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

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

 

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

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

+49 202 4391371

 

 

 

November 27, 2016

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

 

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

title for the English edition is

 

Paul Welfens

 

AN ACCIDENTAL BREXIT

UK Government Policy Pitfalls and New EU & Global Economic Perspectives

(shortened version of the edition of the German book)

 

British Referendum with Information Desaster: No Legitimate Basis for BREXIT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Department of Economics, JOHANNES KEPLER UNIVERSITY LINZ

 

 

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

 

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

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

EU Disintegration Pressure and Germany’s New Instability

 

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

2015 = 20 years of award-winning EIIW research in Economics

 

March 21, 2016 EUdisintegrationEnglish2016MarchWelfens

EU Disintegration Pressure and Germany’s New Instability

After six decades of growing economic and political integration, in 2015/2016 the European Union is facing disintegration dynamics for the first time where the main impulses are Germany’s strange handling of the refugee wave in 2015 and the British BREXIT referendum of June 23, 2016. Both elements show that the EU cannot survive without a Political Union and that the collapse of the Soviet Union could indirectly translate into a collapse of the European Union: It was mainly a commonly shared fear of the Soviet Union and certain economic benefits which were the political glue keeping the EU together and without this common fear a lack of political discipline has become widespread – visible, for example, in the non-respect of the Eurozone/EU fiscal policy rules in the run-up to the euro crisis in Greece, Portugal, Ireland and Cyprus. Germany and other EU countries pretend that the Soviet collapse has not impacted the EU except for the fact that former eastern European member countries of the Soviet economic bloc would subsequently join the European Union.

An expansion of the EU budget, which could have generated new benefits for all EU member countries, was prevented, particularly by the British government, when the EU expenditures were reduced after the Transatlantic Banking Crisis from 1.24% to just 1% of GDP. It is the British government that now proposes to voters in the UK to consider a vote on the UK either remaining in or leaving the European Union and it effectively means that about three million UKIP voters – getting 12.6% at the national elections in 2015 – can put political pressure on 500 million people in the EU: Conservative Prime Minister David Cameron is under such pressure from UKIP – the British winner of the European elections – that he had to promise the aforementioned EU referendum. Such a referendum has become possible under the Lisbon Treaty which allows EU member countries to leave the European Union. One may point out that should the UK leave the EU other countries are likely to follow, since a smaller European Union is less attractive than a big EU (i.e. including the UK, which represents about 17% of the EU GDP) and since the external perception is that the EU is not a stable politico-economic club, this will reduce the international political leverage in all future negotiations of the EU; the latter effect might even occur if the pro-EU side should have a narrow victory in the BREXIT referendum. France under De Gaulle had always been resistant to allowing the British EU membership, as De Gaulle was not convinced that the UK would really be a strong member country in the EU.

Besides the UK, it is Germany under Chancellor Merkel which is leading the EU into disintegration. Until mid-2015, it was Germany’s standard political wisdom that the country would never again start a war in Europe, would defend Israel’s right of existence and would always be a reliable EU partner. The latter pillar of Germany’s political fundament was as good as destroyed in early September 2015 when Chancellor Merkel unilaterally – not calling for an EU summit to focus on the refugee crisis – decided to open Germany’s borders for refugees that had stranded in Hungary and Greece. Shortly after the decision, the German government then added that the refugee crisis was an EU problem. Most of the EU partners, having been ignored in September 2015, in effect said: No, Germany should take care of the problem itself.

Obviously, the Chancellor’s Office had become so arrogant in the context of the apparently bravely assumed EU leadership role in the face of the Euro crisis that Mrs. Merkel thought she could simply decide about an EU question on her own. Never would Helmut Kohl oder Helmut Schmidt, two former German Chancellors, have made a similar quasi-autocratic decision.

