Posen Discusses the Damage of Brexit to the British Economy

good morning and my thanks to Desmond and to Alex for having me here um as was mentioned in the introduction I spent three years as a policy maker at the Bank of England so I am here to provide the economics at least that's how I view it of what this will do to the UK and therefore how this affects the relationships with the US and with with the EU I think very I very much agree with the number of ambassador Sullivan's comments I just want to start where he started I think it's the wrong decision for the UK but they're entitled to it so the question is what happens as a result of making that decision I like to think of AEI as the place inspired by people mugged by reality some of you will remember that famous Irving Kristol quote and I fear that both several people in Britain and some people on this panel are either in the process of or about to be mugged by reality the UK definitely had a long-standing ambivalence about membership in Europe and there is no question that part of the European project and written in the laws is the idea of an ever closer Union and so there was this happy ambivalent state happy in the sense it was the best anybody was going to do of the UK being sort of in sort of Al and that worked well pretty well for everybody but was not a sustainable equilibrium it was not a sustainable equilibrium once the euro area became a majority of the Member States it was not a sustainable equilibrium once the foreign policy arm of the EU started to develop more coherence and it was not a stable equilibrium because there was a cultural current we can get into why and how but recurrent throughout Britain and particularly in England that the EU was a problem much the same way people decided in this country Washington was a problem and and so this was not going to last and so we now do have the break and what are the implications well the implication is very simple the UK economy is going to suffer what we call a negative supply shock and in fact is already doing so what is a negative supply shock a negative supply shock means you are reducing the productive capacity of your economy or the ability of your economy to purchase things for the same amount of money as used and this takes several forms fundamentally and again this is something that I would hope in the AEI would be religion it is across the street of my shop putting up trade barriers is bad for your economy the withdrawal from the EU is a form of putting up trade barriers we'll stop now you can debate how much how big which industries what happens in the end but it is a withdrawal moreover and this relates to some of the things about Darrell Sullivan said it is a negative supply shock in that yards you are ruining your competitiveness specifically with your largest trading partner it is a fact of life it's one of the few things in economics we can talk about as a fact of life the gravity applies what is gravity you trade far far more with the countries you are contiguous with in the countries that you historically have interacted with than with countries that are far away that is true for the u.s. in the context of NAFTA that is true for the UK no matter how much there's been a special relationship no matter how much the UK tries to be a global exporter the fact is you've got more than twice as much trade with the EU one choice as much investment with EU as you do with the US or let alone the rest of the world as David Cameron pointed out when Prime Minister while I was at the Bank of England the UK does more trade with Ireland they do with the BRIC countries combined Brazil Russia India and China so this is negative full stop and even if we were to get the kind of UK US trade deal and ambassador Bolton puts forward I don't think we will and explain that at the very end if we have time but even if we were it would not matter very much compared to the shock additionally because the UK had this special status as the less regulated less low tax english-speaking rule of law place not that all of that was in question elsewhere in the EU and certainly Ireland was similar but had this special place in people liked living in London you had a huge amount of investment in the UK as a platform to enter the EU because you were part of the EU deal that goes away may not go to zero it will gradually come down I see a representative for example 302 Motor Corporation here Toyota Nissan Ford all have disproportionate amounts of the European auto production in the UK all have indicated that they will not expand those production will probably decline those production points in the UK when the UK loses full market access fourth there is a distinction that gets made and with sort of there and ambassador Bolden and it was more there an ambassador of Sullivan's comments which is important there's a distinction between a trade deal and the access to the single market the single market is covering all those things that aren't simple the price of goods off the book it's whether your auto meets safety standards it's whether your chemicals or your food additives have been recognized it's whether you fit standard sizes of various objects its whether your accountants are accredited its whether your university degree is recognised in other countries universities now there's a large body of research on the in the US and Europe somewhat written at AEI that says many of these things are restraints from trade in reality they are partially restraints from trade and partially economically beneficial because they set standards and make it easier to have large markets in any given industry there'll be more or less of those attributes but so then the question is since the UK primarily is an exporter of high-end products and of services especially financial services business sir