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

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

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

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

March 24, 2017

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

 

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

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

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

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

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

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

 

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

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

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

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

 

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

 

 

(file TrumpInauguration)

 

 

Wuppertal, January 20, 2017

 

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

 

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

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

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

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

 

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

 

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

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

 

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

 

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

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

 

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

 

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

Prof. Dr. Paul J.J. Welfens is President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal. He is also Chairman of the Research Institute of the bdvb. Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC and IZA Research Fellow, Bonn.

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

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

English Version of the book is An Accidental Brexit, forthcoming

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

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

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

 

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

 

 

January 17, 2017

 

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

 

(BrexitUKtrump2017welfensENG)

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

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

 

 

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

 

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

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

 

Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

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

+49 202 4391371

 

 

 

November 27, 2016

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

 

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

title for the English edition is

 

Paul Welfens

 

AN ACCIDENTAL BREXIT

UK Government Policy Pitfalls and New EU & Global Economic Perspectives

(shortened version of the edition of the German book)

 

British Referendum with Information Desaster: No Legitimate Basis for BREXIT

The BREXIT referendum of June 23, 2016, represents a rather surprising decision by the UK electorate and it is a historical result with implications for the UK, Europe and the world economy. It can be shown that a major information blunder by the Cameron government forms part of the explanation of the referendum result: The 16 page info brochure that government sent out to households did not contain a single key finding of the Treasury study on the economic effects of EU membership on the UK and the cost of BREXIT, respectively. While prior to the Scottish referendum of 2014 the Cameron government conveyed key economic insights to households (devolution would mean a loss of 1400 pounds per capita in Scotland), before the BREXIT vote the government did not give the Treasury’s finding that a 10% output loss was to be expected as a long run BREXIT effect – had households obtained this information, the referendum would have been 52% in favor of Remain. Thus there is a new, very convincing argument for a second referendum. Also, US perspectives are emphasized.

At the Conservative Party Convention, held in Birmingham at the beginning of October 2016, Prime Minister Theresa May has argued that her government wants to start EU-UK negotiations no later than March 2017 (so as to complete the largely unexpected BREXIT process by early 2019). As Mrs. May said “Even now, some politicians – democratically-elected politicians – say that the referendum isn’t valid, that we need to have a second vote…others say they don’t like the result, and they’ll challenge any attempt to leave the European Union through the courts…But come on. The referendum result was clear. It was legitimate. It was the biggest vote for change this country has ever known. Brexit means Brexit – and we’re going to make a success of it…We will invoke Article 50 no later than the end of March next year”. It can be shown, however, that the referendum lacks both legitimacy and clarity: That the result was not clear at all. It was not the biggest vote for change in the UK but an accidental BREXIT vote whereby the responsibility for the chaotic situation surrounding information and communication in the UK in the weeks before the referendum lies completely with the Cameron government. That Mrs. May says her government will seek an agreement with the EU on access to the single market, while not accepting verdicts of the European Court of Justice, not only undermines the role of international law but is also a signal that a hard BREXIT could be on the agenda and the worst case scenarios of the British Treasury study on the cost of BREXIT, respectively (published April 18th 2016), could indeed become relevant for the UK. For EU27 countries, and the US, the lack of political professionalism visible in early 2016 under the Cameron government was a strange phenomenon and the Western world would be seriously discredited should the new May government follow a similar contradictory course of great announcements combined with a lack of realism and sense of responsibility.

The first informal EU summit after the BREXIT referendum took place in Bratislava on September 16, 2016, shortly after the G20 meeting in Hangzhou where the UK faced pressure from several countries that it should remain a reliable international partner. The British referendum result of June 23 was quite surprising, but there is an explanation for this as is shown in a new book (Paul Welfens, BREXIT aus Versehen, published November 2016, Heidelberg: Springer) by Professor Welfens who is the president of the European Institute for International Economic Relations and a leading European economist. On the 26th June, 2016, 34 million Britons voted in a non-binding referendum with 51.9% casting their ballot in favour of the UK, which had joined in 1973, leaving the EU. The referendum led to the fall of Cameron’s cabinet, while his long-serving Home Secretary Theresa May will now, as his successor, lead the UK out of the EU. The referendum, however, suffered from a serious drawback, Prime Minister Cameron had not managed to include extremely important information on the economic effects of a BREXIT, from a study by the Treasury published on 18th April, 2016, in the 16-page info booklet which was sent out to all households: between 11th and 13th April to all households in England, and during the week from 8th May to all households in Scotland, Wales and Northern Ireland. The 6.2% reduction in income as a long-term consequence of BREXIT, which Chancellor of the Exchequer George Osborne stressed in the press release on the 18th April, remained a fact hidden from the vast majority of households. If one takes into consideration the usual links between income trends and voting results in opinion polls/national elections and assumes a similar influencing factor in the case of a referendum, the BREXIT referendum would actually have resulted in a victory for the Remain camp had this information been more widely known.

