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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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

Standard
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

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

BREXIT: European Instability, a New Beginning Required for the European Union

 

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 EIIW/prize-winning analyses, worldwide network

file  BREXITwelfensENGWashington2016

July 2, 2016, Brexit Referendum – UK goes, without reform and fresh ideas the EU is not fit for purpose going forward

 

 

40 years after the first Yes in a British EU-referendum – which took place in 1975 and resulted in a clear 2/3rds majority for membership – the Brexit-Referendum of June 23rd has concluded with a slight majority in favor of leaving the EU. Above all, older British voters opposed EU-integration, showing an inclination towards neo-nationalism which will now increase in other EU countries. Cameron’s resignation in the wake of the result is the logical conclusion, but it will be followed by massive devaluation of Sterling, inflation and recession in the United Kingdom and, within the next circa two years and following negotiations, the UK exiting the EU. As the EU will lose 13% of its population, 12% of exports and 18% of its Gross Domestic Product, the Eurozone must also count on a depreciation of the Euro – apart from against the Pound – and possibly also with a recession. Disintegration of the EU is now a fact, and if other countries should follow, its very existence is in danger. Political instability and a loss in growth are already foreseeable.

Furthermore, right-wing populism in many EU countries – and in the US – will continue to grow, with the BREXIT result, one can see the enormous frustration on the side of voters being aimed at the political elites: If the Britons had voted on doing away with zebra crossings – and Cameron had campaigned for keeping them – then it is likely an angry majority of voters would vote for their abolition; not the smart decisions, even a dangerous one, but emotionally the right one and the electorate are emotionally-driven actors.

The European Commission is also a big loser of this outcome, above all the silent Commission President Juncker, who during the run up to this historic moment did not have the courage to hold a pro-EU speech in London. That kind of weak political leadership in Brussels will be voted out sooner or later: A Commission boss who cannot engage in the debate with a speech in support of Remain such as that of Obama is not credible nor effective and certainly not a leadership figure. Juncker will go down in history as the Commission President who presided over the UK’s exit. That Juncker did not make a state visit to the US during his first year in office has also been noticed in circles beyond the White House. That is a policy-failure on the side of the EU.

The primary institutions of the EU are the European Commission, the European Parliament and the European Council – the coming together of heads of state and government in Brussels but also in power domestically in the member states. Political leadership in many EU countries is by and large incapable of self-criticism; this also applies in the case of Germany. That is not a solid basis for rational and prudent EU reforms which could, and indeed must, help to stabilize the EU and Eurozone, respectively. The terrible impression created by the Eurozone and indeed the crisis management of the EU during the Greek- and Euro-crises have seriously damaged the reputation of, and respect for, the European Union in the United Kingdom. From that perspective, BREXIT is the result of inadequate and unsatisfactory policies in the Eurozone: evidenced by years of weak regulatory enforcement and bad crisis management. However, nobody in the EU is willing to accept the responsibility for these shortcomings. The EU urgently requires reforms and a solution to the Greek crisis – including a pragmatically conditional debt-relief or haircut for Greece, which will help the country towards growth. The German position, which refuses to endorse an economically and legally (according to information from leading jurists from respected universities) sound and reasonable relief of debt, is completely irresponsible, not to mention a political mistake. If a new institutional solution, better than the current arrangement, cannot be achieved, then the EU will collapse in the face of new conflicts regarding the Euro which are constantly threatening. That the new President of the Commission wants to portray his constant bending of the rules regarding the deficit ratio as being politically intelligent is regrettable and also not very convincing. With BREXIT, the interest rate differentials within the Eurozone will become larger – there will be higher rates for Spain, Portugal, Italy and Greece – as all future crises will take place in the economic area of the EU27 which has been reduced and weakened by 18% economically. The flight of investors to high quality bonds in the wake of BREXIT will benefit Germany even more; while the UK could, for a time, appear to be doing well – until a new referendum on Scottish independence takes place.

