, I am hopeful for the Leave side to prevail but not at all confident.