The Cameron government allowed the overwhelming majority of voters to cast their vote under a veil of ignorance regarding the economic consequences of a UK exit from the EU; a phenomenon which is historically unique. On the other hand, the Cameron government proved itself capable, when the situation of the referendum on Scottish independence arose in 2014, i.e. the preservation of the United Kingdom, of supplying all Scottish households with the relevant economic information, by providing two economically convincing info brochures to all households in Scotland, which contained meaningful insights on the expected consequences of a vote for Scottish independence according to experts, in a timely manner. Against this background, the 2016 referendum therefore appears as damaging to democratic quality standards and thus unfair to British voters and EU partner countries alike.

However Britons would like to vote in a referendum – and however they want to decide – one must expect that a referendum, here announced by Cameron as early as 2013, in an OECD country would fulfill the minimum standards regarding information. In the UK in 2016 that was clearly not the case and from that perspective one cannot say with certainty how the UK’s referendum would have turned out in the event of a normal situation vis-à-vis information. Should the government of Theresa May want to refuse a second – but well prepared from an information point of view – referendum, then it could be said that the government has no interest in getting an unbiased and well-informed decision from the population; and futhermore, after almost 45 years of UK membership, intends to implement a separation from 27 partner countries on the basis of the inadequate and uncertain first referendum. From a political and integration perspective, that is not a rational process, particularly given the knowledge of British voters, with just 49% answering questions on EU Institutions in a Bertelsmann survey correctly. With that result, the UK voters were 4% behind their counterparts in Poland, a country which joined the EU 31 years after the UK. The results for Germany, Italy and France were 81%, 80% and 74%, respectively. The second most asked question on Google in the UK on the day after the BREXIT referendum was: What is the EU?

According to the analysis of FREY/SCHNEIDER (1978) in the Economic Journal, the unemployment rate, the rate of inflation and the growth rate of disposable incomes, in particular, influence the government-related popularity lead margin (i.e. the popularity of government versus the popularity of the opposition). If one takes as an example the analysis of FREY/SCHNEIDER (1978) for Great Britain’s national elections and the popularity of government according to opinion polls, then according to this classic study: A 1% increase in the growth of real disposable incomes leads to an improvement of government’s relative popularity lead by 0.8%. Thus one could, in the hypothetical scenario that the findings of the Treasury’s EU study, according to which BREXIT means a 6% loss in real income, were included in information sent to all households, reinterpret the results of the referendum thusly: The actual result on referendum day was 51.9%:48.1%, meaning a difference of 3.8% at the expense of the government position. Had the electorate understood that BREXIT threatens to bring with it a loss of real income of 6% (or more), the pro-EU referendum result would have been higher by a factor of 1.048 (0.8% x 6): the vote for Remain would have been 50.4%. The pro-BREXIT camp would, in the event of an adequate information policy on the part of government, have received 49.6%. Moreover, the UK cannot, in the event of BREXIT, realize the income gains as a result of EU membership which the Treasury expects as a result of a deepening of the EU single market: Remaining in the EU would have brought a 4% growth in income. Considering additionally that BREXIT brings a rise of the income tax rate of 3 percentage points (the study says 4%-10%) the necessary correction factor would be 1.0824 and the vote for Remain would have been 52.1%

One should take these illustrative figures with a grain of salt as more recent econometric approaches show somewhat different elasticities and since a confidence band could be indicated. However, the key point here is, of course, that no referendum on the question of whether or not to remain in the EU can be considered as a serious democratic exercise if government has not conveyed the key results from an economic analysis of EU membership and hence on the consequences of BREXIT to all households. A western government that publishes 201 pages of Treasury analysis on the economic consequences of BREXIT and puts not one figure from this analysis in 16 pages of referendum info sent to households and voters, respectively, is acting totally irresponsibly; and certainly not in line with decent information standards of Western democracies for a referendum.

