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Thinking aloud about Brexit

Posted on January 15, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

2016 will be dominated, among other things, by the British question.  The word ‘Brexit’ has been added to the English language.  As everyone knows by now it would mean the UK (and that includes Northern Ireland) leaving the European Union following a referendum later this year.  Historically, the island of Britain has always displayed a singular approach in international affairs possibly well captured in the sentiment prevalent during the English reformation: “The Bishop of Rome hath no jurisdiction in this Realm of England." (no. 37 of the 39 Articles of Religion).  History also arranged that Britain’s neighbouring island to the west has had a complicated relationship with Britain as well as, in the distant past, Britain’s enemies and allies on the European mainland.  That the world has changed dramatically in the course of the last 40 years is evidenced by the fact that:

  • A key argument in favour of the Republic of Ireland joining the European Economic Community in the 1972 referendum was that ‘we have no choice if Britain goes in’. In other words, given the very high levels of imports and exports with the UK the option of negotiating some alternative trade agreement with the EEC was seen a non-runner.
  • Northern Ireland narrowly voted, in a low turnout, in favour of the UK leaving the EEC in the UK referendum of 1975 (it should be noted that the UK did not agree to letting Northern Ireland disaffiliate from the EEC!).
  • The ‘EEC’ has gone from 12 members in 1973 to 29 of which almost one half were under some dictatorship including Portugal, Spain and Greece which were under fascist dictatorship in 1972.
  • Living standards in both parts of Ireland have risen dramatically in the course of 4 decades and along with this access to education and life expectancy (only a minority completed secondary education in the Republic as recently as the late 1960s). Travel to the ‘continent’ (especially by airplane) was an exotic luxury for the better off in the 1960s.
  • The ‘common market’, as the EEC was sometimes called, has evolved from a free trade area to a much closer political, economic and monetary union.

The Europe Union has changed

The orientation of policy in the European Union has evolved with changing membership as well as a changing world landscape. Notions of ‘social Europe’ have taken a back seat in deference to making Europe and its public institutions lean, mean and fit for competition with that other giant, the United States of America.  The rationale for a strong economic and political compact to rally against communism to the East evaporated in 1990 although in a strange twist of history a new geo-political and trade related rationale for EU expansion towards the East has come back in recent times with the deterioration of relations between Russia and many countries to the West (at least up to very recently).

 The counter-reformation ushered in by Reagan and Thatcher in the 1980s left a profound mark on much of Europe – and especially Ireland.  A criticism levelled at political economy on the left in the 1970s was that it would ‘nationalise everything that moves’. The reverse holds now in practice. Governments of all hues and inclinations will ‘privitise everything that moves’ in the name of efficiency and consumer choice and if these arguments fail it is claimed that ‘Europe will insist on this anyway’.

The European Union is a different place to what it used to be. Ironically, many of the strongest supporters of the EU today in the Republic of Ireland belong to movements and parties that opposed the Republic of Ireland’s membership of the EEC in 1972. Similarly, many though not all, in the UK labour and trade union movement were in favour of ‘Brexit’ in 1975. History has turned the tables since then. Today, the case for Brexit is led by forces anxious to opt out of progressive European social norms such as they are and limited as they have become. Most Brexit advocates obsess about immigrants and the cost of free movement of labour and persons across internal boundaries of the EU. But, it is not possible to have it both ways. Freedom of movement of capital goes hand in hand with free movement of labour. The idea behind a common market and ultimately some form of united European settlement is that products, goods and services move freely and the necessary regulations and institutions reflect this. The dilemma faced by the UK Government is that any modifications or concessions it wins through negotiation prior to a referendum must be so minimal as not to unduly upset its EU partner governments and must be so maximal as to convince Eurosceptics on the right of the political spectrum to join the In-camp. It remains to be seen how this circle will be squared.

Underpinning free movement of goods and people, two powerful external and visible symbols of the EEC/EC/EU project have been:

  • The Schengen Agreement providing for free movement of persons across borders within the EU.
  • The common currency as a single medium, store and unit of account. (The head of the sovereign on one side of the coin united New Zealand, Canada and Ireland for many years.)

Both symbols have been seriously put to the test in 2015. And this testing will not abate in the years to come.

A mix of views within the UK

It should be noted that not all proponents of Brexit are on the right of the political spectrum. There is a small but consistent (at least in the UK) contingent of left Eurosceptics. Their views have gathered some momentum in the course of last year as events unfolded in Greece. A sense of ‘Lexit’ (a left support for UK exit) is conveyed in a short article last year by Owen Jones (‘The left must put Britain's EU withdrawal on the agenda’).  The Trade Union Congress and some key member unions are holding back on a decision concerning Brexit until workers’ rights concerns are evaluated in the light of on-going negotiations. However, any concessions won by the UK government in relation to workers’ rights is only likely to further strengthen trade union opposition to Brexit.

