The great majority of economists were opposed to Brexit – about 90% according to a survey of members of their professional societies. Over 200, including 12 Nobel prize winners, signed a statement explaining why. Diane Coyle was among them. Here she explains why and outlines why Brexit has ignited economic turmoil.
Unfortunately, the arguments made by me and other economists did not sway enough voters to chose to stay in the EU. But now the ‘Leave’ vote has happened, it is worth explaining why we are saddened, and worried, about economic prospects.
At the heart of it lie the UK’s prospects for trade with our main export market, the rest of Europe. Some other countries like China are growing in importance but we do not yet export very much to them. The share of our trade that is with the EU has been in decline as other markets like the ‘BRICs’ grow, but about half our exports still go to other EU countries (a similar proportion to other member countries, reflecting the depth of European economic integration).
The ability to export depends on being part of a trade agreement, and all of the UK’s arrangements to trade, with all countries, have been negotiated through the EU. They will now all need renegotiating, which will take years, and our trading partners made it clear ahead of the vote that this will not be a priority for them. Tariffs (that is taxes on our exports) are not the main issue. More significant are the ‘non-tariff barriers’ – the rules about product standards, paperwork and so on – that will make it far harder for British businesses to sell their goods overseas.
It will be even harder for services, one of our areas of export strength currently and 80% of the economy, because they are not well covered by trade agreements. Being part of the European Single Market gave UK services such as finance, consultancy, education, and digital access to a market of 300 million consumers. That guaranteed access will go. Already some large international banks are saying they will relocate. Dublin, Amsterdam, Paris and Frankfurt will be keen to make it easy for them.
Some ‘Leave’ campaigners play down the risks to trade, arguing that the UK can create a freer environment for trading outside the EU. If that is true – and it is the only hope of avoiding serious economic damage – it still needs to be negotiated with many other countries and will take years. Trade experts think this scenario is not plausible.
The consequence of the vote is therefore that investment will decline and jobs will go. In the short term a recession is possible. In the longer term, the British economy will grow more slowly than it otherwise would. How damaging the impact on trade, investment and jobs turns out to be is unknowable because so much depends on future negotiations. Our former European partners have no incentive to make it easy for us, however.
That is not all. The pound has already fallen sharply. Holidays abroad this summer will be more expensive. Prices of imported goods will start to rise. Uncertainty about what is going to happen, what future regulations there will be, and what trade arrangements, will probably cause many people to hold off on their plans, whether that is investment or house purchases. There are some silver linings in this. A weaker pound will help British exporters as their products will be cheaper in Euro terms. It will be no bad thing for house prices to fall a bit.
Immigration – the red herring?
And what about immigration, one of the key factors behind the ‘Leave’ victory? The success of the British economy has been the reason for high immigration. We have been the California of Europe. Immigrants on the whole do different jobs from native-born Britons, including many in the health service and social care.
There is no evidence at all that they have ‘stolen’ jobs – indeed, the employment rate is at an all-time high – and ample evidence that they make a positive contribution to the government’s coffers. Public services are under strain, but that is because of government funding cuts.
Still, the high level of immigration is clearly a concern for many people. But there is a choice for post-Brexit Britain. If we want access to trade with the rest of the EU, we will have to accept the condition of free movement of people, and immigration from the EU will continue.
If we want to prevent future European immigration, we will have to accept the consequences: no agreement to export to the EU, and no freedom ourselves to travel there. The ‘Leave’ campaigners are now starting to admit that – despite their pre-referendum claims – we cannot have our cake and eat it too.
This is not fancy, elite economic theory; it is reality.