The Eurozone will only be capable of functioning when the majority of Eurozone countries, including all the large countries, are obligated, under their national constitutions, to observe a sound debt-brake. Should a small number of small member states should refuse to implement such a rule, they would, in the event of a future crisis, naturally be candidates for insolvency and bankruptcy and if could foresee that at very most only a handful of small member states could present a problem, then the Eurozone as a whole would remain credible and a model of success in the slipstream of a sound monetary policy from the European Central Bank. Here, a speedy normalization of monetary policy is important, without reforms in the Eurozone or EU, respectively, these reforms will not be implemented.

BREXIT can cause problems for the EU in any number of ways: If the United Kingdom, as the second largest net contributor, should leave, then net recipients will worry about their precarious position – that will lead to political tension and conflict, above all in Eastern Europe. Thus, the United Kingdom has caused problems for the EU in two ways: A number of years ago the British government was responsible for forcing a reduction in the EU budget from 1.2% of EU GDP down to just 1%. That was completely inappropriate, as the EU, representing only 1/9th of the public consumption at a federal level in Washington DC, is inadequately equipped. The UK leaving the EU makes these budgetary problems even worse. The EU has, in the absence of smart principles, for years been pushed into undesirable fiscal and political developments by London – and then the UK leaves the Union.

That is an absurd situation and this foolish self-denial of the European Union cannot continue. To ignore the logic behind fiscal federalism is an economic mistake and always will be. At least one can hope that the European finance center will stay in the Eurozone; London, as a financial center, will lose above all US investors. Frankfurt and Paris have the chance to profit from this development; but naturally only if the Eurozone remains stable: With the current institutional framework, that stability cannot be guaranteed.

Moreover, there will no merger of the stock exchanges in London and Frankfurt: This will not happen due to the depreciation of the Pound, and will definitely not happen due to BREXIT. A London-Frankfurt joint exchange as the primary actor in the Eurozone, but subject to regulation under British policy would be nonsensical. Without further developments this fusion is not desirable in any event. The single capital market within the EU is in danger, as are, naturally, the liberal foundation of the Union’s economic policies and as a result its prosperity and stability. With the stepping down of Lord Hill, EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union, in the direct aftermath of the BREXIT referendum, the UK has lost some of its power in Brussels. The claim of Leave campaigners, that the UK would have more influence without EU membership is wishful thinking to the greatest possible extent. With the UK withdrawing thousands of staff upon exiting the EU, in for example 2018, the Commission will also lose competence.

From the point of view of democracy, it is indeed problematic that the EU has a European Commission which not only takes on the role of a supranational government (executive organ) but also that of the legislator (legislative organ) – with some supplementary powers vested in the European Parliament. In this regard, the pro-BREXIT EU-critics have a point, that in the EU laws are made from the top down, passed down from the Commission to be applied in all EU member states with little legitimacy. This would change with an EU political union, then there would be an EU Parliament, an EU government, EU tax and also EU sovereign bonds; if this could be combined with a sound reform package, then the entire tax burden of national and supranational (Brussels) taxes would be less than before, due to the added efficiencies as a result of smarter vertical distribution of tasks and public expenditure.

From a German point of view, a heavyweight political partner will be lost when London leaves the EU – furthermore, that the Chancellor involved herself little in the BREXIT issue over the last year or so, will be seen as a political failure in Berlin. The United Kingdom, Germany, the Netherlands and Denmark, as the four traditionally liberal countries soon will no longer constitute a single bloc – and at least 35% of the population – to stand against economic dirigisme in the EU. Denmark could indeed follow the UK as the next country to exit the EU. If the number of countries seeking the exit should increase, the EU would rapidly collapse. It is now all the more important, that the EU itself undertakes a rigorous testing of its functions. As the pro-BREXIT campaigner, and Secretary of State for Justice, Michael Gove has said, there are far too man nonsensical and petty EU regulations. The EU should in future not occupy itself with many minor issues, and instead lay the large cornerstones of major policies – also by means of a much larger EU budget than before, whereby the national public expenditure will rise. The EU accession of Turkey is also now off the table, as the fear that ruling politicians have of populists will not shape the coming years of negotiations by national governments, in Germany the threat of AfD expansion threatens ruling parties.

