Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research (and previous/current research will colleagues at Hertford College/Oxford University; University of Birmingham; University College London)
+49 202 4391371
October 4, 2016
Paul JJ Welfens, BREXIT AUS VERSEHEN November 2016, Heidelberg nad Wiesbaden: Springer, 400 pages, ISBN 978-3-658-15874-3 (English version forthcoming in spring 2017): title for the English edition is
AN ACCIDENTAL BREXIT
UK Government Policy Pitfalls and New EU & Global Economic Perspectives
(shortened version of the edition of the German book)
British Referendum with Information Desaster: No Legitimate Basis for BREXIT
The BREXIT referendum of June 23, 2016, represents a rather surprising decision by the UK electorate and it is a historical result with implications for the UK, Europe and the world economy. It can be shown that a major information blunder by the Cameron government forms part of the explanation of the referendum result: The 16 page info brochure that government sent out to households did not contain a single key finding of the Treasury study on the economic effects of EU membership on the UK and the cost of BREXIT, respectively. While prior to the Scottish referendum of 2014 the Cameron government conveyed key economic insights to households (devolution would mean a loss of 1400 pounds per capita in Scotland), before the BREXIT vote the government did not give the Treasury’s finding that a 10% output loss was to be expected as a long run BREXIT effect – had households obtained this information, the referendum would have been 52% in favor of Remain. Thus there is a new, very convincing argument for a second referendum. Also, US perspectives are emphasized.
At the Conservative Party Convention, held in Birmingham at the beginning of October 2016, Prime Minister Theresa May has argued that her government wants to start EU-UK negotiations no later than March 2017 (so as to complete the largely unexpected BREXIT process by early 2019). As Mrs. May said “Even now, some politicians – democratically-elected politicians – say that the referendum isn’t valid, that we need to have a second vote…others say they don’t like the result, and they’ll challenge any attempt to leave the European Union through the courts…But come on. The referendum result was clear. It was legitimate. It was the biggest vote for change this country has ever known. Brexit means Brexit – and we’re going to make a success of it…We will invoke Article 50 no later than the end of March next year”. It can be shown, however, that the referendum lacks both legitimacy and clarity: That the result was not clear at all. It was not the biggest vote for change in the UK but an accidental BREXIT vote whereby the responsibility for the chaotic situation surrounding information and communication in the UK in the weeks before the referendum lies completely with the Cameron government. That Mrs. May says her government will seek an agreement with the EU on access to the single market, while not accepting verdicts of the European Court of Justice, not only undermines the role of international law but is also a signal that a hard BREXIT could be on the agenda and the worst case scenarios of the British Treasury study on the cost of BREXIT, respectively (published April 18th 2016), could indeed become relevant for the UK. For EU27 countries, and the US, the lack of political professionalism visible in early 2016 under the Cameron government was a strange phenomenon and the Western world would be seriously discredited should the new May government follow a similar contradictory course of great announcements combined with a lack of realism and sense of responsibility.
The first informal EU summit after the BREXIT referendum took place in Bratislava on September 16, 2016, shortly after the G20 meeting in Hangzhou where the UK faced pressure from several countries that it should remain a reliable international partner. The British referendum result of June 23 was quite surprising, but there is an explanation for this as is shown in a new book (Paul Welfens, BREXIT aus Versehen, published November 2016, Heidelberg: Springer) by Professor Welfens who is the president of the European Institute for International Economic Relations and a leading European economist. On the 26th June, 2016, 34 million Britons voted in a non-binding referendum with 51.9% casting their ballot in favour of the UK, which had joined in 1973, leaving the EU. The referendum led to the fall of Cameron’s cabinet, while his long-serving Home Secretary Theresa May will now, as his successor, lead the UK out of the EU. The referendum, however, suffered from a serious drawback, Prime Minister Cameron had not managed to include extremely important information on the economic effects of a BREXIT, from a study by the Treasury published on 18th April, 2016, in the 16-page info booklet which was sent out to all households: between 11th and 13th April to all households in England, and during the week from 8th May to all households in Scotland, Wales and Northern Ireland. The 6.2% reduction in income as a long-term consequence of BREXIT, which Chancellor of the Exchequer George Osborne stressed in the press release on the 18th April, remained a fact hidden from the vast majority of households. If one takes into consideration the usual links between income trends and voting results in opinion polls/national elections and assumes a similar influencing factor in the case of a referendum, the BREXIT referendum would actually have resulted in a victory for the Remain camp had this information been more widely known.