Prime Minister Cameron would still be in office, there would have been no depreciation of the Pound, and no BREXIT. More recent approaches applying a refined methodology will bring modified results for the elasticity of government popularity with respect to GDP growth changes and the case of a referendum might show elasticities in the popularity/voting function that are slightly different from the classical FREY/SCHNEIDER paper. However, the reality of the first half of 2016 clearly indicates an information blunder in the British government.

There is no doubt that a sound information policy both should and could have been implemented for the referendum (in any event, a narrow pro-EU victory would certainly have resulted in a discussion over the required EU reforms). The determination that a professional information policy was required also applies in the hypothetical case that, taking the EU referendum into consideration, a lower elasticity existed between the influence of the economic growth and government popularity as was found in the classic study by FREY/SCHNEIDER which related to national elections in the UK.

The central point here is simply that the non-communication of crucial, and of general interest, economic findings influenced the result of the referendum, to the benefit of the campaign for a British EU exit and the disadvantage of EU membership, considerably. There was no sound reason to withhold the major findings of the tax-payer financed Treasury study from the electorate – apart from an act of sabotage by BREXIT supporters within the British government. The study also contains further important findings – for example that considerably higher taxes – or a reduction in public services – would be required in the case of BREXIT. Tax increases have a corresponding reducing influence on the, according to FREY/SCHNEIDER, important variable for popularity and election results – the growth of disposable real income (income after tax and including transfers). Thus there are some very good arguments which imply formulating the following hypothesis: If a sound government policy on information with respect to the Cameron government’s own expected economic effects of a BREXIT had been implemented, then the actual result of the referendum would have been circa 52%:48% for the UK to remain a member of the European Union. Why, therefore, the result of the extremely biased and distorted June 23rd referendum must be taken as the foundation of policy in the UK, the EU, the G20, et cetera, is completely unclear.

The economic influencing factor of the government study referred to above would have been of considerable importance for the result of the referendum on June 23rd, if it had been made known to the households (for example, if it had been included in the 16-page government information booklet); even if the elasticity of disposable income was smaller than in FREI/SCHNEIDER. The British government will definitely have to explain the aforementioned issues – a lack of coordination, a visible indifference to an extremely poor information policy and the unprecedented information breakdown by the government itself – to Parliament and the British and European public in general. Certainly, one would have also had, in the event of a narrow margin of victory for the Remain side, reason to carefully consider an EU reform agenda. However, the many conclusions on the referendum result to date, which have not taken the massive information blunder of government into account, need to be qualified. What is more, it is surprising how little the EU, and the national governments in Berlin, Paris and other countries, carried out critical monitoring, i.e. engaged in a supervision process, in the run up to and indeed during the referendum. The huge information deficiencies and procedural irregularities stressed here would have been apparent to any critical monitor prior to the referendum. As astounding level of flippancy with regard to government work in EU member countries is apparent, which can only be a cause of concern for citizens. Here, too, can one reasonably expect and indeed demand more professionalism in the work of government. Going forward, political responsibility is an absolute must – and the in part superficiality of the internet needs to be opposed where necessary.

Moreover, the flawed, negligent information policy of the Cameron government can be a ground for the EU27 to offer the UK, in regard to conditions for future access to the single market, a diplomatic minimal solution which is not much better than the WTO conditions. As an EU member, the UK has rights and responsibilities in the community, with a political duty to appropriately inform its own citizens; in the second national EU-referendum, the Cameron government, due to organizational failures of the government itself, did not fulfil this duty. Professor Welfens therefore comes to the following conclusion: There is every indication of the need for a critical British and European debate on the information failure of Cameron’s government in relation to the BREXIT referendum 2016, and every responsible and rational politician must now reassess the need for a second referendum on the question of EU membership in light of the arguments and facts which are now known. A second referendum and a wider debate on referenda in the EU are called for.

Furthermore, the Cameron government, through massive cuts in financial transfers from central government to local authorities, has created the underprovision of public services locally and huge deficits in the National Health Service, a situation which many voters falsely ascribed to a convenient scapegoat – immigrants: Cameron’s cuts took an enormous 3.5% of Gross Domestic Product away from local government in just five years, while Cameron and May – as a minister in his cabinet – repeatedly complained about levels of migration from other EU countries being too high. At its height, this source of immigration amounted to 0.2% of the population and, according to the IMF, the United Kingdom was not even amongst the top five destination countries for migrants from Eastern Europe. That Cameron made calls for the fourth pillar of the EU single market to be abolished, i.e. to end the free movement of labour, was both strange and unfair: Not once did Cameron take the trouble of presenting an objective description of the facts relating to immigration.

In the August 6th, 2016, edition of The Economist it was shown that there is a positive correlation between a country’s UK export share (i.e. the ratio of exports to the UK relative to total exports) and the percentage of people indicating in a MORI-IPSOS survey, carried out in 15 countries, that they find BREXIT to be a bad development. Belgium, Sweden, Germany and Spain each have a fairly high share of people – between 40 and 55percent – who hat find BREXIT a bad idea. Outside the EU, in Japan and Canada more than 25 percent view BREXIT negatively, while the percentage in India and the US is below five percent. The G20 meeting in Hangzhou has shown that BREXIT is also is considered by most G20 countries to be a rather doubtful political project.

With the statement of the constitutional committee of the House of Lords of September 13th arguing that to invoke Article 50 of the EU, and thus declare that the UK wants to leave the European Union, government needs a positive vote from Parliament, new questions have been raised as to whether or not BREXIT will become reality. The UK is facing new political infighting resulting from a deeply flawed referendum that is undermining political stability in the whole of Europe – not least since right-wing populist parties on the European Continent feel encouraged by the BREXIT vote. At the bottom line, inconsistent British politics and policy is undermining the stability of the Western world.

The foreseeable strategy of the May ministry, to achieve a new impulse for growth via numerous new free trade agreements, may, on closer inspection of the partner countries being mentioned, bring less than one might expect – as the analysis of one ex-employee of the Bank of England and other considerations show. While the exit-minister David Davis explained in spring 2016 (in a speech at the Institute of Chartered Engineers in London) that he would suggest free trade agreements with China, the US, Canada and Hong Kong in the first instance and in a second stage with Australia, Brazil, India and South Korea, one may argue that China will be a difficult negotiation partner and embracing broadly free trade with China would immediately condemn certain sectors, including the steel industry. Canada and Australia are rather small countries and thus cannot deliver major impulses for more growth in the UK. A free trade agreement with India, in turn, is difficult since India’s government will certainly require visa liberalization which is not exactly what the UK will want if one considers the strong anti-immigration sentiment of many voters in early 2016.

Nevertheless, the BREXIT decision represents a call on the EU to vigorously undertake new institutional reforms – i.e. steps towards a better functioning Neo-EU. Less regulation, more transparency and a better implementation of democratic principles are pressing matters to be addressed in the medium term, in the longer term a political union in the Eurozone, which would represent 5-6% of GDP in terms of expenditure for Brussels; through the transfer of above all infrastructure projects and spending, defence expenditure and the introduction of an EU unemployment insurance for the first six months; plus interest expenditure on Eurobonds, where member countries of the EU and Eurozone, respectively, can only raise credit for infrastructure expenditure and would also be subject to a constitutionally-guaranteed debt brake. National borrowing should, via constitutional debt brakes, be restricted to about half the Brussels structural net borrowing: 0.25% of GDP, which with 0.5% of GDP as an upper-limit on the cyclically neutral deficit ratio on the supranational level results in a long-term debt ratio in the Eurozone of 50% (assuming that the trend rate of economic growth amounts to 1.5%). The political competition in the elections to the European Parliament in such a new EU would intensify and the voting shares of small, radical parties would decrease significantly, Europe would be more stable. Germany and France, in particular, are encouraged to undertake national reforms and EU initiatives.