In addition, the vote represents a level of revenge for the weak image with the EU portrayed during the Euro and Refugee Crises – for that, Chancellor Merkel must should some of the blame for British, and indeed worldwide, perception that the EU is an integration club without a sustainable order and carefully considered crisis management. The United Kingdom itself could disintegrate: The next independence referendum in Scotland is fast approaching and could this time get a majority in favor, the pro-EU referendum results in Scotland could indicate the future accession to the EU of almost 5 million Scots. The European Union is destabilized politically, which costs growth and brings with it higher interest rates. The topic of financial safe-havens is once again on the agenda, Switzerland will shows a very high appreciation of its currency and the price of gold will climb. The potential victims of BREXIT include the TTIP project, the planned transatlantic free-trade agreement between the EU and US, as one could expect that without British support in the European Union, the weak pro-TTIP campaign Germany would not get majority support. France represents a huge source of danger, the election of the leader of the Front National, Marine Le Pen, would sound the death knell for the EU.

Europe is threatened by a return to the 19th century. Should the EU collapse, Germany would be left with good institutions but rudderless – and facing the pressure of AfD populism. As from an economic point of view, large EU countries would be instable in the event of EU disintegration, the stability of Europe could be weakened, economically, politically and militarily. The leading powers in Europe at the end of the 19th century spent 4% of GDP on defense, a situation large European countries could return to. With BREXIT the EU is weakened, and with it NATO too – and a large silent winner on the margin of this debate is Russia’s Putin. All of the above is not in the interests of the people in the EU, nevertheless the UK has taken this historic step, which can be regarded as a major error; the ability to reach rational decisions appears, in the context of BREXIT, appears to be greatly reduced in the United Kingdom. One could also argue that an emotional “plus”, from the point of view of the feeling of neo-nationalism supported by the Leave camp, has overtaken the clearly recognizable economic “minus” as a result of BREXIT:

What developments can one expect going forward, what will happen in the UK, what reforms does the EU require? It is questionable what a BREXIT majority will bring forth: Is the €80 net per capita contribution to the EU too large, and under 150,000 immigrants per year from EU member states for a country of 65 million inhabitants too many? Hardly. It is obvious that certain EU regulations are annoying for the economy and that the EU did not present itself in the best light during the Euro Crisis; not to mention the Refugee Crisis. However, in truth the BREXIT referendum was only partly about EU-related issues. Above all, the population wanted to show the political establishment in London a red card and thereby to make a huge smoldering trust conflict, apparent since the Banking Crisis, clear to the ruling political circles. The citizens hardly want to accept the advice of the government in the United Kingdom at face value. The disenchantment and disillusionment brought about by the Banking Crisis between 2007 and 2009, with its huge losses in terms of jobs and wealth, the following massive increase in the state’s deficit and a raising of the national debt by 30% and the doubling of University fees to increase income in the state coffers. At the same time, the public were becoming aware of the massive incomes of the, often incompetent, managers of some large banks; a top banker even dodged the fares of his commute to work by rail for years. The reputation of the British political elites, who created the false framework for the finance markets and banks, respectively, has been massively impaired.

That Prime Minister Cameron promised that he would limit immigration to 100,000 was the biggest erroneous claim by the head of government in London, as the foundations of the EU’s internal single market make clear that free movement of persons cannot be restricted. Why Cameron promised things, which he could not deliver based on the institutional makeup of the EU, is incomprehensible and illustrative of a lack of political professionalism. The British government wanted the freedoms of the Single Market for many years and in 1985 also signed the Single European Act (the single market started at the beginning of 1993).

A broad feeling of being disenfranchised and undesirable developments combined to create the perfect storm, for which a majority of UK voters held the British government responsible. That also applies to the growth in income of the Top 1% of earners in the UK, which between 1990 and 2010 was circa 8%, almost as large as the increase in America where the Top 1% now account for a further 10% of income. The real incomes of the average earners – marking the point on the trend line between the top half of earners and the poorer bottom 50% – have reduced in the USA between 1999 and 2012, in parts of Great Britain too. The EU Commission faces the challenge of tabling a reform package; to set the stage for a move towards political union. Less bureaucracy, but more cooperation with a larger EU budget: For infrastructure, defense and promoting innovation. With the UK now no longer being a brake on progress, the first steps towards a political union are conceivable.

An EU which would seek to simply carry on just as before as a smaller community would disintegrate piece by piece. A large European debate on the future of the EU is required; if that does not happen or if such a debate would not being convincing results on integration then the EU will, within decades, become ever small and ever more instable through other member states leaving – lacking leadership and hampered by conflict, the EU would, by 2025, become insignificant on the world stage. If the EU disintegrates, that would be a disaster for Europe; other integration projects around the world could also descend into conflict – threatening more military conflicts and lower economic growth. Following a collapse of the EU, member states would be increasingly dependent on the United States, China and also on Russia, the 21st century would be an era shaped by non-European powers. Disintegration phases – whether one considers the Hapsburg Monarchy following the First World War or indeed BREXIT – are always periods of slower growth and high trade protectionism, the latter having a causal relationship to the former. BREXIT weakens the UK and the EU for about a decade, also in terms of growth. The largest EU member countries had promised at the G20 summit in Brisbane in 2014, to realize an additional 2% in growth in real income between 2014 and 2018. In making this commitment Prime Minister Cameron obviously did not think that he was a shrewd national politician who was also not particularly sound.

The British process to exit the EU should, from an EU point of view, be organized quickly, however, nobody is likely to believe that such a weak Commission will perform particularly well against a professional British diplomatic corps. The disintegration process, which currently threatens, has foreseeable risky regions: Parts of Eastern Europe, which could fall again under Russian influence, Germany could seek to create its own sphere of influence – a new Central Europe; and would that not be a return to the 19th century. There is also the insights of the Forschungsgruppe-Wahlen-Analyse to be considered, namely that the current EU, with its 1% mini-budget, is not noticeable for the voters; this is opposed to the situation regarding the relevant themes for elections to the Bundestag (German federal parliament) or to the regional governments – and therefore in European elections voters in Germany tend to vote impulsively for small, radical parties. The same applies to British voters. One need only consider: According to CNN, the day after the BREXIT referendum, the second most common BREXIT-related Google search in the UK was “What is the European Union?”. Former German Chancellor Schröder once said: In European elections a governing party cannot win votes using European issues; meaning that even when one has good policies, because of the confusion surrounding EU political issues, in the voting booth decision-making via EU ballot papers boils down to the voter extracting some delight in ‘punishing’ national politicians – and that is absurd. Only in a political union with more EU power would there be increased political competition in Brussels, which would only benefit the efficiency of the hereto often weak EU policies.

The level of anger of many voters feel towards the political establishment is extremely high, as can be seen from the BREXIT vote, during which dozens of economists and over 1,000 business leaders and managers from large firms in contributions and advertisements in the Times clearly warned of the negative economic consequences of BREXIT. If the contra-BREXIT comments were coming from bankers, most readers, already annoyed at bankers over the Banking Crisis, did not take them seriously. Nevertheless, half of the Conservative Party and the majority of the Labour MPs in the United Kingdom were against BREXIT. Despite that, the majority of voters decided otherwise; and that is illustrative not only of displeasure with the political establishment but also of a criticism of globalization, which the politicians did not take seriously enough. More globalization works only with sensible accompanying measures and with a sound individualized better innovation and economic policy: at a regional, national and supranational level.

The rationality of political decisions in western countries and in particular in the EU has, as the BREXIT case shows, weakened. The simple solution would be to quickly create a visible EU political union by means of the infrastructure and defense expenditures transferred to Brussels, as well as a certain amount of income redistribution directly to relatively poorer households. Some liberals shout down such ideas with cries about the principle of subsidiarity, despite the fact that the principle is being misinterpreted in this instance. In the US the federal level in Washington DC stands for 9% of public expenditure and a further 11% in social expenditures. If the EU would first achieve spending of 4-5%, that would be a sensible and in keeping with the economic theory of fiscal federalism, which seeks to explain at which political level various categories of expenditure should be based. A lack of political innovation and the stubborn cultivation of mental blocks in Berlin are no less to blame for the bad situation at the EU than the subtle excuses on the part of France and Span, which is why they have not been able to reduce the deficits more over the years; not to mention the political sacred cow in Greece – an allergy to privatization. If the shock of BREXIT does not make the EU countries of continental Europe regroup, reconsider and quick to undertake large reforms, the European Union will fail.

