Over the last few weeks as polls have shown that the vote on whether Britain will leave the E.U. to be exceedingly close with the “Leave” crowd gathering strength, we have been treated to increasing amounts of editorializing that a British exit would be a disaster; both for the British and for the world economy as a whole. Even Barack Obama has weighed in and stated that a British exit would seriously impact the “special relationship” that Britain has historically enjoyed with the U.S. The institutional infrastructure has lined up behind the “Remain” campaign, and as of this writing, it is unclear as to whether this will be enough to keep Britain in.
But the question of the whether a British exit would be an economic disaster is one that is far more complex than what the analysis currently on offer seems to appreciate. The sometimes shrill denunciations remind one of the promises of disaster that will befall the world economy if Greece (accounting for 2% of the E.U. economy) were to be forced out of the euro or the E.U. Although the exit of the British economy (which is the world’s 9th largest national economy and second largest in the E.U. after Germany) would have a significant negative impact on the E.U. as a whole, it is not exactly clear that the long-term impact on the British economy would be negative.
What IS clear is that the current economic structure and Britain’s place within the E.U. is very good for the elites of Britain. For them, unity with Europe and the economic linkages resulting from that, have provided a living, if not wealth/power/status. Naturally, they don’t want a disruption to the status quo. The shrillness of some arguing for the “Remain” camp implies that they believe that an exit would negatively impact them personally.
What is also clear is that there is a significant fraction of the population that doesn’t feel that they are benefitting from the current arrangement. What they do feel in many cases is that they, and the government that they help to elect, has limited control over their destiny. Many feel that their concerns, such as uncontrolled immigration that forces competition for scarce jobs (or drives down their wages), are dismissed and ridiculed as racist by an elite insulated from the effects of the policies that they impose on others. While the magazine “The Economist” dismisses “romantic notions of national sovereignty”, a population that feels disempowered and ignored is not going to care that GDP grows by an extra 1% or that inflation is 2.5% instead of 2%. What they are going to care about is that they feel that they can change things to their benefit through collective action. Simply being told that they have to accept things as they are because an unaccountable, uncontrollable, bureaucracy in Brussels says so (when they don’t feel that they benefit from the arrangement) is a real problem. It is not some imagined problem with an imagined solution.
But this doesn’t mean that a Brexit won’t be economically problematic in the short-term. There is a certain amount of jobs that are dependent upon the current arrangement, and a change in the nature of the status quo will likely mean some economic dislocation. During the recession caused by the financial crisis of 2008, the British economy shrunk by 7.2% from peak to trough. Although problematic and undesirable, it did not mean the end of Western Civilization as we knew it. Were the Brexit to have a similar economic effect, it might be thought of as a small price to pay for the future flexibility that British governments will enjoy not being tied to the E.U. in the same way that they are now.
Also, the sometimes boisterous arguments against leaving could possibly mean that economic problems that caused by an exit are being oversold. The idea that there will be a “sucking” sound as jobs leave for the continent imply that Britain has no economic leverage. In fact, the British GDP represents roughly 16% of the total E.U. economy, which means that it can’t just be ignored. In addition, the fact that Switzerland and Norway have thrived outside of the E.U. means that a British exit doesn’t have to mean a massive economic depression with a lost economic generation on par with Japan.
Whether a Brexit will ultimately prove to be beneficial or damaging economically speaking is really something that can’t be said for certain at this time. Whether any economic dislocation associated with a Brexit turns out to be a transitory phenomenon or a more permanent reduction in GDP will depend on the skill of certain policymakers going forward. However, simply being outside the E.U. is not likely, by itself, to turn Britain into a third class economy. Pretending that it will reflects a blindness, dishonesty, or perhaps both.