From the back cover text of the new book       Welfens, Paul, An Accidental BREXIT

UK Government Policy Pitfalls and New EU & Global Economic Perspectives (Spring 2017)

Paul Welfens has written a highly perceptive study of the origins – and the implications – of what must be Britain’s worst deliberate economic policy mistake since the Great Depression.

Prof. Dr. Harold James, Department of History, Princeton University

 

This book by Paul J.J. Welfens dealing with the result of the Brexit referendum presents a harsh, rational and critical analysis of how the result came to pass. Welfens covers the crucial and fundamental points and surprising facts: This book is highly recommended reading for anyone looking for a frank and candid approach to the subject matter.

Prof.Dr.Dr.h.c.mult. Friedrich Schneider

Department of Economics, JOHANNES KEPLER UNIVERSITY LINZ

 

 

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

 

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

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

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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

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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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After the BREXIT referendum: Europe seeking a new orientation?

EUROPÄISCHES INSTITUT FÜR INTERNATIONALE WIRTSCHAFTSBEZIEHUNGEN (EIIW)              www.eiiw.eu

European Institute for International Economic Relations

Prof. Dr. Paul JJ Welfens, Präsident des Europäischen Instituts für internationale Wirtschaftsbeziehungen (EIIW) an der Bergischen Universität Wuppertal; Non-resident Senior Research Fellow at AICGS/Johns Hopkins University; IZA Research Fellow, Bonn. Alfred Grosser Professorship 2007/08, Sciences Po

EIIW, Rainer Grünter Str. 21, D 42119 Wuppertal, Germany

Prof. Dr. Paul J.J. Welfens © welfens@eiiw.uni-wuppertal.de

 

 

After the BREXIT referendum: Europe seeking a new orientation?

The BREXIT referendum has witnessed narrow opinion poll results in the months prior to June 23rd – with the implied probability of a vote for leaving from betting firms lying below 45% a week before the referendum. The survey results have the weakness of having been confined to the UK so that the about 1.2 million British citizens living in other EU countries – obviously mostly in favor of remaining in the EU – are not included. The leave-position was thus overstated in the survey results of the UK. It should also be noted that a critical weight is assigned to the roughly 400 000 Irish residents in the UK that are eligible for voting in the BREXIT referendum. The tragic attack against Labour MP Mrs. Jo Cox is likely to finally tip the referendum for a No BREXIT majority.

As regards the result of the BREXIT referendum – the second EU referendum in the UK (the first was in 1975: 2/3 majority in favor of EU membership) – it will have a decisive impact on the UK and indeed the EU integration process. If the UK should leave the EU, the British economy will face massive depreciation of the pound and possibly a recession while the European Union would lose a heavyweight liberal member country which accounts for 18% of the EU’s gross domestic product, 12% of trade and 13% of the EU population. As the theory of regional economic integration shows, both country I and country II will benefit – in a two-country model; if now instead an existing regional integration club, namely the EU, is losing a key member, there will be economic welfare losses and transitorily or permanently lower output growth in the UK and in the EU27; by implication there will be a nominal and real depreciation of both the British Pound and the Euro (and other currencies of continental EU members which are not in the Euro area).

Secondly, major current international negotiations of the EU would face serious problems. For example, the TTIP project would probably be dead in the water as the German government has not been able to garner broad support for TTIP and the German industry’s campaign is also rather poor while anti-TTIP supporters from many environmental pressure groups have gained an upper hand in the public debate in 2015: Surprisingly, the EU country that is to gain most (relative to GDP) – along with the UK and Ireland – and has a large current account surplus-GDP ratio has not managed to establish a clear public majority in favor of TTIP. As regards the national government of France, that has many problems including a big long-standing current account deficit, it is also largely skeptical about TTIP; a position that is likely, however, to change if a conservative government would come to power in 2017. If the UK would leave the EU, one may thus argue that TTIP is unlikely. According to recent analysis by the European Institute for International Economic Relations at the University of Wuppertal, TTIP will bring about a 2% rise of Germany’s real GDP, mainly through innovation and FDI plus trade effects, and for the EU as a whole a similar order of magnitude would be missing without TTIP. A negative side-effect would thus be that the Brisbane promise of the G20 summit in 2014, according to which GDP should be raised by a least 2.1% relative to the business-as-usual benchmark development, could not be fulfilled by most of the big EU countries until 2018.