The threat of populism is still reasonably small on the continent, if it should grow then the EU could disintegrate into a number of half-autocratic systems and a group of democracies. The laziness of democratic national political parties not to found real EU-wide organized parties, is also a part of the problems of the EU/Eurozone problems. In the US, a deficit fraud such as occurred in Greece in 2009 could not happen, because 49 of the 50 US states have a ban on structural deficits in their respective state constitutions; and should a US governor ever have the crazy idea to buy an election victory with a 15% budget deficit, s/he would not be stopped by the voters but simply following a telephone call from the chair of their respective party – Democrat or Republican – sent to the political wilderness. These institutional details and the historical experience, that the federal government, in the event of a debt crises in seven states, did not provide the help requested, is the basis for the relatively stable US structure. The EU member states (or at least a large majority of the Eurozone countries) must now gradually consider if they cannot within the next decade, by 2026, 250 years after the independence of the US, have achieved reaching even half the political structures of the US.

In international power games, the winners are US, Russia – thanks to a weakened NATO and smaller EU – and China, which from a weakened EU will achieve benefits in terms of easier concessions in many policy fields than would have been possible from the EU28. That these points were thoughtlessly and carelessly overlooked in the BREXIT debate will surely give many voters pause for thought one day. Within the EU, the leading countries are damaged, including Poland, the EU could experience problems with financing, transfers and funding cuts in the future and the pressure from Russia will be increased. BREXIT is the largest self-inflicted damage in the West since 1945. Only with the passage of time will the true impact of the decision be recognizable.

That David Cameron will go down in the history books as one of Europe’s a not very clever leaders is already almost guaranteed. It remains to be seen if the United Kingdom can, from 2018, follow a Norway-EU model or Swiss-EU model, under which the UK would have access to the single market; but at the price of quasi-normal contribution payments. That will have to be dealt with by a new Prime Minister from autumn 2016. The UK, with almost 50% of their exports going to EU partner countries, urgently needs that access. Boris Johnson, the former mayor of London, who got involved in the campaign against Cameron, i.e. for a BREXIT, will not become the new leader of the Conservative Party (and Prime Minister). As a man he is full of contradictions, the grandfather of Boris Johnson, who spoke repeatedly about immigration during the BREXIT campaign, was himself part of the history of immigration to the UK having fled Turkey for London.

With the UK, the EU should strive for a reasonable separation and a sound new relationship, however no softly-softly approach or conditions should be applied. The UK will, after this politically extraordinary development, surely expect little concessions and goodwill from the side of the EU; the most important would be quasi-integration with younger generations – students, young researchers and scientists, could, on the basis of the well-known breakdown of BREXIT voting patterns represent a good bridge between London and the continent. From that starting point, there may one day be the possibility of re-integration or reunification in Europe. Furthermore, it is crucial that no new conflict, i.e. a reigniting of the previous conflict, emerges in Ireland. This is now a threat after BREXIT, if the border between Northern Ireland and the Republic of Ireland can no longer be crossed with ease. A new EU-integration initiative would be important not just for Europe but for many similar integration projects around the globe who might now appear insecure. That a majority in the Great British nation, in a democratic referendum, reached such a decision on BREXIT, which will seriously damage themselves and many others, needs to be considered carefully; in the end it shows that the price of the banking crisis and the forerunning inadequate banking regulation will be enormous. In the USA, a Trump victory in the presidential election or even a strong result for Trump threatens to also replace rational policymaking with neo-nationalism.

A strange element of the British government’s anti-BREXIT campaign is the incomplete information about the EU single market. In a short film on the website www.EUgovernment.gov.uk it is indicated that the single market brings only duty free access to the EU partner countries’ markets; there is not a single word on the fact that the single market also means free labor mobility. Never in (political) life can one win a great cause without telling the truth and those who conceal important elements of the truth will get in trouble sooner or later.

The economic cost of BREXIT will be rather large: A fall of UK output of 5-6% in the long run and a short run recession (in 2017) and an additional long run fall of output of EU countries by about 1% from BREXIT plus the non-realization of TTIP – the envisaged EU-US free trade and investment liberalization treaty has become quite unlikely since without the UK there is no longer a strong supporting group of EU countries in favor of TTIP. The French Prime Minister Valls has indicated only a few days after the referendum that France no longer considers TTIP to be an adequate project, the German government – which, in trade issues, has been a traditional partner of Denmark, the Netherlands and the UK – is quite hesitant in the field of TTIP. Since TTIP could bring about a rise of the real gross domestic product of about 2 percent in the EU (see the analysis by Jungmittag/Welfens – http://www.eiiw.eu/fileadmin/eiiw/Daten/Publikationen/Gelbe_Reihe/disbei212.pdf) and also of about 2 percent in the USA, non-TTIP is equivalent to a loss of output of about 1% for the world economy. Rarely in history has a referendum caused such political chaos in the referendum country and simultaneously massive international economic damage as the British BREXIT referendum has done.

Many critics of the EU argue that less EU integration would be an adequate answer to the BREXIT. While it is true that less regulatory intervention of the EU would often be useful, it is also clear that the theory of Fiscal Federalism suggests that one should indeed assign certain policy fields to the highest vertical policy layer – the federal government in Washington DC in the case of the US; and the supranational government in Brussels in the case of the EU. While after the BREXIT shock few governments/parliaments in EU countries seem willing to endorse a political union, it is only a question of time until this issue will be on the political agenda. Failure to adopt a political union will bring about a disintegration spiral in the EU and political and economic instability for the whole of Europe. If the EU disintegrates, it will only be a question of time until NATO faces disintegration. From EU and US perspectives, there is every reason to consider BREXIT as a dangerous political development in the UK and Europe, respectively. The fact that a day after the BREXIT referendum “what is the EU?” was the second most popular BREXIT-related question on Google in the UK suggests that the degree of information about the consequences of BREXIT was quite poor. A second referendum in the UK should not be excluded and indeed the British minister of health has suggested this hardly a week after the BREXIT referendum. In Ireland, with its history of rather frequent referenda, there is a Referendum Commission – composed of independent experts – that serves as a source of reliable information for citizens (http://www.refcom.ie/en/). Unfortunately, no such institution exists in the UK and the range of nonsense statements on BREXIT in British politics thus was rather broad: For example, a slogan carried on Mr. Boris Johnson’s campaign bus claimed that the UK pays 350 million pounds per week as a contribution payment to Brussels while in reality the net payment is only about ½ this amount. It is also noteworthy that Mr. Arron Banks – a British multimillionaire supporting BREXIT – has explained that the Leave.eu BREXIT campaign relied partly on US campaigning and election experts who have helped creating the right BREXIT mood, while not really relying on facts. Note: The popular claim of Mr. Boris Johnson that a post-BREXIT UK could easily retain or get access to the EU single market is totally implausible; even limited access to the single market in a model similar to the EU-Norway deal or the EU-Switzerland deal implies that the UK would not only have to contribute to the EU budget but would have to accept the four freedoms of the EU single market as well, including the free movement of labor and thus EU immigration. The fact that the British conservative government has made a big fuss about some 150 000 immigrants from Eastern European countries during the BREXIT campaign – not to mention the populist and racist UKIP campaign – is a sign of political and intellectual weakness of the UK. In the days immediately after the BREXIT referendum racist incidents occurred in many parts of England. The weak leadership observed in the UK raises worries about that country and the stability of Europe. Some Western democracies run the risk of being considered by people in many countries of the world to no longer be examples for rational government, stability and prosperity. The next decade will be quite decisive for Europe and the whole western world.

 

PS: My BREXIT analysis for the AICGS/Johns Hopkins University, dated early April 2016, covered the important points

http://www.aicgs.org/issue/british-referendum-pains-and-the-eu-implications-of-brexit/

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Allgemein

BREXIT – looking at the analysis of March 2016

This is my BREXIT analysis from March 2016 that picks up most of the key issues in a piece for AICGS/Johns Hopkins University. A difficult day for the UK, a dangerous day for the continent – and a shocking impulse for the populist politicians. Lack of critical reflection in Berlin, Paris and Brussels. As the UK has left the EU should move towards a European Political Union; a smaller weaker EU will disintegrate and implode. Effective tax policy and hence effective redistribution is only possible through more supranational policy.

http://www.aicgs.org/issue/british-referendum-pains-and-the-eu-implications-of-brexit/

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