Founded upon of a very thin legal basis – so the view of renowned legal experts – Germany assumed the right to decide about more than half a million asylum-seekers whose case, under the so-called Dublin framework, could normally only be decided in Greece, the first EU country entered by so many refugees coming from Turkey – originally coming mostly from Syria, Iraq and Afghanistan. Greece in turn was unable to cope with its duties to examine the asylum requests of refugees – at first, due to its disastrous economic policy and as regards the sharp overall recession, which set a record for western industrialized countries after five years of consecutive recession, one could argue that Germany is also to blame for the Greek misery because the Merkel government has refused a debt haircut for sovereign creditors – although this would have been both possible and certainly also necessary economically speaking as the IMF has emphasized in 2015 (Germany’s Minister of Finance, Mr. Schäuble, claims that there are legal barriers to Greek debt cutting, but independent legal experts from several universities hold a different view). If Greece had been a normal country with a functional government and administration, Germany’s government would have had no right to assume the asylum examination procedures by effectively replacing Greece in 2015. The German government’s propensity, in the refugee crisis, to explore extreme interpretations of rules and laws – already partly visible in the euro crisis – is doubtful and has raised criticism among many legal experts who often have the impression that the EU no longer represents the traditional EU three pillars: the rule of law, democracy and the market economy.

The EU countries could, in late September 2015, agree that only 120 000 refugees who had at first landed in Italy and Greece would be reallocated across EU countries, but by mid-March 2016 less than 1 000 had actually been reallocated. The German approach to the refugee crisis did not work at all and the more than one million refugees coming to Germany in 2015 have revealed enormous overregulation and poor public service organization in Germany where many cities found themselves unable to cope with the big wave of refugees – fortunately, many private volunteers helped out in this difficult situation. The chaotic impression created by the refugee wave in Germany raised a very unfavorable impression about the federal government of Chancellor Merkel and on top of that came the incidents from the New Year’s Eve night at the Cologne central station, where more than 1 000 women reported being sexually molested and that mobile phones and/or wallets etc. had been stolen – apparently mostly by Muslim immigrants and refugees from North Africa. The political message understood by many voters in Germany was that the leading political parties and government at both a federal and regional level were unable to cope with the refugee challenge. The populist new right-wing AfD party harshly criticized Chancellor Merkel and partly joined forces with the east German xenophobic, anti-Islam Pegida movement.

The state elections – concerning Germany’s economic powerhouse Baden-Württemberg, the Rhineland-Palatinate and the small eastern German region of Saxony-Anhalt – ended with disastrous results for both parties in the federal grand coalition (i.e., the conservatie CDU and the social-democratic SPD; the latter could, however, gain about 0.5% of the votes in the election in Rhineland-Palatinate). The CDU and the SPD lost huge numbers of votes to the new populist right-wing party AfD (Alternative für Deutschland) who succeeded, on the basis of 240 party members in Saxony-Anhalt, in getting 24 members elected in the regional elections. The AfD, initially created by an economist from Hamburg University Mr. Bernd Lucke, who left the party in disappointment in 2015, had hovered in opinion polls at 3% in spring 2015, but due to Merkel’s strange refugee policy in autumn 2015 the AfD obtained double digit results in all three states (15% in Baden-Würrtemberg, 12% in Rhineland-Palatinate, 24% in Saxony-Anhalt). Part of the AfD, which is very well organized across Germany, is openly xenophobic, anti-US (e.g., in the context of the TTIP project) and favors physical violence coupled with racist prejudices.

A new problem since March 13, 2016, is that – following the bad precedent of the unstable Weimar Republic in the 1930s – a strong leftist party plus a strong populist party could, in the future, make a normal coalition of middle of the road parties unworkable; for example, in Saxony-Anhalt the two traditionally big parties, CDU and SPD, are so much weakened that they need the small Green Party to form a governing coalition and this is the only option existing. The AfD is likely to gain additional seats in upcoming regional elections as well as in the national election in autumn 2017. The rise of the AfD has been strongly supported in 2013-15 by the influential conservative newspaper Frankfurter Allgemeine Zeitung – more specifically, by its Economics and Business Section, with its strong long run opposition to the euro. A report by the Bertelsmann Foundation has shown in 2014 (spotlight Europe 2014/No. 2) that readers of the Frankfurter Allgemeine Zeitung internet-edition features a strong overlap with AfD voters. Who would ever think that a conservative newspaper would support a xenophobic right-wing populist party which destabilizes Germany and the EU? The level of economic competence of the Economics and Business Section is apparently quite low; e.g., for several years readers were told that the Eurozone countries’ euro rescue policy would lead to high inflation (in reality, the ECB had to start fighting deflation in 2015) and that civil servants are the richest group in Germany (complete nonsense as any careful statistical analysis shows: Entrepreneurs are, of course, the richest household group) – maybe this low level of analytical competence in key economic issues also extends to the quality of assessment of political developments.