Membership of the European Union has undoubtedly raised productivity, investment, trade and living standards compared to some speculative counter-factual scenario. Empirical work by Campos and Coricelli (Some unpleasant Brexit econometrics) suggests that a combination and mutual interaction of favourable productivity, inward investment and financial flows help explain a lift-off in economic performance since the 1970s. Like making love, making trade has been good for Europe not just in terms of boosting economic conditions but avoiding wars and conflicts (the history of peace Europe since 1950s has been unprecedented since the antiquity). The work of Campos and Coricelli suggests that intra-industry as distinct from inter-industry trade benefitted greatly from membership of the EEC/EU with most of this attributable to technological innovation and competition.  By contrast, UK trade with the rest of the commonwealth had been traditionally driven by inter-industry factors based on specialisation and scale. The UK experience is particularly interesting because it has not shared in the single currency experiment. This may have been a crucial factor in explaining UK monetary management of the recovery from 2010 onwards. (Let’s say that the European Central Bank has been a slow learner.)

An open mind on the future

The case for Brexit as made by many in the UK is not edifying to those who wish to see a more cohesively social Europe with a proper balance of national and supra-national powers and responsibility. In the case of the Republic of Ireland it is undeniable that many progressive developments in the field of social policy are due in no small part to EU laws and directives (although the counter-factual is always difficult to assess). However, is there a case for Brexit in the UK that differs from the line taken by the main proponents? Economists and other analysts must approach these questions with an open mind and not allow given assumptions or shared collective thinking to disallow an open debate on these matters. Why has the EU project gone in such a racially different direction to what was on offer in the 1970s or 1980s?  Rather than a levelling up to shared standards on employment rights, corporate taxation, social entitlements and democratic accountability could the Union be at risk of levelling down to a base standard more akin to a North American social model? What has emerged is not a federal Europe or anything near it but a loose confederation of nation states intent on pursuing national capital (more than labour) interests in a world where geo-politics has shifted since the end of the cold war. Far from a single monetary and fiscal union we see a fixed-exchange rate regime for some members of the EU waiting to be buffeted by the next political or economic crisis. Instead of monetary, fiscal and political union we see an unbalanced Europe with some of the trappings of federalism but none of the substance in terms of full fiscal transfers, mutualisation of debt and free movement of capital. Once capital controls and deposit bail-in happened in Cyprus the precedent was set for another such event. Markets are not entirely stupid even if they are short memories and little or no long-term understanding.

Profound questions are raised that go beyond the immediate risks or opportunities posed by short-term politics. A worrying feature of many EU-related debates and national deliberative referenda whether on Brexit or fiscal rules or Treaty change is that the case for further integration, continuity or staying in is governed less by passion for a dream and more by fear of not going along with the ‘only realistic option on the table’. The European Union and its single currency might be saved for now by fear as was seen in Greece last year but is this a winning template in the longrun? Most people don’t like being bullied around even if they sense that this is the only option for now. Federalism and unitary political arrangements work when there is widespread popular buy-in and mutual economic interest tied to shared cultural belonging. The USA worked but the USSR did not. The British empire did not last but other empires developed based on global capital.

Northern Ireland is in a particularly vulnerable place

Northern Ireland stands in a particularly vulnerable place. Its fate is sealed by UK national politics and the outlook is decidedly austere for the immediate years ahead. A Brexit could hit Northern Ireland particularly hard given that it is the only part of the UK with a land frontier with the EU.  Moreover, a Brexit could reignite the Scottish question with renewed urgency and could precipitate a break-up of the United Kingdom further down the road. Where would that leave Northern Ireland economically and politically?

And the Republic of Ireland is highly vulnerable to Brexit

And what of the Republic of Ireland? Nobody is seriously suggesting and Irish exit from the EU or a renegotiation of the contract as it stands. However, were the UK to leave the EU following a referendum this would pose huge challenges to the economies of both Northern Ireland and the Republic.  Questions and major uncertainties are opened up. Would there be border controls again at Killeen and Beleek?  Would a European Health Insurance Card be recognised in a Belfast hospital by a visitor from Cork who has had an accident?  What of the 15% of total merchandise exports that are destined for the UK and come from the Republic? And what of the 30% of total merchandise imports to the Republic sourced from the UK (much of which is accounted for by gas and oil)?

