Brexit: Its not over! – Hein Roelfsema

Hein Roelfsema, a recent visitor to the University of Adelaide and Associate Professor of International Macroeconomics at Utrecht University in The Netherlands, has a unique perspective on the implications of Brexit…

There is no doubt about the significance of the impact of the UK’s choice to exit the EU on its economy. The market’s assessment is in on these effects, with share market falls and a drop in the value of the pound. The UK credit rating has also dropped.

But what about the effect on the EU?  And what will be the EU’s response and how will that feed into UK decision making?  This is a complex situation and the Brexit process is far from over.

The context is that the UK is not alone in being in a state of unhappiness with the EU.  Some of the same forces apply to the same groups in the economy, that is, those displaced by a combination of globalisation and technological change.

There is another element in many European economies which is important to consider.  These are the views of the middle class;  they are relatively highly educated, they are in work, and they hold positive views on globalisation.  But they also hold negative views on the EU – for its intrusiveness, its excessive regulation, and it’s over-the-top approach to international relations, including the way it prods the Russian tiger.

The UK decision legitimises the views of both of these groups in the EU.   They are freed to speak louder, not just mumble among themselves.  More political entrepreneurs will emerge to give them voice.  If a similar vote were held in other EU economies, it would be a ‘line ball’ decision.   This structure is fragile.

The EU is a ‘thinking organisation’, it is smart and it will respond.  Expect to see for example more efforts to decentralise to allow for higher degrees of local autonomy. The EU will start to evolve. In fact, these events may save it!

How then will the UK respond?  What will the UK actually be leaving?  Would these changes assuage some of the UK concerns? Boris Johnson is in a real pickle – he probably wanted to challenge PM Cameron through the vehicle of the referendum, but he did not actually want the proposal to pass. He looked like a tormented person on TV responding to the vote and has been missing in action over the weekend. Does he really want to be a long-term political relationship with the bedfellows of the exit campaign? He needs an out.

The EU knows this.  In this context, it will not actually push for a rapid exit by the UK. Its leadership will want to take time, in order to repair their own house and then make it more difficult for the UK to enact the currently popular choice of exiting.

The EU may also seek to gain from other pressures on the UK. One will be via markets – for example, the relocation of firms to EU economies and the decline in foreign direct investment (which is critical to fund the UK’s deficit and without which we would expect more pressure on the pound).  These will be powerful effects.

Another is via politics, with Northern Ireland and Scotland looking to secede. The EU will entertain this, in a statesperson-like manner. The days of the ‘united’ kingdom could be over; at least, that is the risk the English will perceive, which goes back to the heart of their concern (or at least the concern of older citizens) in the vote to restore what they saw as the glorious days of their independence. What an irony: an attempt to rediscover their past has led to their current dissolution!

As it is up to the UK to trigger the exit clause (the now famous Article 50), the EU could just sit back and watch and wait for these events to unfold. The smart people won’t be pushing for the UK to post the letter on exiting.

The challenge for Boris Johnson (or whomever becomes PM) is how to accept the voice of the referendum but not actually implement the exit. The changing context may provide the way out – it can be imagined with an economic crisis and political crisis alongside a reforming EU that the UK leadership might at least put a stay on proceedings. It might retain the ultimate threat to withdraw (put a time line on it, say 2 years time), but in the meantime the new UK leadership could negotiate a new relationship with the EU. That could be argued to be exiting, but actually leaves them ‘in’, in a manner consistent with the new less-centralised EU.

Brexit?  Its not over.

This entry was posted in Business economics, Economic reform, International trade, Public policy. Bookmark the permalink.

Leave a Reply

You must be logged in to post a comment.