The EU’s capital market union will also be undermined if the UK should leave – knowing that the responsible Commissioner from the UK, Mr. Hill, is a lame duck will largely bury many EU financial market integration and modernization initiatives. It is also clear that the envisaged merger of the Frankfurt Stock Exchange and the London Stock Exchange will not take place in the case of BREXIT. All EU countries will take some time to sort out the mess that would be the consequence of BREXIT – beyond a decline of output in the UK. A major problem in the medium term would be the situation of some 600 000 Irish people living in the UK; once the UK is no longer an EU member country, say after 2018, many Irish citizens might want to leave the UK. Even worse, the easy daily travelling between Northern Ireland and the Irish Republic is likely to end and a new (old) border regime could even endanger the peace process in Ireland.

For the British universities, cooperation with EU universities will become rather complex and the UK is likely to seek more cooperation with the US in this situation. Rather difficult will also be the situation of about 1.2 million British citizens working in EU countries and of the roughly 3 million EU citizens working in the UK. Mr. Cameron would have to step down and Mr. Boris Johnson is likely to become the new British prime minister, but he would not be really welcome in EU countries after BREXIT. Several other EU countries are likely to also consider leaving the EU: Denmark and the Netherlands are two obvious cases and one should also not underestimate the risk that even France and Germany could start moving out of the EU. The political and economic prospects would be a disaster. More protectionism, less growth and more political instability and also political radicalization on the EU continent may be expected. Sooner or later the Western European countries will face a kind of 1910 situation in which the leading powers devote 4% of GDP for defense and this would be twice the share of GDP to devoted to defense in 2015. For Germany it would be almost 4 times as much. Higher income tax rates and lower growth again would be the economic price. Russia, facing an EU in disarray, will sooner or later start to become more aggressive again in the Ukraine and other parts of Eastern Europe. NATO could be the next victim of an EU in disarray. The US could come under pressure to seek broad compromise with China once the EU is no longer a stable partner and NATO looks like an unstable group. For Turkey, an EU in disarray will certainly reinforce those groups in Ankara seeking to establish a stronger regional role of Turkey in part of the former Soviet Union and this in turn will reinforce the risk of potential conflicts between Turkey and Russia.

The EU after a BREXIT would soon witness a much more protectionist economic policy since Germany’s traditional ally – along with Denmark and the Netherlands -, namely the UK, would no longer be on board. After a few years the UK might have regained, at a high price, including high net contributions to the EU without much say in Brussels, access to the EU single market. These uncertainties and technical problems will all undermine transitorily the EU growth.

While the UK citizens would henceforth save 80 pounds per year in net contributions to the EU, the net cost of BREXIT for the average UK citizen would be much higher. About 5% of GDP losses in both the UK and the EU27 over a decade or so could be the medium term costs in Europe. There will be an additional cost outside the EU, since EU disintegration is a sure recipe to stimulate disintegration in other parts of the world economy: ASEAN which just had started in 2015 an ASEAN single market modeled on the EU single market could come under pressure, as could MERCOSUR which already faces the disaster case of Venezuela in its own right since 2015. Other regional integration clubs in Africa and parts of the Arab world could also fall victim to BREXIT dynamics. The negative global economic effects would add up to a strong temporary decline of global output, more regional conflicts, stronger incentives to emigrate to the UK (the US and other countries) – certainly not what the BREXITEERs had anticipated or wished.

