10 May.

Economics of Brexit is based on fallacy: structural economic problems of the U.K. are British made

By Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.

With Barack Obama, President of the U.S., throwing his weight into the Brexit debate supporting in economic terms the remain camp it should now be very clear to everyone in the U.K., and especially to the leave camp, that there is no such thing as economic sovereignty in our age of globalised world economy. Of course the leave camp in the U.K. is driven primarily by a quest for political sovereignty not economic sovereignty but it is extremely difficult to separate the political from the economic for a country of U.K.’s size in international relations. For a nation that produced some of the most influential works on political economy, from Ricardo to Keynes, the referendum on the E.U. membership in June 2016 will call for some fine thinking on the subject because, if the leave camp wins, Britain can find itself in a historically significant wilderness as a sovereign state, looking into a tunnel without light for quite some time.

The sterling and the U.K. government bond markets have already felt the chill of the possibility of being in wilderness in international relations. Alarmed by these adverse developments the Bank of England and the U.K. Treasury have produced calculations showing the economic loss the U.K. is going to suffer outside the E.U. Most of the arguments of the leave campaign, on the other hand, were based on a political assessment of the economic balance sheet of the U.K. from the E.U. membership in the aftermath of the 2007 financial crisis. A referendum would be unthinkable in the booming years of the early noughties before the crisis.

Therefore the remain campaign feels that the success will hinge upon putting forward a strong economic argument on the higher cost of leaving the E.U. And it looks like the votes in the referendum will swing to the tune of perceived economic benefits of leaving versus remaining. So Obama’s intervention to warn the economic costs of a Brexit was very effective although the final outcome of referendum is not guaranteed.

The economic cost of Brexit is extremely difficult to be expressed in monetary measures that ordinary people would understand.  Like most economics all long term calculations are based on numerous assumptions about not only what happens in Europe and the world economically but also politically.  Notwithstanding the difficulties of measuring direct cost of Brexit, I believe, the economics of both the remain and the leave campaigns are based on fallacies rather than reality. For example the most important economic and social problems in the U.K. with seriously destabilising potential have nothing to do with the E.U. and all to do with the U.K.’s own historical choices and economic structure.

For me the most important economic problems of the U.K. are affordable housing for the younger generations and adequate pensions for the aging population.  Both the housing market and the pensions system in the U.K. are as British as pork pie and have nothing to do with the E.U. membership. These two generational problems pose great social and economic threats to the U.K. and leaving the E.U. will reduce the number of options to solve them.  Being cut off from the financial and labour markets of the E.U. is likely to increase the costs of home ownership and returns on pension funds.

In addition to these generational problems other structural problems of the U.K. that prevent creation of jobs and cause deterioration of public finances have nothing to do with the E.U. either. Past industrial policies and heavy reliance of the banking system to funds outside U.K. mean that the U.K. has very high levels of current account deficit that makes foreign direct investment and capital flow into the U.K. vital for deficit financing. Can such structural problems be balanced by the economic opportunities outside the E.U. as the leave campaign argues? Post-crisis spectacular growth of emerging economies in South America, East Asia and Africa has stopped in 2014 with the U.S. ending its monetary ease and Chinese economy slowing down.

Therefore a U.K. outside the E.U. achieving higher economic growth by increasing trade with the emerging economies and China is no longer a realistic future for the U.K.  On top of this the U.K. outside the E.U. is very unlikely to be an attractive base for corporations from the U.S., Japan and China to trade in the E.U. We now live in an age where trade agreements between major economic powers, like TTIP, are the norm. Outside the E.U. the U.K. is not going to have meaningful economic or geopolitical power to protect the economic interests of the U.K. London, as a city state within the U.K., can of course prosper outside the E.U. because of its strengths in international finance and openness to cosmopolitan wealth.  But this is going to increase the already unhealthy divide between the South and the North in the U.K. with considerable political and social problems.

The current debate on the economics of Brexit revolves around a suspect analysis of the external economic and political conditions that are conjunctural and contingent over the last seven years since the financial crisis of 2007 rather than the internal dynamics of the U.K.  economy. The fatal weaknesses of the U.K. economy are embedded in the structural problems of the U.K. like dysfunctional housing market, crumbling pensions system, high levels of current account deficit, low productivity, low private sector investments and regional imbalances. The U.K. is more likely to find solutions to these structural problems within the E.U. than outside because these structural problems outside the E.U. are likely to cause volatile currency and serious balance of payment crisis that discourage foreign and domestic firms from long-term investment and trade decisions.


Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.

Ismail is a regular commentator in the broadcast and print media. He has taught corporate finance, bank financial management and international finance on both the School’s MBA and Executive Centre programmes. His research interests are in financialisation and financial innovation.

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