In March 2016, the EU-Turkey summit brought a preliminary solution to the refugee crisis by undermining the business case of people smugglers and human traffickers in Turkey who had helped ship an estimated million people to Greece in 2015 when the country was totally overwhelmed by the refugee wave. The deal is such that as of March 20, 2016, illegal immigrants entering Greece from Turkey would be sent directly back to Turkey which could, in turn, send up to 72 000 Syrian refugees to the EU who would distribute the incoming refugees internally. Turkey would also get € 6 billion in EU support for the costs of refugee for Turkey, which has about 2.8 milllion refugees. Moreover, Turkish citizens will soon get visa-free access to the EU and the EU-Turkey membership negotiations would resume. The expectation is that the number of new refugees to the EU will strongly reduce in 2016, not least since the situation in UNHCR refugee camps in Iraq, Afghanistan, Lebanon, Jordan and Turkey should improve as the London donor conference of early 2016 raised new funds for bringing the provision of food and services back to a decent level – before the US, Kuwait and several EU countries had not paid over funds which had been promised to the UN, with the result that part of the refugee crisis was indeed triggered by the hunger and misery prevalent in many UNHCR camps.

Many EU countries have erected new national border controls in order to fend off refugees coming from Greece or via other EU entry countries. This in turn shows that there are serious problems with respect to controlling the EU’s external borders – with poor countries, such as Greece and Bulgaria, left to fend for themselves instead of organizing a joint financing of external border control. As a consequence of the resurrection of national border controls, the Schengen Treaty – relevant for all EU countries except for the UK and Ireland – that brings free movement of people without border controls between continental EU countries is impaired: Thus the GDP of the EU could be reduced by 0.8% in the long run and two to three million additional unemployed people can be expected. It is noteworthy that Mrs. Margaret Thatcher, in responding to a question about whether the UK should join the Schengen Treaty, responded (to paraphrase) ‘No, since we do not want a situation in which Greek civil servants would effectively control access to the UK’.

The EU will face serious challenges. With France facing serious economic problems plus a new broad fear of terrorism and Germany being politically destabilized through Merkel’s decision-making in September 2015 as regards the refugee crisis and the following enormous rise of the AfD, there will be lower economic growth in Germany and the eurozone, respectively (Germany accounts for about 23% of EU GDP; France for 16%); what’s more, the xenophobic AfD will impair Germany’s FDI inflow and thus innovation and growth dynamics and a move towards more well-paid skilled jobs. There will be lack of EU leadership and this in turn will undermine the EU’s stability. A weakened EU implies a weaker NATO and this should worry the EU.

Mr. Putin is likely to cheer this new EU weakness and the rise of the AfD and the number of populist xenophobic parties in many EU countries is bound to increase. The only positive perspective for 2017 in Germany concerns the election victory of the Green Party Baden-Württemberg Minister-President, Winfried Kretschmann, who was not only re-elected but his party is now No. 1 in that state with 31% of the vote. If Kretschmann should become the first green candidate for Chancellor in Germany, he should be able to get about 40% of the votes in Baden-Württemberg and about 20% for Germany as a whole in the national elections in 2017. This might be enough to create a conservative-green coalition government that may be expected to push for ecological innovation and green growth.

