Allgemein, BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

An Accidental BREXIT – summary of presentation at Georgetown University

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations at the University of Wuppertal Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris; Research Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC.

Prof. Welfens has testified before the US Senate, the German Parliament, the European Parliament, the European Central Bank, the IMF, etc. Welfens is one of Europe’s leading economists

welfens@eiiw.uni-wuppertal.de , www.eiiw.eu                                file BREXITusUK2017

EIIW 2015 = 20 years of award-winning research

Welfens is the author of An Accidental Brexit, London: Palgrave, 2017 (German edition=26000 downloads in 10 months)

October 3, 2017, based upon a presentation at Georgetown University (September 12), with a PS on the Florence Speech of PM May (September 22) and the Norgrove-Johnson EU contribution controversy

BREXIT Analysis: Distorted Majority, Fake News about Immigration Burden, Dim Prospects for Global Britain Approach, Weakening Europe as Problem for the US

  • The result of the British EU referendum of June 23, 2016, was 51.9 % for BREXIT. The expected ‘fair’ result, however, would have been 52.1% for REMAIN – namely if the Cameron government’s information brochure (16 pages, sent to all households in England April 9-11) would have mentioned the key finding of the Treasury Study that BREXIT would mean a -10% real income effect in the long run: -6% from weaker EU single market access in the future and a -4% non-realized gain from the enhanced EU single market implementation that Mr. Cameron had obtained in negotiations with the EU. Using standard UK popularity functions, which show the link between output growth and government popularity, suggests that the inclusion of the income loss figure in the 16-page information brochure would have resulted in a clear REMAIN vote. This information blunder is very strange, and this all the more since the Cameron government had, in the run-up to the Scottish Independence referendum in 2014, clearly informed voters that every Scot would lose £1,400 Pounds in the case of independence – and all the benefits from British EU membership. The income loss of BREXIT according to the 2016 Treasury analysis amounted to £1,800 Pounds per capita, yet this info was suppressed in the information brochure.
  • There has been an intensive debate about EU immigration which Mr. Cameron portrayed as a major burden for the UK. However, the OECD has shown that immigration in the UK brings net benefits for the British budget. This has not prevented Mrs. May – she had been the Home Secretary (interior minister) in the Cameron governments for six years – from repeating the point about the massive long run immigration burden in the White Paper of 2017 which, however, also shows a graph according to which non-EU immigration had been the dominant phenomenon. The anti-immigration rhetoric of Cameron has mainly served to create a scapegoat for the massive cuts in government transfers to local communities after the Transatlantic Banking Crisis: – 3.5 percentage points of national income within five years which brought an under-provision of local public goods; and this problem was then blamed on EU immigrants.
  • The May government has announced a new Global Britain strategy according to which a series of new free trade agreements (FTA) will be concluded by the UK after BREXIT and this should raise output growth considerably. Such a strategy will not deliver on promise since the only free trade agreements with major trading partners to be concluded concern the US and Japan. An FTA with India will be difficult since the Indian government will want to negotiate about both trade and easier visa conditions for Indian workers – and immigration is not popular in the UK. An FTA with China is hardly conceivable since the US will oppose this for strategic reasons and since a broad FTA would bring a sharp contraction of UK industry. A Global Britain approach will be very difficult to implement if the Trump Administration continues undermining multilateralism, the World Trade Organization and the Bank for International Settlements et cetera.
  • The British EU referendum of 2016 was a disorderly – thus violating the principles of political rationality and fairness in a serious way. It is impossible to draw any valid conclusions from this distorted referendum as to what the British majority really wants in terms of EU membership. The promise of the Leave campaign that BREXIT would come at no cost or would even bring economic benefits is quite doubtful. The strong Pound depreciation – about 15% in the year since the referendum – drives up the inflation rate which has reached almost 3% in 2017 instead of the 1% or so anticipated in 2016. The Pound depreciation rate is also equivalent to a 15% loss of the British GDP share in world gross domestic product and hence the British leverage in international negotiations will reduce. The suggestions of the Leave group in the UK that the country could play a new leadership role in the Commonwealth is totally misleading: Dean Acheson already noted clear doubts about such an idea in his West Point speech in 1962.
  • Knowledge about the EU institutions in the UK was particularly weak. In a survey by the Bertelsmann Foundation, two simple questions about the EU were put to respondents in EU countries and could be answered correctly by 81% of the German respondents, 80% of the Italian respondents, 74% of the French respondents, 53% of the Polish respondents, but only 49% of British respondents; the UK joined the EU in 1973, Poland in 2004 – lack of adequate information policy by the EU in the United Kingdom thus was part of the problem surrounding EU membership.
  • The EU should adopt broad institutional reforms, including stricter admission criteria for Eurozone membership and a stricter implementation of national debt brakes; plus a higher EU budget – so far only 1% of gross domestic product. The latter is a key problem since the Forschungsgruppe Wahlen – an expert group on voting in Germany – has shown that voters at the national election easily understand what the key political topics and fields are, while at the European elections a majority indicates that they do not understand what key policy fields are relevant at the EU level; consequently, there is a tendency to vote rather strongly for radical parties as a means to express general dissatisfaction. Those radical parties have won the European elections in the UK and France in 2014 and the radical, right-wing start-up party AfD obtained 7% in Germany. These radical parties then reinvest the reputation and EU funds obtained in Brussels into national elections so that the EU becomes a source of political radicalization in Europe and creates a self-inflicted need for a strange grand coalition in the European Parliament until that day when an anti-EU majority will dominate. The EU should be reformed.
  • BREXIT also risks having a negative impact on the peace process in Northern Ireland and the Good Friday Agreement in particular – an agreement which was reached partly due to support from then President Bill Clinton.
  • With a weakening of Western Europe there will be problems for the West. In the future, the US will rely on Germany’s government as a voice in Brussels, at the same time a more Germany dominated EU will not find broad political support from EU27 partners. Both the US and the EU should consider options for better cooperation, particularly in a consistent policy for foreign direct investment in China where a more level playing field is needed. Germany and the EU27 without the UK and traditional US support for the EU integration look like a new problem version of the Home Alone movies.
  • The US banking deregulation under President Trump, combined with new UK deregulation after 2018 will create excessive deregulation in the whole of Europe and therefore risk of a Transatlantic Banking Crisis2.0. Joint EU28 regulation remains crucial.

PS: About true lies in the BREXIT campaign: On September 17, 2017, Sir David Norgrove, Chair of the UK Statistics Authority, wrote a letter to Foreign Secretary Boris Johnson, concerning the alleged £350 million in weekly EU contributions emphasized by the latter in an op-ed and in his pro-BREXIT campaign, stating “This confuses gross and net contributions…It is a clear misuse of official statistics”. Mr. Boris Johnson still is Foreign Minister in the May government.

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Allgemein, BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations at the University of Wuppertal Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris; Research Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations at the University of Wuppertal Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris; Research Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

Welfens has testified before the US Senate, the German Parliament, the European Parliament, the European Central Bank, the IMF, etc. Welfens is one of Europe’s leading economists and the author of An Accidental Brexit, London: Palgrave, September 2017

welfens@eiiw.uni-wuppertal.de , www.eiiw.eu

EIIW 2015 = 20 years of award-winning research

 

Serious BREXIT-related Problems for the UK: Mystery surrounds the Suppression of Treasury Report Findings in Government Brochure

 

August 21, 2017

The British EU referendum of June 2016 resulted in a 51.9 percent majority in favor of Leave and Mrs. May, as the successor of the political loser David Cameron, has argued not only that she wants to implement BREXIT but that she will make a success of it. As her government’s White Paper on BREXIT (February 2017) argues in the Chapter Controlling Immigration, the UK had faced a high burden from EU immigration for more than a decade – while the accompanying graph actually indicates that it was non-EU immigration which was the real problem, at least in the sense that it clearly exceeded that from EU countries. The conjecture that EU immigration is a burden is in itself incorrect, as the OECD has shown that immigrants stand for a net contribution to the British budget. Given the fact that EU immigrants have a labor market participation rate that is higher than that of non-EU immigrants, and also higher than the British average, it is absolutely clear that their net contribution to the government budget of the UK is positive. Why is the May government presenting such a contradictory message?

One can certainly understand some of the criticism of the EU emanating from the UK, but the referendum of 2016 is a serious political pitfall since Mr. Cameron warned in the context of the Scottish Referendum of 2014 that every Scot would lose £1,400 Pounds in the case of independence, while in his 16-page information brochure sent to all households prior to the EU referendum in 2016 the same Mr. Cameron did not mention a single word about the Treasury Report’s (published April 18, 2016) main finding that BREXIT would bring a loss of £1,800 Pounds per capita considering the medium scenario on future British access to the EU single market. Using standard UK popularity functions to simulate the result of a correct referendum campaign, in which the Cameron information brochure would have included the Treasury Report’s 10% income loss as an expected BREXIT effect, the result would actually have been 52% for Remain.

The UK’s National Audit Office has argued in a note of 2017 that the Treasury study was rather extreme in its BREXIT analysis; the Treasury Report had argued that there will be a 6% income loss from weaker EU single market access in the future and an additional 4% income loss stemming from the UK’s non-participation in the agreed EU single market deepening that the Cameron government’s negotiations with the European Commission had envisaged. One may, however, argue that the Treasury Study’s analysis is rather close to the real damage to be expected and that the negative economic fallout from the BREXIT could be even bigger than 10%. Incidentally, it is quite strange that the mailing of the 16-page government information brochure on the EU referendum took place in England April 11/12, 2016, while the Treasury Study was published a week later – all key findings of that Study were, however, already known in government circles in early April 2016.

The British Pound has experienced a 15% devaluation in the year since the EU referendum and this has three crucial implications: (1) there will be a rise of the inflation rate to about 3% in late 2017, much higher than was anticipated by observers in 2016. The rather weak British trade unions will hardly be able to obtain full compensation for this loss of purchasing power in the medium term, (2) the UK’s political leverage at the international negotiation table is weakened by roughly 15% since this is the loss of the British share in world gross domestic product (GDP) within a year, (3) the strong devaluation will bring about a rise of cumulated inward FDI which stood at 27% of the UK’s net capital stock in 2016, but which could increase to about 35% in the medium term. Considering the fact that profits in the UK are about one third of gross domestic product, the international dividends accruing to foreign investors in the UK will increase from 9% of GDP in 2016 to almost 12% in the medium term (the link between inward FDI, in the form of international mergers and acquisitions, and the real exchange rate has been explained in a clear way by FROOT/STEIN in the QJE, 1991). The implication from this is that the growth rate of the UK’s real gross national product (GNP) will be weaker than the already weakened growth rate of real gross domestic product. For welfare analysis it is indeed the growth rate of real GNP which matters and hence the order of magnitude of the Treasury Report study seems to be fairly adequate (although this point was not actually mentioned in the Report itself). Moreover, from a theoretical perspective, the UK’s moving out of the EU single market requires to consider both effects on trade, foreign direct investment and innovation dynamics – this approach has been emphasized by JUNGMITTAG/WELFENS (2016) in the context of a TTIP analysis for 20 EU countries (the revised version of the paper presented at the IMF can be downloaded from www.eiiw.eu).

On the question of EU membership, the British population may decide whatever way it considers as adequate, but the Cameron information blunder in the campaign of the UK referendum of 2016 has been quite decisive; not to mention that Mr. Cameron himself introduced a new young voter registration measure in 2015 that may have reduced the number of young voters – usually not with broad support for the Tories – by about 800,000 in the national election of 2015. These mostly pro-European young voters were then also missing a year later when Mr. Cameron called for a vote in favor of Remain. As regards the British EU referendum of 2016, one may call this a disorderly political event since it remains a mystery why Cameron’s information brochure was totally silent on the Treasury Study’s key findings. The British political system is in a state of crisis if it cannot organize an orderly referendum; one may argue that there is a broader crisis facing the Western system and the fact that Mrs. May has been seeking to forge a strong political alliance with the protectionist US under President Trump may be called a strange perspective for the basically pro-free trade UK government.