The Cameron government allowed the overwhelming majority of voters to cast their vote under a veil of ignorance regarding the economic consequences of a UK exit from the EU; a phenomenon which is historically unique. On the other hand, the Cameron government proved itself capable, when the situation of the referendum on Scottish independence arose in 2014, i.e. the preservation of the United Kingdom, of supplying all Scottish households with the relevant economic information, by providing two economically convincing info brochures to all households in Scotland, which contained meaningful insights on the expected consequences of a vote for Scottish independence according to experts, in a timely manner. Against this background, the 2016 referendum therefore appears as damaging to democratic quality standards and thus unfair to British voters and EU partner countries alike.
However Britons would like to vote in a referendum – and however they want to decide – one must expect that a referendum, here announced by Cameron as early as 2013, in an OECD country would fulfill the minimum standards regarding information. In the UK in 2016 that was clearly not the case and from that perspective one cannot say with certainty how the UK’s referendum would have turned out in the event of a normal situation vis-à-vis information. Should the government of Theresa May want to refuse a second – but well prepared from an information point of view – referendum, then it could be said that the government has no interest in getting an unbiased and well-informed decision from the population; and futhermore, after almost 45 years of UK membership, intends to implement a separation from 27 partner countries on the basis of the inadequate and uncertain first referendum. From a political and integration perspective, that is not a rational process, particularly given the knowledge of British voters, with just 49% answering questions on EU Institutions in a Bertelsmann survey correctly. With that result, the UK voters were 4% behind their counterparts in Poland, a country which joined the EU 31 years after the UK. The results for Germany, Italy and France were 81%, 80% and 74%, respectively. The second most asked question on Google in the UK on the day after the BREXIT referendum was: What is the EU?
According to the analysis of FREY/SCHNEIDER (1978) in the Economic Journal, the unemployment rate, the rate of inflation and the growth rate of disposable incomes, in particular, influence the government-related popularity lead margin (i.e. the popularity of government versus the popularity of the opposition). If one takes as an example the analysis of FREY/SCHNEIDER (1978) for Great Britain’s national elections and the popularity of government according to opinion polls, then according to this classic study: A 1% increase in the growth of real disposable incomes leads to an improvement of government’s relative popularity lead by 0.8%. Thus one could, in the hypothetical scenario that the findings of the Treasury’s EU study, according to which BREXIT means a 6% loss in real income, were included in information sent to all households, reinterpret the results of the referendum thusly: The actual result on referendum day was 51.9%:48.1%, meaning a difference of 3.8% at the expense of the government position. Had the electorate understood that BREXIT threatens to bring with it a loss of real income of 6% (or more), the pro-EU referendum result would have been higher by a factor of 1.048 (0.8% x 6): the vote for Remain would have been 50.4%. The pro-BREXIT camp would, in the event of an adequate information policy on the part of government, have received 49.6%. Moreover, the UK cannot, in the event of BREXIT, realize the income gains as a result of EU membership which the Treasury expects as a result of a deepening of the EU single market: Remaining in the EU would have brought a 4% growth in income. Considering additionally that BREXIT brings a rise of the income tax rate of 3 percentage points (the study says 4%-10%) the necessary correction factor would be 1.0824 and the vote for Remain would have been 52.1%
One should take these illustrative figures with a grain of salt as more recent econometric approaches show somewhat different elasticities and since a confidence band could be indicated. However, the key point here is, of course, that no referendum on the question of whether or not to remain in the EU can be considered as a serious democratic exercise if government has not conveyed the key results from an economic analysis of EU membership and hence on the consequences of BREXIT to all households. A western government that publishes 201 pages of Treasury analysis on the economic consequences of BREXIT and puts not one figure from this analysis in 16 pages of referendum info sent to households and voters, respectively, is acting totally irresponsibly; and certainly not in line with decent information standards of Western democracies for a referendum.