If the UK should leave the EU, this would not only be a signal that British voters are not really willing to support EU economic integration – although the UK net contribution per capita is less than 70€ per year – but that there is a broader mistrust of the British public against the political elites: This is an attitude that clearly dates back to the Transatlantic Banking Crisis of 2007-09 which has shaken the peoples’ confidence in both the political system, financial market regulators and leaders of big banking business in the US, the UK and some EU countries. So if government in the US suggests that it is in the self-interest of the UK that the country should remain in the EU, many voters are not believing this, moreover, many voters wish to effectively punish the political elites for the banking crisis – leading to massive wealth losses, higher government debt-GDP ratios (implying higher future tax rates) and higher tuition fees plus lower federal government transfers to the cities – via a non-EU vote. In this respect it is pure coincidence that the UK election calendar has the EU vote on the agenda; no referendum could be won by government in the present situation. Mr. Cameron has made things worse by undermining his own credibility when he announced that he would limit immigration to 150 000 per year – the UK government under EU single market rules has no instrument to easily limit immigration from other EU countries; only social benefits for immigrants from the EU could have been cut slightly, but this is unlikely to have a big impact. Rather some limitations on immigration from non-EU countries could be imposed. It is absolutely unclear why Mr. Cameron has promised something that he cannot deliver and why at the same time the British Prime Minister failed to pick up the key results of Economics Immigration Research saying that the UK has a clear net economic benefit from immigration since immigrants are relatively young and since the immigrant entrepreneurship in the UK is considerable. The fact that the EU referendum came on the agenda at all is finally the mistake of the strange institutional setup of the European Union in the field of European Parliamentary elections and the very construction of the EU. Mr. Cameron likes to argue – imitating the rhetoric of UKIP’s leader Nigel Farage – that the EU is too big and too much money is spent in Brussels. This, however, is nonsense as the research by the renowned Forschungsgruppe Wahlen (Germany’s leading election think-tank) in has shown: As regards German voters, they can easily tell you what the critical topics and issues at the local, regional and national policy layer are and hence a roughly rational voting behavior at these policy layers may be expected.

However, when it comes to the EU, the standard answer of voters asked is “no idea” and the consequence is a broad willingness to experiment in voting, usually in favor of smaller and radical parties. What is found in Germany is also relevant in the UK (and in probably any other EU country as well) and the consequence has been that the radical and small UKIP party has flourished at EU elections and has been able to use financial support from the EU for the votes obtained to start a broad political campaign at the national level where UKIP ended with about 1/3rd of the voter share obtained at the EU level. If the EU had clear and larger responsibilities where it makes sense in accordance with fiscal federalism, the voter turnout at European elections would have been much higher and the propensity of the average voter to squander his/her vote by experimenting with radical small parties would have been sharply reduced.

Mr. Farage’s party would almost certainly not exist and Mr. Cameron would never have faced the challenge to call for a national EU referendum that effectively mirrored the strange and actually unnatural strength of UKIP in the UK. The principle of subsidiarity, according to which tasks that can be better solved by the national level should not go to Brussels is ok, but the interpretation of this philosophy and the actually stated principle in the EU Lisbon Treaty is absurd in London’s conservative leadership. What would make sense is an EU allocation of tasks and supranational government expenditures that would look similar to the case of the US at its federal level where 9% of GDP was spent in 2014 – plus an additional almost 11% on social security. The EU expenditures should be not 1% of GDP – reduced under the pressure of Cameron in previous years down from 1,25% – but about 4-5% where key fields would be: large infrastructure projects, electricity market integration, ICT innovation policy, defense and paying for the first six months of unemployment, except for youth unemployment, rates (here national governments have a strong responsibility through their often irresponsible minimum wage policy such as is the case in Belgium and foremost in France, which is roughly five times the size of the average US state but which has imposed a very high nationwide minimum wage which was close to 10 € in 2015 while government handed out heavy subsidies, about 1% of GDP, to firms employing workers with a minimum wage). It should be noted that nobody needs a Commission with a hybrid institutional nature of being partly an executive government and partly a legislative body taking most initiatives for new laws in the European Parliament. The EU Parliament should be massively strengthened and half of the EU structural funds should be abolished as they generate no economic benefits in the respective regions of the EU. A bigger supranational EU government and a more efficient vertical division of labor in the EU would bring efficiency gains of overall government and hence allow to cut tax rates by 1 percentage point at least.