Merchandise exports include the produce of agri-food and traditional industries with a preponderance of small firms employing a large number of workers.  A UK outside the EU might negotiate more favourable treatment of agricultural or food produce from other parts of the world to the detriment of Irish exporters. The hassle of converting currency is already familiar to cross-border visitors. Swings in the value of the Euro against sterling in the wake of a Brexit referendum (or before it) might not matter quite as much in Notthingham as in Newry as any trader in the latter will tell you in the course of the last 18 months. The Dublin-based Economic and Social Research Institute published, last November, Scoping the Possible Economic Implications of Brexit on Ireland’). Their focus was exclusively on the Republic of Ireland.  The Report provided a very bleak view of the economic fall-out for the Republic were Brexit to proceed. Some key findings indicate:

  • A likely significant reduction in bilateral trade flows between the Republic and the UK – ‘The impact could be 20 per cent or more’ with disproportionately large impacts on some sectors more than others (including, for example, UK trade intensive sectors such as agri-food & beverages as well as the larger multinational companies exporting chemical and pharma products).
  • Likely adverse impacts on Northern Ireland exporters are discussed (separately, official estimates put the total of exports from North to South at £3.5 billion or just over 10% of NI GDP).
  • A likely fall in foreign direct investment in the UK and a contraction in UK economic demand (especially in supply-linked chains from the Republic to the UK) would adversely impact on the Republic.
  • Interconnection of electricity between the Republic and the UK including Northern Ireland could be impacted according to the ESRI authors.  UK demand for renewable energy produced in the Republic might be less were it outside the EU given EU climate change targets.
  • Given the Republic’s reliance on gas and oil imports from the UK an unlikely but sudden disruption in supplies could leave it highly vulnerable.
  • Border controls, restrictions on migration and a review of residency rules are open issues post-Brexit with implications for an estimated 470,000 Republic of Ireland born residents in the UK (of which an estimated 40,000 are in Northern Ireland).  In the Republic of Ireland, there are an estimated 290,000 UK born residents (of whom about 60,000 are from Northern Ireland). 

The ESRI authors qualify their findings by pointing to the scoping nature of their study and the absence of in-depth sectoral analysis. They also point to the difference between various hypothetical post-Brexit scenarios involving membership of the European Economic Area (such as applies to Norway) and other possible models including bilateral agreements such as apply to Switzerland and Turkey. The report cites a number of international studies that project a fall in UK GDP per capita of between 0.5 and 3.0% by the year 2030.  A policy briefing produced by the Bertelsmann Stiftung in Germany last year indicates a possible disproportionately higher loss among UK trading partners for the Republic of Ireland of between 0.8 and 2.7% of GDP (Brexit-Potential Economic Consequences if the UK exits the UK).  Presumably, Northern Ireland would also stand to lose by up to 3% based on these projections and scenarios.  However, the ESRI authors suggest even higher possible losses still because additional channels not taken into account by IFO (including, for example, impacts on R&D and supply chains).

By way of analogy the question of Brexit is akin to a break up of a marriage after decades. Nobody – including close family members –  is going to be economically better off as a result certainly in the short-term and probably in the medium-term as well. Rather, they are very likely to be worse off. The risks of break up involve larger potential downsides compared to staying in and the prospects in the very long-term are impossible to predict.

Break up is likely to lower living standards in the short to medium-term compared to some ‘counter-factual’

On the very last point, it is useful to recall that partial political independence for the Irish Free State in 1922 probably – compared to some counter-factual home rule arrangement within the UK – involved lower living standards for at least some decades following independence. However, in the long-run the independence strategy seemed to work out well at least from a narrowly economic point of view. The growth from the 1960s onwards and the rise of the Celtic tiger in 1993-2007 testify to the benefits of a go-it-alone policy (albeit relying heavily in inward investment as well as integration into EU markets). Ultimately, what happens in the longrun is a result of luck, events beyond one’s control as well as policies within one’s control. And the outcome can be surprising. Nobody could have predicted Finland’s rise from rural impoverishment in the early 1990s to world leader in Nokia technology (before the latter lead collapsed). Nobody, in 1991, could have predicted the rise and decline of the Celtic tiger and the resurgence of a little Celtic Tiger (tíogairín) over the last year.  The outcomes of any social or political strategy are shaped partially by what sort of model of economy and society people are prepared to accept and work for.  Do we want an American model for Europe or something else and what is on offer?  While the question of Brexit may be decided on short-term considerations and anxieties the future of Europe (and not just those 29 countries that belong to the EU) will be decided by European citizens taking charge of their own collective destiny.

Ultimately, the ‘British’ question over the EU is linked to the ‘Irish’ question and the ‘European’ question – what sort of society and economy do we really want and are prepared to work for? Western Europe saw, from 1946 to 1973 30 years of extraordinary growth coupled with a strong social market economy in most places (but not in the case of the Republic of Ireland for some of that period). There followed a period of economic ‘liberalisation’ and dismantling of many aspects of the post-war social model. What will follow next? This is where the debate needs to go on these islands of the North Atlantic.

 

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