Prime Minister Cameron would still be in office, there would have been no depreciation of the Pound, and no BREXIT. More recent approaches applying a refined methodology will bring modified results for the elasticity of government popularity with respect to GDP growth changes and the case of a referendum might show elasticities in the popularity/voting function that are slightly different from the classical FREY/SCHNEIDER paper. However, the reality of the first half of 2016 clearly indicates an information blunder in the British government.
There is no doubt that a sound information policy both should and could have been implemented for the referendum (in any event, a narrow pro-EU victory would certainly have resulted in a discussion over the required EU reforms). The determination that a professional information policy was required also applies in the hypothetical case that, taking the EU referendum into consideration, a lower elasticity existed between the influence of the economic growth and government popularity as was found in the classic study by FREY/SCHNEIDER which related to national elections in the UK.
The central point here is simply that the non-communication of crucial, and of general interest, economic findings influenced the result of the referendum, to the benefit of the campaign for a British EU exit and the disadvantage of EU membership, considerably. There was no sound reason to withhold the major findings of the tax-payer financed Treasury study from the electorate – apart from an act of sabotage by BREXIT supporters within the British government. The study also contains further important findings – for example that considerably higher taxes – or a reduction in public services – would be required in the case of BREXIT. Tax increases have a corresponding reducing influence on the, according to FREY/SCHNEIDER, important variable for popularity and election results – the growth of disposable real income (income after tax and including transfers). Thus there are some very good arguments which imply formulating the following hypothesis: If a sound government policy on information with respect to the Cameron government’s own expected economic effects of a BREXIT had been implemented, then the actual result of the referendum would have been circa 52%:48% for the UK to remain a member of the European Union. Why, therefore, the result of the extremely biased and distorted June 23rd referendum must be taken as the foundation of policy in the UK, the EU, the G20, et cetera, is completely unclear.
The economic influencing factor of the government study referred to above would have been of considerable importance for the result of the referendum on June 23rd, if it had been made known to the households (for example, if it had been included in the 16-page government information booklet); even if the elasticity of disposable income was smaller than in FREI/SCHNEIDER. The British government will definitely have to explain the aforementioned issues – a lack of coordination, a visible indifference to an extremely poor information policy and the unprecedented information breakdown by the government itself – to Parliament and the British and European public in general. Certainly, one would have also had, in the event of a narrow margin of victory for the Remain side, reason to carefully consider an EU reform agenda. However, the many conclusions on the referendum result to date, which have not taken the massive information blunder of government into account, need to be qualified. What is more, it is surprising how little the EU, and the national governments in Berlin, Paris and other countries, carried out critical monitoring, i.e. engaged in a supervision process, in the run up to and indeed during the referendum. The huge information deficiencies and procedural irregularities stressed here would have been apparent to any critical monitor prior to the referendum. As astounding level of flippancy with regard to government work in EU member countries is apparent, which can only be a cause of concern for citizens. Here, too, can one reasonably expect and indeed demand more professionalism in the work of government. Going forward, political responsibility is an absolute must – and the in part superficiality of the internet needs to be opposed where necessary.
Moreover, the flawed, negligent information policy of the Cameron government can be a ground for the EU27 to offer the UK, in regard to conditions for future access to the single market, a diplomatic minimal solution which is not much better than the WTO conditions. As an EU member, the UK has rights and responsibilities in the community, with a political duty to appropriately inform its own citizens; in the second national EU-referendum, the Cameron government, due to organizational failures of the government itself, did not fulfil this duty. Professor Welfens therefore comes to the following conclusion: There is every indication of the need for a critical British and European debate on the information failure of Cameron’s government in relation to the BREXIT referendum 2016, and every responsible and rational politician must now reassess the need for a second referendum on the question of EU membership in light of the arguments and facts which are now known. A second referendum and a wider debate on referenda in the EU are called for.
Furthermore, the Cameron government, through massive cuts in financial transfers from central government to local authorities, has created the underprovision of public services locally and huge deficits in the National Health Service, a situation which many voters falsely ascribed to a convenient scapegoat – immigrants: Cameron’s cuts took an enormous 3.5% of Gross Domestic Product away from local government in just five years, while Cameron and May – as a minister in his cabinet – repeatedly complained about levels of migration from other EU countries being too high. At its height, this source of immigration amounted to 0.2% of the population and, according to the IMF, the United Kingdom was not even amongst the top five destination countries for migrants from Eastern Europe. That Cameron made calls for the fourth pillar of the EU single market to be abolished, i.e. to end the free movement of labour, was both strange and unfair: Not once did Cameron take the trouble of presenting an objective description of the facts relating to immigration.