The May government’s announcement that the new “Global Britain” approach will generate more free trade for the UK in the context of a series of new free trade agreements after 2019 may be called illusory. Certainly, a free trade agreement with the US will be possible, but British exports to the US stand for just 2.5% of the UK’s gross domestic product, while British exports to the EU represents more than 12% of GDP. A free trade agreement with China is also illusory, the British manufacturing industry would dramatically shrink if such an agreement would be realized – on top of that, the US is unlikely to welcome such an agreement. A free trade agreement might be considered with India, but the Indian government will want to raise the issue of immigration and visas; with the May government arguing that no more than 100,000 immigrants can be accepted at all, the perspectives for a UK-India deal is also quite modest. Free trade agreements with New Zealand and Australia will be possible, but the quantitative benefits for the UK will be small. Also it is quite unclear how the UK could pursue a Global Britain approach easily in a period in which its key partner, the US, is aiming at weakening the leading international organizations, particularly the World Trade Organization and the Bank for International Settlements.

The Office for Budget Responsibility’s forecast for 2017-2019 – with a slight fall of output growth in 2017 followed by rising output growth in 2018/19 – is rather fanciful. The Eurozone’s GDP growth is likely to exceed that of the UK in 2017-2019. It is not really clear whether or not this will stimulate the BREXIT debate in the UK.

Whatever the results of the two envisaged EU-UK treaties, namely one on the UK’s exit from the EU and the other on the UK’s future access to the EU single market, the May government is not very likely to find a majority in the British Parliament in March 2019. This suggests that the UK could have a serious political crisis in the spring 2019, new national elections later in 2019 and possibly even a second referendum. If the UK government implements BREXIT, the question of a new Scottish independence referendum will re-emerge. If there would be BREXIT, there will be new conflicts between Northern Ireland and the Republic of Ireland in the context of a new border regime. In the end, the UK might want to adopt a written constitution with careful rules on national referendum procedures. At the same time, the EU would be wise if it were to adopt major reforms – possibly on the basis of a German-French initiative.

A constitutional debt brake in all EU countries, and for the EU/Eurozone itself, would be useful and Greece in particular should adopt particularly broad constitutional reforms. Less regulation on the one hand, but a bigger EU budget – with considerable expenditures on EU infrastructure and defense plus the first six month of unemployment insurance (except for youth unemployment, for which national governments with their national minimum wage policy bear strong responsibility) would be important points that would give the EU more political visibility and would allow the EU/Eurozone to implement its own fiscal policy as a counter-cyclical tool. The latter would be useful considering the IMF’s finding that a 1% GDP shock to the Eurozone and the US will reduce the consumption-GDP ratio in the Eurozone three times as much as in the United States. The former is necessary to bring about a higher intensity of political competition in the European elections and in Brussels, respectively, so that the efficiency of the political process in Brussels would increase. Moreover, the very small EU budget of 1% is part of the problem that voters cannot identify what the EU’s relevant policy areas really are – the German voting expert group Forschungsgruppe Wahlen has argued that due to a lack of a clear EU profile, many voters feel encouraged to experiment at European elections and to vote for rather radical parties. High expenditures at the supranational level should go along with reduced national government expenditures. In a reformed EU/Eurozone it would be possible in the end to reduce the income tax rate since efficiency gains in government expenditure programs (e.g. in defense procurement) at the supranational level can be expected from the reforms suggested.

The EU should clearly accelerate its digital single market program where decision-making so far takes much too long. The historical lead in mobile telephony of the EU over the US under the GSM standard has been lost and many policymakers do not understand that the share of real value-added in information & communication technology (ICT) relative to real GDP has now been increasing over more than three decades; the popular focus on the ratio of nominal ICT value-added to nominal GDP is totally misleading – and indeed it shows a peak for leading OECD countries, but as explained here this is totally irrelevant in economic terms: Given more than three decades of absolutely falling ICT price indices in leading OECD countries, only taking a look at the ratio of real ICT value-added to real GDP is an economically relevant perspective. The EU should also push much harder to get a broad free trade agreement with the whole of ASEAN, the current approach on agreements with individual countries is quite inadequate in the EU-ASEAN case which both have a single market. The political and economic transaction costs that the EU’s firms will be facing in the case of country-by-country approach are much higher than in an EU-ASEAN agreement. The EU should also put pressure on China so that EU firms face a level playing-field in terms of the foreign direct investment framework: EU firms often cannot have majority ownership in China, such barriers clearly should be removed if China wants to face a liberal regime for its foreign direct investment in the EU.

As regards financial market rules, the EU should put pressure on the UK to maintain a joint institutional framework and a common prudential supervision approach as there will be strong pressure in the UK – facing modest economic growth after 2016 – to again liberalize banking rules. Here, the UK would follow the US lead where the Trump Administration has already started to push for a new deregulation of US financial markets in 2017. If the EU would once again face joint deregulation pressure from the US and the UK – as in the years before the Transatlantic Banking Crisis of 2007-09 – the EU would most likely switch to a new excessive deregulation wave and then the next international banking crisis would come within a few years; and it could be much more dangerous and even more costly than the 2007-09 crisis.