versus media services cultural services educational services how much do they lose by not being in the single market even if you have a trade deal and the answer is a lot most of the financial regulation that affected the UK was set in the UK and was not set by Brussels and while the UK was in the EU they had a predominant voice in the setting of those regulations in Brussels now there will be no such interest and that is why we are seeing an estimate to my colleague Simeon John cough who runs the financial markets group at the London School of Economics a third of City jobs the economic and financial jobs in the City of London will be moving to Dublin Frankfurt New York so full stop this is bad economically now you can say ah but this is four centuries over the long term it will be better so then you have to think about what's wrong with the EU economy versus the UK so most of us who see their being problems in the EU economy as a whole or at least the euro area economy because frankly Eastern Europe isn't doing so bad um tend to focus on five things we say there's over-regulation of labor markets there's heavy-handed regulation other things there's an excessive welfare state there's demographic decline and there's the problems of being associated with the euro membership now if you look at that list four of those five do not apply to the UK even as members of EU the UK has a looser labor market regulations than anyone else in the u EU the UK has a smaller welfare state than anyone else in the EU the UK was a beneficiary in the demographic sense of people from Poland and France and Portugal and elsewhere and Romania coming and helping balance out the aging of their society and the UK was of course not a member of the European monetary system even if the UK were to stay in the EU none of that would change so what is it getting so you're balancing essentially non financial regulation in certain areas being excessive versus all the other stuff I spoke about and giving up the ability to affect or push back against those regulations in future because you will no longer be a member leave the rhetoric aside look at the reality this is not a very good deal in economic terms now again you can always say well this is about sovereignty if you won't do it again I'm not fit to say that that's fine but you should be aware that there is no economical side to this so let me just be predictive in my remaining three and affluence what's going to happen I agree with ambassador Bolton that there is no going back right now I in the UK there is the the election was not about rubrics and I completely agree with him on that what it's perhaps ironic for people to understand is the real reason the election was not about brexit and there's no turnaround on brexit is not because of anything to do with the Tory government it's to do with the fact that the current extreme left-wing leadership of the Labour Party is horribly entire Corbin and MacDonald are viscerally anti-europe Corbin vote voted against the European Union back in 74 and consistently since again that's his right but if the Labour leadership were different you could have a remain vote come back as long as the Labour leadership is these two nutjobs and it will remain these two nutjobs for the foreseeable future run by the union's you will not see it working so the UK is going to have to cope with this economic aspect they're going to have higher inflation lower purchasing power weaker pound the pound is a ways to go yet because it mostly declined against the dollar where as I mentioned is more than twice as much trade and investment with Europe is with the dollar so it has to adjust further against Europe as my colleague Lord Mervyn King from the bank then begun from the Bank of England used to point out the UK have a huge set of imbalances the UK has very large budget deficits is very large trade deficits at some point that means going beyond their savings they have to pay it back well what we've seen over the last few years and in the run-up since the brexit is that we've seen a further boost of consumer borrowing while corporate investment has gone negative and trade has gone the wrong way so in other words the household balance sheets are getting worse the government balance sheet is getting worse the trade balance sheet is getting worse at the same time that they are now going to be pulling themselves out of economies of scale in their biggest markets and at the same time that there is inflation which means the real purchasing power and ability to pay off those steps is going to go down not good do the mental exercise if this was 1974 Britain and you were on a fixed exchange rate and you had this set of macroeconomic indicators you would be predicting a power crash thankfully Britain is Great Britain UK is not part of your area does not have a fixed exchange rate but if you do that exercise it reminds you of just how unsustainable the current British pathé is so then you have to go further into being mugged by reality in this game given that economic situation what does the UK do well the threesome a government has made very clear that they intend to try to become Singapore on the temps they want to become the city state alternative to the over-regulation Europe there are dozen problems with this but I will highlight one in particular that Theresa Mae came out repeatedly saying well the way we're going to get around these immigration restrictions which we're going to put in place we're going to make it hard for you people to have secured citizenship in the UK we're going to control our borders you know that phrase and not let all this cheap labour and foreigners and Eastern Europeans in but yet home all of business is really mad about this well we're going to start allocating on an industry by industry if not company by company