The UK referendum does not stand so much for Yes or No with respect to EU membership but it is reflecting the depth of political confusion in Downing Street. After the collapse of socialist Eastern Europe, the West has at first celebrated in certain political quarters the end of history and thought that only further market economy expansion would be the natural answer to all challenges in the world; and secondly, that financial markets would stand for superb economic wisdom and rationality. The first hypothesis – the end of history debate started by Francis Fukushima in the US – is nonsense. As regards big banks in the US and the EU, the best that one could say about these institutions is that they were largely led by managers with irresponsibly excessive ambitions, namely a rate of return on equity of about 25% (instead of about 12-13% that would already be a great return for banks and insurance companies) that would be possible only with excessive risk-taking. Big banks have organized frauds, exchange rate rigging and interest rate manipulations in many cases and have paid more than € 300 billion in damages and costs for out-of-court settlements, suggesting that this industry has not been properly regulated in the US and the EU for at least a decade. Hardly any of the, often foolish, directors of the incompetent prudential supervisors was held responsible by losing their jobs or sentenced in court – look at the UK, Ireland, Germany and the US.

This has ultimately created the impression that politicians cannot regulate big banks. Not only is this true, the IMF’s ability to come up with a consistent financial sector assessment programme (FSAP) has been poor in critical cases: The FSAP on Switzerland was totally wrong – saying prior to the Transatlantic Banking Crisis that UBS was in excellent shape while there were problems with Credit Suisse (in fact it was UBS that after 2008 faced the biggest financial loss in Swiss history and had to be rescued by the central bank); in the case of Ireland, the IMF published in mid-2006 an FSAP that argued that the banking system was fine, there were only problems in re-insurance – this report was ridiculous and to-date no consequences have been imposed due to these massive misreporting and misleading analyses. That the IMF did not dare to publish any FSAP analysis on the US was the biggest mistake, although one may argue that the US President George Bush Jr. prevented such a report from being published. However, the IMF should have written at least an internal FSAP on the US. It was the IMF and the western world that had argued in the aftermath of the Asian crisis that an FSAP would be necessary and helpful as a new regular instrument to avoid major regional financial crises in the future. As regards the Russian economic crisis of 1998, it was the IMF itself whose inadequate policy advice contributed massively to this economic disaster – the IMF suggestion had been to introduce fixed exchange rates in a country where the optimum currency area literature (decades old) would never have come with such a proposal for a country in which about 60% of export revenue was generated from just one sector, namely energy. The responsible head of the IMF’s Europe II department, Mr. Odlin Smeh, sent to Washington DC by the British government, never faced any consequences for his irresponsible strategy. This simply adds up to the finding that the western world’s biggest international organization is partly not contributing to more international prosperity and stability, rather occasionally, it actually destabilizes parts of the world economy.

The lack of parliamentary accountability of international organizations, such as the IMF, the WTO, the BIS and so on, is part and parcel of globalization risk and a creates a considerable risk of massive stabilization crises (having said this, one should not overlook that probably most standard working fields of the IMF deserve high respect and that its chief economist, Ragurham Rajan, gave a great presentation at the international central bankers’ Jackson Hole meeting in 2005, where he warned about the inadequate institutional framework of financial globalization and modern securitization, respectively). However, the majority of the western central bankers in Jackson Hole did not want to listen to this careful and excellent analysis. The list of the leading western central bankers at that time thus cannot stand for a high intellectual understanding of transatlantic banking; or to put it differently, the system that western governments have allowed to emerge in the 25 years after 1991 – the year of the end of the Soviet Union – is too complex for leading western central bankers to understand. Should the consequence not be to build a new system which is much less complex, creates less negative international external effects and carefully contributes more to prosperity and stability in the world economy? The fact that big banks can escape the identification of irresponsible and illegal management practices by resorting to out-of-court settlements on a super-large scale in the US and the EU is also not contributing to building a broader sense of responsibility and thus to nurture the reputation of institutions and the stable trust of voters in politicians. The rise of western right-wing populist parties and candidates after the Transatlantic Banking Crisis clearly testifies to this.

If BREXIT would come and be followed by US presidential elections won by Mr. Trump, the end of the post-1945 world would be seen. If populist parties would start to dominate the political process in the US and the UK, new uncertainties would undermine transatlantic economic growth and new rivalries would emerge among OECD countries.

If BREXIT can be avoided – a likely outcome -, the EU has some breathing space to reconsider all major issues, topics and problems. If no major reforms are adopted, the next BREXIT initiative will come soon – and if not in the UK a similar initiative could pop up elsewhere. Obviously, the European Commission and the European Parliament must come up with new ideas to make regional integration in Europe more attractive and EU policy far more consistent. A political euro union should be considered carefully.

 

 

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