BREXIT will weaken the UK, but also the EU which will lose about 1/5th of its economic weight. A 6 % UK output decline – due to BREXIT – implies a roughly 1% output decline in the EU27. The UK output growth could also be undermined by a wave of EU immigrants returning to continental Europe in case that the UK-EU negotiations on the exit conditions would not go well. It is fairly clear that with the UK leaving after 46 years of membership, the EU in 2019 will be taking a historical step away from EU integration for a century. The EU27 would face a shifting internal policy balance as some smaller EU countries that so far have enjoyed strategic cooperation with the UK – e.g. the case of the Netherlands eager to avoid being dominated by the German-French couple – will have to position themselves in a new way where more cooperation among smaller countries is one likely outcome of this process. The politico-economic power of Germany – mainly on economic grounds – and France (mainly for political and military reasons) will be reinforced after BREXIT. It is unclear whether or not a solution to the Eurozone problems can be found quickly, the critical case of Greece should not be repeated, but the Eurozone reforms adopted so far have not created an adequate institutional setup. Populism in Eastern Europe, and indeed parts of Western Europe, remains a major challenge in the EU. A weaker EU is certainly also undermining regional trade integration dynamics in ASEAN, Mercosur and other regional integration clubs, so that a loss of global political and economic stability could be a side-effect of BREXIT. From the perspective of China and Russia, BREXIT clearly means a weakening of the West, the UK and the EU27. At the bottom line, the disorderly referendum of 2016 in the UK raises serious questions about the ability of the British system to deliver high quality political services to British citizens. The cost of a half-baked referendum campaign and the BREXIT itself could easily exceed 10% of GDP in the long run (and the loss in terms of real GDNP will be even higher), the benefits from reduced EU contributions – or possibly zero contributions in the future – could be rather limited if one considers that 0.3% of British GDP, the current UK net contributions to the EU, capitalized at 3% interest rate is 10% of GDP. In the end, the growth rate of British per capita consumption will also be reduced considerably, not least since the growth rate of real gross national income will decline.

 

 

JUNGMITTAG, A.; WELFENS, P.J.J. (2016), Beyond EU-US Trade Dynamics: TTIP Effects Related to Foreign Direct Investment and Innovation, EIIW Discussion Paper No. 212 www.eiiw.eu.

 

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BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

May’s BREXIT Letter: Lacking in Legitimacy and Economic Reason

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

(www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

March 24, 2017

  • Prime Minister May’s Article 50 letter is lacking legitimacy
  • Cameron/May claims on the immigration burden were perfidious
  • Historical but flawed referendum can only lead to a political debacle in the UK

 

May’s BREXIT Letter: Lacking in Legitimacy and Economic Reason

On March 29, 2017, just a few days after the 60th anniversary of the signing of the Treaty of Rome, Prime Minister May will send the letter officially notifying Brussels of the UK’s intention to leave the EU. Theresa May has said she wants a hard BREXIT and that the majority which voted for Leave in the referendum on June 23rd, 2016, gives the process a high-level of legitimacy. The latter argument, however, is clearly questionable – in the 16-page information brochure, the Cameron government concealed the findings of a Treasury study which found that an exit from the EU would lead to a loss of real income of up to 10%. By applying well-known popularity functions for the UK, which show the relationship between income growth and government popularity, a standard information policy on the side of the Cameron government would have resulted in a 52.1% majority for Remain. From this perspective, the 23rd June referendum is flawed – particularly so, as prior to the Scottish Independence Referendum in 2014, the Cameron government informed voters that a vote for independence in the referendum would mean a loss in income of £1,400 per capita. Before the EU referendum, however, not a single word on the even higher threatened per capita income losses was included in the information brochure which was sent to households across the UK.

A referendum without an orderly information policy – especially with a result as close as 51.9% for BREXIT – has no legitimacy, nevertheless the May government has used the referendum as a starting point to energetically follow a policy of withdrawing from the EU, i.e. for the UK to leave the EU in 2019 after more than forty years. The economic situation for the UK in 2016/2017 is not particularly bad, as a strong devaluation of the Pound and a soaring stock market in the US, which also pushes the FTSE in London higher, is stabilizing Gross Domestic Product in the UK. However, with a raising of the inflation rate by 2 percent in 2017 – compared to 2016 – real income will fall, and in 2018/2019 British real income will grow at a slower pace than previously. The announcement by the May government that it would seek to achieve more growth from 2019 by concluding a number of free trade agreements, under the heading of ‘A Global Britain’, will not work (not least as the Trump administration is dismantling multilateralism and the WTO, respectively). Exports to the US, which represent about 2% of GDP, pale in comparison to British exports to the EU – which account for more than 12% of GDP – even in the event of a slight rise as a result of a US-UK mini-TTIP agreement. The United Kingdom will have to pay substantial exit costs of €40-50 billion, or about 2% of GDP, as the UK will have to foot the bill for the pensions of British EU officials and for EU projects which are ongoing and which will continue after 2019. One cannot assume that the UK will still be part of the EU in mid-2019 when elections to the European Parliament are due to take place.

Thus, the claim made by Chancellor of the Exchequer Hammond in presenting his March budget to the House of Commons, that he had £26 billion in reserve in order to finance an expansive fiscal policy without difficulty, is a misleading assertion. The model of the Office of Budget Responsibility (OBR), which Hammond used to support his figures, is neither a modern DSGE model, nor does it facilitate the modelling of the BREXIT-related problems facing the UK, in particular the significantly inhibited access to the EU single market after 2019. The rising growth between 2018 and 2021 as forecast by the OBR is extremely doubtful.

With the flawed referendum in June 2016, the UK is succumbing to a historical error and indirectly rejecting international cooperation in Europe – at the same time, damaging the very concept of integration in the world economy. BREXIT also indirectly destabilizes other regional integration clubs, such as Mercosur in Latin America and ASEAN, which since 2016 has established a single market modelled on the EU.

The claim by Prime Ministers Cameron and May – including in the British government’s White Book on exiting the EU in 2017 – that the UK was overburdened by EU immigrants is an absurd assertion: In Chart 5.1 of the British government’s White Paper, it is shown that for over a decade it was not EU immigration which dominated net migration dynamics, but rather immigration from non-EU countries. Furthermore, the OECD has shown that the EU immigrants have a positive net effect on the UK’s state coffers, meaning that EU immigrants contribute to financing infrastructure and investment in education and schools for British citizens. Here, the British and European public are being treated like fools – this is far removed from the words of Sir Francis Bacon, one of the founders of the British tradition of rationality in the Middle Ages, who argued that political and scientific claims must be supported by some kind of statistical evidence in order to be taken seriously. Of course, the EU also needs urgent reforms in order to cope with the challenges of the 21st century. However, the UK should move away from dishonest and insincere politics, or face its own disintegration – at least in terms of a pro-European Scotland and the rest of the Kingdom, not to mention the fate which could await the Conservative Party.