basis through our government permits of who gets how many immigrants in which industry for the rest of the time again this should be anathema to anyone in this building in a it certainly is a nap to any market economists basically this is the labor market program of the prefactor industrial policies of the Labor Party in the 70s and 60s which Teresa may wants to reimpose on the British economy so don't entertain the fantasy that this is going to make Britain this wonderful like Hong Kong was in the seventies it's going to make Britain like Britain was in the seventies that is a step backward that is step away from freedom that doesn't step away from prosperity again as we've seen repeatedly and not just in this country pop your votes in any given time can collect things that are in bad self-interest and political factors can rightly overcome economic concerns but let us not mistake what are the actual economic implications of brexit and finally I'll end on the fact of well so what are the values because as people at AEI have repeatedly argued rightly the arguments for free markets are not just about economic efficiency and as Arthur Brooks is going out there about morality they're about openness they're about interchange with other people's they're about foreign policy the people who voted for brexit and the choices they are making to emphasize border control and symbolism of the European Court of Justice is an ideology that is about what we call and Britain little England it is an ideology that is no nationalist is an ideology to distrust free markets and competition is an ideology the distrust change again they have the right to do this but do not kid yourself about what the values are they are not values anything anyone in this building should support I do want a second avascular also the NAM so the push back on ambassador both about who's responsible for what in and it also I think is instructive for today in September 1992 I was sitting in Chancellor Cole's office the day the UK dropped out of the exchange okay this was an accident of history that I happened to be there it had no effect on anything I can assure you but I was there okay and so there are there are there are two important lessons from my having sat there that day that I would apply to today's discussion the first is coal like Merkel now is about German self-interest they mean like the automakers they may like the ideal of Europe and as davidís argue they view that as in Germany's enlightened self-interest but they are not going to just roll over for this that or the other as has been seen repeatedly throughout the European crisis and so when ambassador Bolton is introduced is someone fighting in the bio I think you read out fighting vociferously or some other word for your American national interest the Germans Chancellor's fight pretty hard for German interest and gamma coal was perfectly content to watch the UK go bye-bye that was a call from John Major he left the room he came back in the room offered me a piece of cake coal like me was a little overweight arm and I said well you know what and he's like no no Sokka Britain they want out they get out that was September 92 the Exchange Rate Mechanism so don't overdo the idea the Chancellor Merkel or the Germans or the Europeans are going to be tabbed because of huge urban auto workers may be out of work remember 18,000 employees is 120 of 1% of the German workforce and there's huge over capacity in the auto industry second point is about this issue of is there going to be UK US trade deal again this is one of those things where there's no question president Trump and the Trump administration has the power has the right if they choose to to tear up the queue or the Disney line or whatever is the American Way of saying you sequence things they want to have a start a trade deal US UK tomorrow thank question is should it happen will happen should it happen the Trump administration what turned its back on the TPP deal which is my colleague John Cameron president CSIS pointed out to Peterson yesterday was the single biggest strategic thing the US could have done to support its allies and stop Chinese influence in Asia and you're going to argue that this is somehow a strategic priority because we have some affinity with with with the stuff on Masterpiece Theater you can do that and in fact it probably wouldn't surprise me if the Trump administration did that but it's hardly pursuing US strategic interest to just piss off excuse my language to annoy the largest economic bloc in the world I don't see what the point is especially if the Trump administration's trade attitude has expressed in its statements yesterday about NAFTA is what they care most about our bilateral trade deficits and they want to press bilateral strengths and advantages wherever they can okay then so you're going to bully give the UK a trade deal in which you believe them to make sure that they are importing more from the US than their export and what purpose will that serve don't know maybe it'll be a big victory and make up for the fact that Mexico isn't going to import more from the US as a result of NAFTA you know it's just you can do it but it doesn't make any sense strategically or economically and there was a sense in which TPP is I think Bob Zoellick argued TPP was a template ambassador or solve dimensionality of template's being useful in trade negotiations if we had TPP the u.s. had specifically made sure the TPP even though it had a geographic title of its name had no limits on geographic membership so we could have just extended TPP membership to the UK it would have been that all the standards that we would have wanted from anybody it would have been totally open to them it would have given them access not just to the US but to all these at growing Asian markets as mr. