With US President Barack Obama throwing his weight in the Brexit debate — supporting (in economic terms) the ‘Remain’ camp — it should now be very clear to everyone in the UK, and especially to the ‘Leave’ camp, that there is no such thing as economic sovereignty in our age of a globalised world economy.
Of course, the leave camp is driven primarily by a quest for political sovereignty, not economic sovereignty, but it is extremely difficult to separate the political from the economic for a country of UK’s size and significance in international relations.
For a nation that produced some of the most influential works on political economy, from Ricardo to Keynes, the referendum on the EU membership in June will call for some fine thinking on the subject. Because, if the leave camp wins, Britain may find itself in a historically significant wilderness as a sovereign state, looking into a tunnel without light for quite some time.
The sterling and the UK government bond markets have already felt the chill of the possibility of being in wilderness in international relations. Alarmed by these adverse developments, the Bank of England (BoE) and the UK Treasury have produced calculations showing the economic loss the UK is going to suffer outside the EU.
Most of the arguments of the leave campaign, on the other hand, were based on a political assessment of the economic balance-sheet of the UK from an EU membership in the aftermath of the 2007 financial crisis.
A referendum would have been unthinkable in the booming years of the early noughties. Therefore, the remain campaign feels that the success will hinge upon putting forward a strong economic argument on the higher cost of leaving the EU.
And it looks like the votes in the referendum will swing to the tune of perceived economic benefits of leaving versus remaining. So, Obama’s intervention to warn of the economic costs of a Brexit was very effective although the final outcome of the referendum is not guaranteed.
The economic cost of Brexit is extremely difficult to be expressed in monetary measures that ordinary people would understand. Like most economics, all long term calculations are based on numerous assumptions about not only what happens in Europe and the world economically but also politically.
Notwithstanding the difficulties of measuring the direct cost of Brexit, I believe, the economics of both the remain and the leave campaigns are based on fallacies rather than reality.
For example, the most important economic and social problems with seriously destabilising potential have nothing to do with the EU and all to do with the UK’s own historical choices and economic structure.
In my view, the most important economic problems of the UK are affordable housing for the younger generations and adequate pensions for the ageing population. Both the housing market and the pensions system in the UK are as British as roast beef and have nothing to do with EU membership.
These two generational problems pose great social and economic threats to the UK and leaving the EU will reduce the number of options available to solve them. Being cut off from the financial and labour markets of the EU is likely to increase the costs of home ownership and returns on pension funds.
In addition to these generational problems, the UK’s other structural problems preventing the creation of jobs and causing the deterioration of public finances have nothing to do with the EU either. Past industrial policies and the heavy reliance of the banking system on funds outside the UK mean that the UK has a very high current account deficit that makes foreign direct investment and capital flow into the UK vital for deficit financing.
Could such structural problems really be balanced by the economic opportunities outside the EU, as the leave campaign argues? The spectacular post-crisis growth of emerging economies in South America, East Asia and Africa ground to a halt in 2014, when the US ended its monetary easing and the Chinese economy started to slow down.
Therefore, the UK’s ability to achieve higher economic growth outside the EU by increasing trade with the emerging economies and China, is no longer a realistic future. On top of this, leaving the EU is very unlikely to make the UK an attractive base from which corporations from the US, Japan and China could trade with the EU.
We now live in an age when trade agreements between major economic powers, like the Transatlantic Trade and Investment Partnership (TTIP), are the norm. If the UK leaves the EU, it is not going to have meaningful economic or geopolitical power to protect the economic interests of the country.
London, as a city state within the UK, could of course prosper outside the EU because of its strengths in international finance and openness to cosmopolitan wealth. But this would also increase the already unhealthy divide between the South and the North of England especially, accompanied by considerable political and social problems.
The current debate on the economics of Brexit revolves around a suspect analysis of the external economic and political conditions that have arisen over the last seven years since the financial crisis of 2007, rather than the internal dynamics of the UK economy, itself.
The fatal weaknesses of the UK economy are embedded in the country’s structural problems, such as the dysfunctional housing market, crumbling pensions system, high levels of current account deficit, low productivity, low private sector investment and regional imbalances.
The UK is more likely to find solutions to these structural problems within rather than outside the EU because isolation is likely to cause currency volatility and a serious balance of payments crisis that will discourage foreign and domestic firms from long-term investment and trade decisions.
The economic promise of Brexit increasingly looks like a mirage — and a delusion.
The writer is with Manchester Business School.
