The core message of the Remain campaign is that Brexit will wreck the UK economy. Leave say this is Project Fear, and yet struggle to come up with a convincing alternative to the status quo. This is an age when many people are disengaged from politics and sceptical of competing claims. So who is right and who do we believe, those of us who are undecided and don’t easily get the arguments in this referendum? Here is a brief layman’s overview, with links to independent studies.
The impact on the economy is usually central to the outcome of UK elections, THE deciding factor arguably, but this is not an election but a referendum. Britain has had all too few of them, we might say, and so we lack guidelines from the past. Yet it would appear that the Scottish referendum was won and lost on the potential impact on the economy, and that might still apply to the UK one. So what is that potential impact?
The UK economy has prospered since it joined the EU
Prior to EU membership (then called the EEC), the UK economy was struggling, being dubbed the “Sick Man of Europe”, borrowing a phrase from the 19th century decline of the Turkish Ottoman Empire; it was plagued by balance of payments crises, inflation, industrial decline and strikes. There followed a painful period of adjustment, in which UK industries were ill-equipped to compete with continental firms and prone to big strikes. It would be hard to separate out what did more to revive UK business from the 1980’s, tariff-free access to the european market, the Thatcherite reforms, curbing of union power, the huge bonus of North Sea oil (now declining), the expansion of the City of London after the Big Bang of de-regulation in 1986, the establishment of the single market in 1992, freedom from a pegged currency, etc. Yet it should be noted that since the UK joined in 1973 its growth per head of national income has been the fastest in the G7 (Group of 7 leading economies). However today, Britain has fared relatively well compared with other EU countries and according to some is set to overtake other major EU countries. She was slower than some to recover from the crash of 2008 but has escaped the stagnation in the eurozone due to having in effect opted out from it since 1992. Some say this is mainly due to the UK being able to run its economy free of the eurozone restrictions and can devalue its currency, helped recently by Osborne’s manipulation of the housing market.
But it is vulnerable
However the UK economy that Brexiters hold up as a strong one well equipped to survive leaving the EU is a lopsided one. Due to the massive shrinkage of the manufacturing sector, since the Thatcher reforms and exposure to global competition, to about 15% of GDP today, the City of London has become the economy’s big mainstay, benefitting from access the to the EU as the largest financial centre. It contributes 22% of GDP (2013), London being the fifth biggest metropolitan economy in the world, employs a large number of highly skilled personnel from across the EU and is the key employer in the booming South East. This sector is estimated to suffer severely from Brexit. However since the 1980’s the UK has benefitted from major global businesses setting themselves up in the UK so as to have access to the EU, starting with Nissan in Sunderland in 1986. One exception to the recent downturn has been the UK car industry, now highly successful and almost entirely foreign-earned. Warnings have been issued by many foreign-owned companies that they might reconsider their UK investments if Brexit occurred, since they would be subject to EU tariffs.
It is not surprising that the Remain camp have stressed the impact to jobs of Brexit. The EU is larger than any individual market in the world. The EU is Britain’s largest market, contributing 44.6% of UK exports. Why, they ask, wreck your largest market? If you were a business, would you turn away from your main customer? No wonder business is running scared, with shares fallen, investment put on hold and the pound slumped in value.
The UK economy is a vulnerable one. It is a relatively open economy, with limited regulation and vulnerable to global fluctuations. It was badly hit by the slump of 2008 and took a long time to recover. Some say it still hasn’t really recovered fully. The big issue waiting in the wings is the UK’s balance of payments deficit. We import much more than we export, the trade deficit reaching 7% of GDP in the last 3 months of 2015. We are at present able to finance it through the good credit the UK has in world markets. In other words people are willing to lend to us. Thus too the Bank of England has been able to sell bonds and thus finance our other key deficit, the fiscal one which we’ve heard so much of since 2008 and which Osborne has been unsuccessfully trying to reduce. However, if serious questions start being asked of our credit-worthiness, international finance can almost literally pull the plug, as S & P have warned. There would a sharp withdrawal of capital from the UK, the pound would collapse, inflation would rise and so would interest rates. In the past this has triggered recession and unemployment.
Independent experts say that Brexit could wreck the economy
Thus it is not surprising that the Remain camp argue that the pound could fall in value by up to 20% or even 30%. That has been the UK’s way of handling economic shocks, hitting UK consumers in the process and usually followed by waves of redundancies, as happened in 1980, 1991 and 2008. Hence it is argued Britain would slide into recession, if not depression, which could go on a long time as post-Brexit it can take, it is estimated, 7 or 8 years to negotiate new trade arrangements with our erstwhile trading partners.
No wonder too that independent bodies have issued a series of cautions. The list of these people is impressive: the International Monetary Fund, the National Institute for Economic and Social Research, the Institute for Fiscal Studies, The London School of Economics, the Organisation for Economic Cooperation and Development, and the Office for Budget Responsibility. As the IFS say:
“…nearly all estimates suggest leaving would reduce national income relative to what it would otherwise have been, both in the next few years, and in the longer term.”
We ignore these warnings at our peril.
Even immigration has, dare I say, an economic benefit
The Leave camp have, it is generally acknowledged, lost the economic argument, which is why their focus has shifted to immigration. Yet to campaign to restrict immigration has an economic side to it. Immigration to the UK has fluctuated since the Second World War, also being replaced by net emigration in hard times. It is a sign of economic prosperity: no wonder German ambiguity about receiving Syrian refugees. Immigrations tend to result in net rises to GDP and they are more people who work and spend money and thus stimulate economic activity. There is no consensus among independent experts that immigration hurts employment. Today we have one of the lowest rates of unemployment in the EU. So, to argue to reduce immigration, many would say, shoots us in the foot.
Voting with your wallet, not your feet
Voting with your feet would very likely, many consider, be like turkeys voting for Christmas and limping badly. Usually voters vote with their wallets in mind. Others outside the UK suggest that leaving is economic suicide. Maybe that will in the end be the conclusion of UK voters too, although current polling suggests otherwise. Despite appearances it will be very interesting to see if this referendum is in the end any different.