 

Forthcoming: Paul Welfens, An Accidental Brexit, London: Palgrave Macmillan, book presentations in London, Washington DC and Brusssels

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Allgemein, BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

Inauguration of Trump; The rhetoric of President Trump represents a break with 70 years of US policy and will cost the US international support; Trump stands against science, knowledge and a multilateral world order

Prof. Dr. Paul JJ Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Non-resident Senior Research Fellow at AICGS/Johns Hopkins University; IZA Research Fellow, Bonn. Alfred Grosser Professorship 2007/08, Sciences Po
(www.eiiw.eu)welfens@eiiw.uni-wuppertal.de
2015 = 20 Years of EIIW/prize-winning analysis, worldwide networks, advanced knowledge for decision-makers and policy actors

 

Inauguration of Trump; The rhetoric of President Trump represents a break with 70 years of US policy and will cost the US international support; Trump stands against science, knowledge and a multilateral world order

 

 

(file TrumpInauguration)

 

 

Wuppertal, January 20, 2017

 

Trump Policies Expected to Contradict 70 Years of American Principles & Rationale

 

Donald Trump is new US President and countries across the globe need to come to terms with a fundamental change in US policy – in terms of both content and style. According to Trump’s announcements, his Administration will pursue an extremely contradictory economic policy with regard to domestic fiscal policies, which considering that capacities are already stretched will soon result in rising inflation. Together with the appreciation of the US Dollar due to speculative capital inflows, there will be a decline in net exports in the medium term, which will overshadow perspectives for growth. It is very unlikely that Trump will realize a 3.5% growth rate without high inflation. The signaled foreign trade policy raises deflationary pressures outside of the US, since as a large economy, import protectionism on the part of the US accounts for excess supply in many other regions and countries of the world, respectively. China’s growth will also be dampened, which will decrease Chinese demand for foreign exchange reserves – to the disadvantage of the US. China’s central bank may soon also reduce interest rates, which will only increase the appreciation of the Dollar. In the US, this appreciation may, however, act as a constraint on inflation and could lead to the central bank adopting a more conservative position.

Trump’s xenophobic and misogynistic rhetoric couples with his own polarizing style represent a negative signal for the West, his anti-scientific comments – for example in the context of climate change – go against more than 100 years of US policy tradition of production cooperation and links between top universities, government and other authorities. Trump’s position against US foreign direct investment (FDI) outflows is economically contradictory, as US firms generate higher returns through investments abroad than investments within the US, which for many years has benefitted the intrinsic value of firms and insurance policies – such as life insurance – and, in doing so, helped to establish America as a global power. Higher incomes through US direct investment in the destination country raises the import demand of that country, which also benefits the US and many US-partner in the form of higher exports. The US has been a pioneer in terms of investing FDI abroad since about 1880, and the country’s role as a global leader would be unthinkable without the international activities of US multinationals.

Trump-Economics is, to a large extent, voodoo economics and finds little to no support amongst leading economists – with the exception of Arthur Laffer. Initially, one can expect two turbulent years in terms of US politics, the mid-term elections, i.e. the next US parliamentary elections which take place two years from now, could lead to the Republican Party losing its majority and, in turn, the downfall of President Trump; however, it cannot be rule out that Trump will indeed serve out his full four-year term. The longer he stays in office, the greater the rise of populist politicians in EU and other countries.

Trump, the political late-comer, who garnered attention during the presidential campaign for various violations, will from January 20 be faced with new rules and regulations which now apply to him in his first public office. As with the previous presidents, Trump will take the oath of office on the US Constitution by swearing to abide by and defend it. In the medium term, this is likely to serious cause some problems for Trump when one considers his lack of political experience and his spontaneous and unpredictable nature. That the policy stance of the Trump Administration will deviate much from the large body of tweets Trump himself sent announcing the main points of is program during the presidential campaign is unlikely; the power of office of president in the US is too high and the US as not seen many cases of officials willing to leave office, at least due to a difference of political opinion with the president of the day. The Trump Administration is thus likely to follow the lead of President Trump in the coming years. Trump is certain to try and seek out new allies, with the United Kingdom one of the few countries which will be by his side; the UK does not have many other options in the West, after splitting with the other 27 EU member states. The economic adventure of BREXIT, which the May government – which also employs xenophobic rhetoric, building upon Cameron’s perfidious misleading rhetoric in relation to immigration – wishes to enforce, will not result in a global leadership role for the UK (a possibility which could celebrated in London as some form of resurgence of the Commonwealth). In this regard, Dean Acheson, then a retired former US Secretary of State, in a 1962 speech at the US Military Academy at West Point, said the following: “Great Britain has lost an empire and has not yet found a role. The attempt to play a separate power role apart from Europe, a role based on a “special relationship” with the US and on being the head of a “commonwealth” which has no political structure, unity, or strength – this role is about played out.”

 

Trump’s exit from office will need to be left up to the US political system. However, what is threatening to the EU, and indeed Europe as a whole, is the combination of political irrationality in London and Washington DC. In the UK, a referendum on a withdrawal from the EU which lacked in legitimacy has served as the foundation for BREXIT, which – if actually carried out – could lead to a disintegration of the UK itself, should Scotland decide to leave that union, and damage the whole of Europe economically. The 16-page official information brochure for the referendum, commissioned by the Cameron government and which was sent to all households in the UK, made no reference to a study by Her Majesty’s Treasury (the UK finance ministry) which found that the long-term effect of BREXIT would be a 10% loss in income. Prior to the Scottish independence referendum in 2014, however, Cameron’s government provided households with the information that Scottish independence threatened to lead to a loss in per capita income for Scots of £1,400 GBP. Before the BREXIT vote, on the other hand, Cameron apparently did not see the threatened income loss of £4,000 GBP per capita worthy of mentioning – that failure amounts to either political fraud or incredible stupidity – both scenarios reprehensible. On the basis of popularity functions for the UK, it can be calculated that a correct information policy by Cameron would have resulted in a Remain, i.e. pro-EU, majority of 52%. Thus it can be argued that the referendum is lacking in real legitimacy and the glib remark by Prime Minster May that “BREXIT means BREXIT” could yet lead to a ‘may-day, may-day’ call on behalf of the British government.