The political pitfall of a visible non-EU spirit of Chancellor Merkel is another argument for calling for an EU political union in the long run. An EU that spends only 1% of GDP in Brussels is much too small in fiscal terms. The US federal government expenditure relative to GDP of 9% (without social security expenditures) is so much higher than the relative level of EU expenditure, but Germany and the UK are the main countries that so far prevent an adequate reform of vertical government expenditure. With infrastructure and military expenditures largely concentrated in Brussels, the Eurozone/the EU could have a much more effective fiscal policy and fiscal federalism also gives clear arguments that the EU’s government expenditures are much too small. The strange hybrid institution of a European Commission that is both a legislative and an executive institution is also doubtful; a true Eurozone Parliament and a Eurozone government is what is needed, plus a distinct EU income tax. The overall tax burden should, however, fall in the EU, if all political layers are added up – efficiency gains in a political union could lead to this result. If the EU should disintegrate, there will be globally negative spillover effects since other regional integration schemes will also be destabilized (for example, ASEAN and Mercosur). The British steps towards a BREXIT will dearly cost the UK and continental Europe plus the world economy at large. Like Mrs. Merkel, Mr. Cameron is a conservative politician – both not having a bright intellectual perspective. The expansion of populist right-wing parties in the EU will lead to more protectionist policies in key European countries. This is neither in the interest of Europeans nor of the US, China, ASEAN or Japan. The AfD has also indicated that its leaders favor more cooperation with Putin’s Russia and they are against the proposed Transatlantic Trade and Investment Partnership of the EU and the US. The AfD, UKIP, Front National and other right wing populist parties will lead Europe back into the late 19th century. One can only worry about such irresponsible perspectives. Historically, Chancellor Merkel’s ill-guided refugee policy amounts to a broad political destabilization of Germany and the EU, respectively.

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Allgemein, Economics, European integration

BREXIT Referendum and Mr. Boris Johnson’s Immigration Story

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    BrexitWelfensEIIW2016feb, February 23, 2016

BREXIT Referendum and Mr. Boris Johnson’s Immigration Story

The EU summit in Brussels has brought a compromise which gives new priviledges to the UK – the British conservative government was mainly interested in being allowed to postpone the access by immigrants to British social security services for about four years and not to face EU pressure on the UK to join the euro area in the future. Prime Minister Cameron has decided, along with his government, that the compromise is good enough to call for a referendum on June 23 and he has recommended that the public vote for the UK to remain in the EU. Mr. Boris Johnson, the conservative Mayor of London on the other hand has declared that he will recommend voting for BREXIT, the UK’s leaving of the EU; the anti-immigration and anti-EU rhethoric of Mr. Johnson is part of his ideological voting perspective. He, as Mayor of London, has been unable in the EU’S richest capital city to solve the problem of helping keep poor eastern European immigrants from sleeping out in Hyde Park (and other parks) overnight and to either travel home or to find a job in the greater London Area. Clearly, many people in London, and also many tourists, did not enjoy the scenes of stranded immigrants from eastern European, Turkey and other countries. Mr. Johnson’s anti-immigrant and anti-EU attitude is strange for many reasons – one of his two grandfathers, namely Osman Ali, fled from Turkey to London many decades ago; interesting, isn’t?

If he does not want to accept, at very generous terms, migrants from EU partner countries, why would EU citizens continue to consider flying to London and investing in the British capital? Also, people in continental EU countries should remember that it was UK financial market deregulation (emerging under the pressure of irresponsible big banks in London etc.; and US financial market deregulation) which brought about the massive transatlantic banking crisis that has undermined growth to a large extent in almost all EU countries. Northern Rock was facing a bank run long before the collapse of Lehman Brothers, and many big London banks were involved in cheating on the Libor interest rate and in many other deals with millions of clients. It seems very odd that Mayor Johnson now takes this anti-EU attitude.

Politicians like Mr. Johnson will lead the UK and Europe back to the 19th century and sooner or later military expenditures relative to GDP would be back to about 4% – the relevant figure around 1900 for the leading European countries; more than twice as high as the level in 2015 and, in the historical perspective, during the period leading to the deadly World War I. The British people will make their decision independently in the referendum, but the outsider continental view favored here is to say that the UK would be very welcome to remain in the EU; at the same time, however, double-speaking politicians such as Mr. Boris Johnson will face strong opposition from millions of responsible European citizens. It is strange in any case that UKIP, with three million votes at the national election, could effectively hijack the Conservative Party in the UK and start a political blackmail maneuver against 450 million EU people on BREXIT (explanation to follow…).