In the August 6th, 2016, edition of The Economist it was shown that there is a positive correlation between a country’s UK export share (i.e. the ratio of exports to the UK relative to total exports) and the percentage of people indicating in a MORI-IPSOS survey, carried out in 15 countries, that they find BREXIT to be a bad development. Belgium, Sweden, Germany and Spain each have a fairly high share of people – between 40 and 55percent – who hat find BREXIT a bad idea. Outside the EU, in Japan and Canada more than 25 percent view BREXIT negatively, while the percentage in India and the US is below five percent. The G20 meeting in Hangzhou has shown that BREXIT is also is considered by most G20 countries to be a rather doubtful political project.
With the statement of the constitutional committee of the House of Lords of September 13th arguing that to invoke Article 50 of the EU, and thus declare that the UK wants to leave the European Union, government needs a positive vote from Parliament, new questions have been raised as to whether or not BREXIT will become reality. The UK is facing new political infighting resulting from a deeply flawed referendum that is undermining political stability in the whole of Europe – not least since right-wing populist parties on the European Continent feel encouraged by the BREXIT vote. At the bottom line, inconsistent British politics and policy is undermining the stability of the Western world.
The foreseeable strategy of the May ministry, to achieve a new impulse for growth via numerous new free trade agreements, may, on closer inspection of the partner countries being mentioned, bring less than one might expect – as the analysis of one ex-employee of the Bank of England and other considerations show. While the exit-minister David Davis explained in spring 2016 (in a speech at the Institute of Chartered Engineers in London) that he would suggest free trade agreements with China, the US, Canada and Hong Kong in the first instance and in a second stage with Australia, Brazil, India and South Korea, one may argue that China will be a difficult negotiation partner and embracing broadly free trade with China would immediately condemn certain sectors, including the steel industry. Canada and Australia are rather small countries and thus cannot deliver major impulses for more growth in the UK. A free trade agreement with India, in turn, is difficult since India’s government will certainly require visa liberalization which is not exactly what the UK will want if one considers the strong anti-immigration sentiment of many voters in early 2016.
Nevertheless, the BREXIT decision represents a call on the EU to vigorously undertake new institutional reforms – i.e. steps towards a better functioning Neo-EU. Less regulation, more transparency and a better implementation of democratic principles are pressing matters to be addressed in the medium term, in the longer term a political union in the Eurozone, which would represent 5-6% of GDP in terms of expenditure for Brussels; through the transfer of above all infrastructure projects and spending, defence expenditure and the introduction of an EU unemployment insurance for the first six months; plus interest expenditure on Eurobonds, where member countries of the EU and Eurozone, respectively, can only raise credit for infrastructure expenditure and would also be subject to a constitutionally-guaranteed debt brake. National borrowing should, via constitutional debt brakes, be restricted to about half the Brussels structural net borrowing: 0.25% of GDP, which with 0.5% of GDP as an upper-limit on the cyclically neutral deficit ratio on the supranational level results in a long-term debt ratio in the Eurozone of 50% (assuming that the trend rate of economic growth amounts to 1.5%). The political competition in the elections to the European Parliament in such a new EU would intensify and the voting shares of small, radical parties would decrease significantly, Europe would be more stable. Germany and France, in particular, are encouraged to undertake national reforms and EU initiatives.
From the back cover text of the new book Welfens, Paul, An Accidental BREXIT
UK Government Policy Pitfalls and New EU & Global Economic Perspectives (Spring 2017)
Paul Welfens has written a highly perceptive study of the origins – and the implications – of what must be Britain’s worst deliberate economic policy mistake since the Great Depression.
Prof. Dr. Harold James, Department of History, Princeton University
This book by Paul J.J. Welfens dealing with the result of the Brexit referendum presents a harsh, rational and critical analysis of how the result came to pass. Welfens covers the crucial and fundamental points and surprising facts: This book is highly recommended reading for anyone looking for a frank and candid approach to the subject matter.
Prof.Dr.Dr.h.c.mult. Friedrich Schneider
Department of Econom