 

It is shocking that almost nothing in terms of defending the benefits of the EU occurred to any EU politician, or indeed leading national politician from the EU27 countries, and that no sensible, vigorous reforms were discussed – even the case of a 52% in favor of the UK remaining in the EU could hardly have been seen as an overwhelming vote of confidence in EU integration. Here are just some of the advantages of the EU:

  • Raising incomes in the EU customs union – which are also realized thanks to the supranational external trade policy of the European Commission (and common institutions are part of the common institutional capital of the EU)
  • Market liberalization and the related impulses for innovation, for example in the fixed-line telephony market and the electricity market
  • Competition policy which benefits consumers through controls on mergers and a partially good framework for regulation policies
  • State aid supervision, which prevents unnecessary subsidization from being carried out by government at the expense of taxpayers
  • The cross-border networking of people via town-twinning programs, which are culturally and socially enriching for those involved
  • Higher growth dynamics through the EU single market, including freedom of movement

 

US President Trump is a vocal proponent of BREXIT and thus an opponent of the EU; the first US president to adopt a position of not supporting European integration since the Second World War. If the Trump Administration should weaken NATO new instability in Europe and worldwide is likely; a strong NATO can generate stability for everybody and reduce the burden of defense expenditures in all NATO member countries. Lack of multilateral policy orientation seems to be a new problem of the incoming Trump Administration. – this is undermining the role of smaller countries and might encourage regional integration approaches.

 

The EU27 will, in the medium term, increasingly turn away from the US and China will certainly see an increased preparedness on the side of the EU to engage in cooperation in many fields. The claim by Prime Minister May in her BREXIT speech, that the UK is overburdened by immigration from other EU countries, and the emphasis that the country needs full control of migration, is odd considering that prior to the referendum EU immigration did not account for a population growth of more than 0.2%: According to the OECD, EU immigrants had a higher employment rate than native British on average and that EU immigration actually represents a net fiscal benefit to the British state.

The wage reductions due to immigration, also claimed by May in her BREXIT speech on 17 January 2017, can, according to a Bank of England study from 2015, only really be determined amongst unskilled workers in the services sector. That the UK should divorce itself from the single market and the customs union after 45 years of membership, and in doing so incur a 10% loss in income in the long term, is politically absurd and irrational. The May government can, however, hope for some help from the US in the form of a mini-TTIP, a UK-US bilateral transatlantic trade and investment partnership – here, Germany and France blundered in 2016, as they could not finalize a possible agreement on TTIP, an EU-US transatlantic free trade agreement, due to ideological delusions in sections of their respective national governments. Instead, in Germany in particular, elements from the Green political scene and some other groups torpedoed TTIP in an odd way: First and foremost, Thilo Bode, head of NGO foodwatch, with his anti-TTIP book “Die Freihandelslüge” (The Free Trade Lie), which is overwhelmingly comprised of economic nonsense and seems to be written without the required specialist knowledge in crucial aspects.

 

Trump has already declared that he will not ratify the Trans-Pacific Partnership Agreement. Trump only wants to conclude bilateral free trade agreements – expecting to achieve good deals for the US. That is a rejection of US policy since 1944 in terms of multilateralism in the context of international organizations and cooperation amongst Western, and indeed many other, countries. The motto of the World Trade Organization is “To make the weak strong and the strong civilized”; with his philosophy of protectionism and the recurrent stressing of ‘America First’, billionaire Trump infringes upon the ideas of enlightenment and humanity that gave rise to this guiding principle and which served to make the leading role of the US at all acceptable to dozens of countries in the first place. European countries and indeed Asian countries will not follow an egotistical American president in terms of policies which undermine the spirit of the World Trade Organization going forward. Trump’s idea to steer American trade using purely bilateral trade deals – and to agree free trade deals only with countries with a high per capita income – contradicts seven decades of successful multilateral US policies.

 

The EU countries should, as a reaction to the egocentric and selfish Trump policies, come together even more and move towards a new integration debate. The UK should get the chance for a second referendum on EU membership in 2018 and the EU-institutions should also be vigorously reformed. Partial debt relief for Greece, linked to reasonable constitutional reforms in the country, is both necessary and sensible. The Venice Commission, a body of independent experts – including excellent legal experts – under the auspices of the Council of Europe, could offer good advice for Greece here. The US would do well to reconsider its electoral laws. That Hillary Clinton is the second victor of the popular vote in the last 20 years not to become President of the US – following Al Gore against George W. Bush – seems bizarre. Perhaps the US should consider a constitutional amendment to change the antiquated and democratically questionable role of the Electoral College in the presidential elections. With BREXIT and Trump, the role of the West and the Western influenced world economic order in under threat. This should be resisted: With rational arguments and sound analyses. It is unfortunate that in 2017 a land as big as the US should inaugurate a president hostile to EU integration, which would weaken the concepts of integration which offer hopes of peace and economic progress, both regionally and indeed globally. That cannot be in the long-term interests of the US. That the British government should, at the same time, become entangled in its own large and odd contradictions, reflects an historical descent of the West and of the two aforementioned countries in particular. Now, it greatly depends on political astuteness in continental Europe, whether or not the West can be stabilized – and on whether in Europe a naïve populism can be rejected and a new voice for reason and sanity in the West can emerge.

Prof. Dr. Paul J.J. Welfens is 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. He is also Chairman of the Research Institute of the bdvb. Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC and IZA Research Fellow, Bonn.

Paul J.J. Welfens  Brexit aus Versehen Europäische Union zwischen Desintegration und neuer EU, 2017, 401 p. Hardcover € 19,99 (D) |ISBN 978-3-658-15874-3   Also available as an eBook (€ 14,99)

Contact Christina Wiens | Secretariat | Tel 0202 439-1371 | wiens@eiiw.uni-wuppertal.de

English Version of the book is An Accidental Brexit, forthcoming

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BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

May’s BREXIT Speech Is Contradictory and Signals New International Problems

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; chair for Macroeconomics; president of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris, Research Fellow, IZA, Bonn; Director of the Research Institute of bdvb, Düsseldorf, Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

 

+49 202 439-1371               welfens@eiiw.uni-wuppertal.de; www.eiiw.eu;

 

 

January 17, 2017

 

May’s BREXIT Speech Is Contradictory and Signals New International Problems

 

(BrexitUKtrump2017welfensENG)

Dean Acheson, former US Foreign Secretary of State in a famous speech in West Point, 1962

„Great Britain has lost an empire and has not yet found a role. The attempt to play a separate power role apart from Europe, a role based on a „special relationship“ with the US and on being the head of a „commonwealth“ which has no political structure, unity, or strength – this role is about played out.“

 

 

During the first weeks of 2017 the BREXIT path of the UK was still rather unclear. However, the speech of the Prime Minister has highlighted some critical points: Theresa May’s speech of January 17 2017 has emphasized the following British government intentions, plans and preparations:

1) Firstly, for the UK to leave the EU single market – this means potentially giving up free trade, free capital flows and the free migration of workers (obviously free capital flows should be maintained, but the point was not mentioned in the speech). Secondly, for the UK to achieve strict immigration control and, finally, for the UK to be free of interference from the European Court of Justice. The Prime Minister has argued that immigration has depressed wages in the UK. While the issue of free capital flows was not explicitly mentioned as a policy challenge in the speech of Mrs. May, the other economic freedoms of the EU single market came into focus, namely free migration and free trade.

2) To make the UK a center of global free trade. To this end, the British government has already started negotiations with Australia, New Zealand and India; the UK would like to welcome (skilled) workers from all over the world, but would like to have control over immigration dynamics.

3) To remain strongly linked with the EU27 via trade relations.

Point 1) is echoing the anti-immigration rhetoric of Mrs. May’s predecessor, namely that the UK is facing an excessive immigration pressure/burden from EU partner countries. Looking at the facts and figures, this conjecture is very unconvincing as OECD studies have shown that the UK has actually benefitted from EU immigration. It is possible that short-term immigration puts downward pressure on the UK wages of unskilled workers, but the medium and long-term effect is rather different unless there would be rising unemployment – and this was not observed in the UK in 2004-2016, if one ignores the clearly negative impulses from the Transatlantic Banking Crisis. Over time, immigrants from Eastern European countries will learn and improve their English language skills and this will facilitate many immigrants in improving skills through learning-by-doing and training and thus to find a job as a skilled worker in the long run. Thus GDP will be raised and this will, in turn, also generate labor demand so that the wages of unskilled workers should also increase (the potential decline of unskilled workers’ wages in the context of biased technological change is a separate issue).

 

As regards point 2), the UK could unilaterally reduce import tariffs, although existing EU import tariffs are already rather low except in the field of agriculture. If the UK has already started free trade negotiations with other countries, then this would be in breach of EU membership rules since only the European Commission is allowed to negotiate a free trade agreement (FTA) on behalf of all EU member countries. Except for Australia and New Zealand, as well as the US, there are no bright prospects for free trade arrangements and the economic effects will be rather modest except for a transatlantic US-UK FTA. A free trade treaty with India will be rather complex and the Indian government is certain to bring up the question of visa regulation and better Indian access to British labor markets; this, however, is certainly not something the government in London could accept since substituting Indian workers for EU workers is a move which will hardly will be welcomed by the population in the UK.

 

3) The prospects for maintaining strong trade links with the EU27 are not clear. The EU27 countries will certainly want to impose import tariffs in many sectors except for those sectors in which a sectoral FTA is agreed upon – Mrs. May has suggested that an FTA for the automotive sector should be considered. Since the EU will impose import tariffs on British exports and the UK will impose import tariffs on EU27 countries’ exports, there will be a loss of economic specialization in EU27+UK which amounts to increases of price levels both in the UK and in the EU27 and thus there will be real income losses. One may emphasize, that a 6% output reduction in the UK will bring about an output loss of about 1% in the EU27. Such a decline of real income in Ireland and on the EU continent amounts to further negative British output and real income effects, respectively.

 

The speech of Mrs. May has made clear that there will be a hard BREXIT and this message will bring about further depreciation of the British Pound which, in turn, will translate in 2017/2018 into rising inflation rates. As the price level in the UK will rise unexpectedly, real wage rates shall fall and hence – in a kind of a quasi-Phillips-curve effect – the firms’ demand for labor will rise transitorily so that the unemployment rate in 2017 could fall. However, once inflation expectations have adjusted, wage inflation will increase and the unemployment rate will start to increase again.

 

As Mrs. May has emphasized in her speech, the US has already given a signal to the UK that a free trade agreement could be agreed upon rather quickly. This suggests that the UK will try to reinforce economic and political relations with the US which, under a Trump Administration, will adopt a rather protectionist policy stance. This in turn will make it difficult for the UK to pursue much of a global free trade strategy unless it is unilateral. The latter, however, is impossible since the UK would face enormous problems if it would liberalize unilaterally imports from China for example – the UK steel industry, as well as other sectors, would face enormous problems in the rather short term.

 

While one may argue that Mrs. May’s speech is contradictory and rather unrealistic, one may also emphasize that she has backing from Labour Party leader Jeremy Corbyn in the field of anti-immigration policy: Mr. Corbyn has explained in a speech of his own that he favors managed immigration and that he also favors future government intervention in support of ailing British industries. So far, EU membership has made national government subsidization of ailing industries a difficult prospect since the European Commission’s subsidization control puts strict limits on subsidization within the EU single market. This control has, so far, been to the advantage of taxpayers, structural change and growth; if the UK’s economic policy would be to subsidize ailing industries in the future, then there is considerable likelihood that EU27 countries’ governments will also will introduce subsidies in the respective sectors, so that a subsidization race in Europe could become more likely and this will be at the cost of the taxpayer in both the UK and in EU27 countries. As regards downward wage pressure from immigrants this is only a modestly significant problem for unskilled workers (see Bank of England Staff Working Paper No. 574) and UK government support for immigrant entrepreneurship plus a special EU fund to encourage such activities could help to make immigration a general win-win situation; to effectively say no to immigration from EU countries – unless high skilled workers are coming – is very strange for a leading OECD country. Mrs. May’s emphasis on more justice in society can be understood to mean only the British society but the UK is part of a European society; and for a Prime Minister who wants her country to be a globally open economy a purely inward-looking view is inadequate.