Additional reflections from my January 2016 contribution

In the UK there is a long-standing debate about the option of leaving the European Union – as announced by Prime Minister Cameron there will be a referendum on BREXIT in 2016. In sections of the British press there is a debate which would seem to suggest that the BREXIT topic is a kind of rational political question (see, for example, the Economist: interview with the pro-BREXIT activist Dominic Cummings on January 21, 2016). The truth, however, is that the BREXIT question has become part of the agenda of the British government – and of that of the Labour Party – as a direct consequence of UKIP’s election victory in the European elections of 2014: only due to UKIP did the BREXIT emerge as a topic for discussion. UKIP’s No. 1 position in that election was as remarkable as that of the Front National in France and the strong showing of the populist right-wing party AfD (Alternative für Deutschland) and all three are reflecting nonsense results related to a European vertical political architecture which stimulates voters to vote for small radical parties at European elections. In Germany the Forschungsgruppe Wahlen – a leading voting analysis think-tank – has analyzed voters’ behavior and finds the following result (axplained by a representative of Forschungsgruppe Wahlen in Düsseldorf at an higl-level meeting of experts from academia):

  • when asked about relevant topics at a local, regional or national government level voters have a clear view about the respective issues. However, when it comes to European elections voters have no clear idea about the relevant topics at EU level – since the EU expenditure-GDP ratio is so ridicously low (1%; 1/9 of that of the US at the federal level). As a consequence voters are inclined to vote on an emotional basis and to actually prefer small radical parties which normally do not enjoy high voters’ shares at the national level. With the financial rewards obtained for every vote received at the European level these radical populist (often right-wing) parties can then invest in national political campaigns. Thus the strange vertical political architecture with the mini-role of supranational government – defended by many German and British politicians under the headline of “subsidiarity” – has contributed to an ever-declining voter turnout at European elections (with a minor exception in 2015) and an ever-increasing share of anti-EU radical populist parties. This is not to say that one cannot find crucial points of inefficiencies and political contradictions in the EU, but the anti-EU sentiments that have grown over decades are largely the artificial result of a contradictory and inefficient political vertical architecture in Europe. Had the supranational EU level – in line with the economic theory of Fiscal Federalism – control over part of infrastructure expenditures, military expenditures and the unemployment insurance, the voter turnout for the European Parliament would be much higher, fiscal policy much more effective, the political competition in Brussels more intensive and the role of UKIP, Front National and AfD effectively negated. Mr. Cameron would never have considered the issue of a referendum on BREXIT the debate over which will largely emphasize the allegedly too large a role played by the EU and that immigration into the UK is a major problem. This is the paradox of the insufficient EU budget and could lead to a truly European political tragedy from which only China, Russia and some other countries will benefit. Is this what people – rational British voters – are really interested in?
  • BREXIT will destabilize the EU, weakening the role of traditional liberal economic countries such as Germany, Denmark and the Netherlands. With Germany increasingly destabilized over time – and struggling to come to terms with the refugee wave that is bound to further reinforce right-wing populist parties in Germany – it will not take many years until there is full EU disintegration plus economic stagnation; and Germany, France, the UK and other countries will return to a stark agressive political rivalry that leads Europe back to the period before 1914. This includes defense-GDP ratios which will increase from below or close to 2% to about 4%, just like in the decade before World War I. Is this what is in the interest of the UK? The artificially strong UKIP has imposed on the British political system an artificial referendum that under normal rational circumstances – in a US-type European Union – would never play any role on the political agenda.

Does it therefore make sense to consider the elegant pros and cons of an artificial, irrational referendum on BREXIT? Not really. There is a lack of political and economic enlightenment in Europe and the potentially rather powerful European Union might face a sad long-term decline and disintegration from which primarily the autocratic and anti-democratic countries worldwide will benefit – with Russia and China to be the leaders in this regard. Disintegration of the EU will clearly undermine the integration prospects of ASEAN and MERCOSUR and the whole concept of regional integration and peaceful economic cooperation. The British people has made the UK a pioneer in democracy, liberal markets and free trade plus the rule of law. An unreflected UK debate on a BREXIT referendum would endanger half a millenium of political progress and rational decision-making. Beyond the UK referendum there are several questions to be analyzed:

  • How can the EU successfully cope with the humanitarian challenge of the refugee crisis? The rather silent role of the UK in this field is strange.
  • How can a more effective and efficient vertical integration generate more benefits for the EU member countries and help to bring about a more intensive political competition process?
  • How can the liberal forces of the EU be reinforced and inconsistent minimum wage policies – as in France and Belgium – be avoided in the future?
  • How EU integration become remain a role model for integration around the world?
  • What is an adequate role for the principle of subsidiarity in the EU?
  • Why are key facts on the success side of immigration – for example the more than 7 million new jobs created by immigrant entrepreneurship – so poorly known in the British public?dd
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