 

If the May government seeks further cooperation with the Trump Administration in the US in the future, this will result in a political couple with internal contradictions: Mr. Trump apparently wants to have FTAs only with high income countries and only on a bilateral basis, while the UK is in favor of global free trade. This also raises questions about the role of the World Trade Organization in the future: Membership in the WTO and WTO rules will be of paramount importance for the UK in the future, a strategy of protectionism and bilateralism is only attractive for big countries such as the US or China. All other countries in the world – with the possible exceptions of Japan and India – require a general rule-based free trade system as enshrined in the WTO. It was Adam Smith, whose book An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, the year of US independence, emphasized the benefits of free trade for all countries. It is clear from modern trade theory that through protectionism big countries can obtain national welfare gains through reduced world market prices and hence lower import prices. However, for the world economy, a nationalistic economic policy strategy undertaken by the US (or China) will not be acceptable in the long run. The very large majority of countries has an interest in institutionalized free trade, based on international organizations and the rule of law.

 

The May government, with its hard BREXIT strategy, is about to contribute to new international conflicts in Europe – here between the UK and the EU27 – and it is fairly clear that Putin’s Russia is carefully observing the disintegration and demise of the West. President Putin might remain calm in the Ukraine for two years or so (until after the mid-term elections in the US), but later he might consider the new western setting with BREXIT and a US Trump Administration to be the ideal moment for tightening the Russian grip on the Eastern Ukraine and also in the Balkans. Bulgaria, for example, is a country that could be rather easily destabilized by Russia and thus the EU27 might lose not only Western countries joining the UK in a potential new EFTA+ project but it could also face a partial reversal of EU enlargement in the east.

 

Mr. Trump’s emphasis on EU countries spending at least 2% of GDP on defense will put

some fiscal burden on Spain, Italy and Germany, which would each have to increase their respective military expenditure-GDP ratio by about 0.8 percentage points to come close to reaching the 2% threshold. For Italy and Spain, this could help to raise output growth slightly but this would also bring an increase of the deficit-GDP ratio. Italy, which had lost its AAA status with all major rating agencies by January 16, 2017 (DBRS then downgraded Italy to B), could face serious problems from an interplay of BREXIT, the Italian banking crisis – involving two big banks – and higher interest rates plus political instability. This, in turn, could bring new issues of instability in the Eurozone. As Mr. Trump expressed in an interview with a German newspaper (BILD) and the Times in January, he does not care about EU integration and potential nationalistic policies in Europe. With the EU facing BREXIT and Mr. Trump’s policy stance, there is considerable risk of EU disintegration unless the EU27 leaders and the European Parliament adopt a rigorous strategy of reforms for the EU. Such reforms should strongly consider the usefulness of EU integration in the context of a digital single market, more free trade treaties with countries in Asia (for example, not just Singapore in ASEAN but the whole group of ten countries from that group) and also the nucleus of a joint unemployment insurance system – e.g., supranational coverage of benefits for the first six months of unemployment while making an exception for youth unemployment; as regards the latter, it is national policy rules and national minimum wage legislation which are relevant above all for youth unemployment and therefore it would not be wise that the supranational policy layer in Brussels assumes any responsibility here.

 

The UK-EU negotiations will last about two years, by late 2018 all major elements for an agreement – for political divorce – must be ready since the EU will hold European Parliament elections in spring 2019. It is inconceivable that the UK should be on a clear BREXIT course while still being expected to hold elections for UK MEPs. It remains to be seen how BREXIT dynamics will unfold. BREXIT will certainly distract much political attention in Brussels and in the other capitals of the EU. This in turn implies a non-optimal national policy in many EU countries and this is part of the politico-economic price faced by EU countries in the context of BREXIT.

 

While the UK will want to postpone part of the divorce settlement for later – i.e. after 2019 –, the EU27 will have an interest in resolving all of the main problems rather quickly. One key challenge for EU firms is that certain very sophisticated banking services can currently be obtained in London but not in EU banking centers. This means that the EU27 faces some dependency on the UK in terms of financial market services; the best way to deal with this rather unexpected problem is that EU countries – some or all of them – would negotiate a special project for supporting high-tech financial technology in the Eurozone and the EU27, respectively. Funding for such a financial innovation project should come from national policymakers; Germany, with its considerable budget surplus, could easily make a major contribution to such a project in which partner countries, such as France, the Netherlands, Luxembourg, Belgium and Italy, also have a strong interest. Whether or not the planned merger between the Frankfurt Stock Exchange and the London Stock Exchange will be approved by the relevant political institutions remains to be seen.

 

Other integration clubs in the world economy – e.g. ASEAN and Mercosur (not to mention NAFTA, which is already half-buried by Mr. Trump’s political rhetoric) – are carefully watching the EU disintegration dynamics. The worse BREXIT challenges are handled by the EU, the weaker the EU27’s international influence in the future will be.

 

 

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Allgemein, BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

BREXIT Does Not Mean Brexit: Simulation Result for Orderly British Referendum Is 52.1 Percent Pro EU

 

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

(www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

+49 202 4391371

 

 

 

November 27, 2016

British Referendum with Information Desaster: No Legitimate Basis for BREXIT see the book

 

Paul JJ Welfens, BREXIT AUS VERSEHEN November 2016, Heidelberg: Springer, 400 pages, ISBN 978-3-658-15874-3 (English version forthcoming in spring 2017):

title for the English edition is

 

Paul Welfens

 

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 Economics, JOHANNES KEPLER UNIVERSITY LINZ

 

 

Read key arguments for an Exit from BREXIT in the Journal International Economics and Economic Policy, October 2016

 

http://link.springer.com/article/10.1007/s10368-016-0361-3

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Allgemein, BREXIT, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy, US

British Referendum with Information Desaster: No Legitimate Basis for BREXIT

 

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)

(www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

+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

 

Paul Welfens

 

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

Standard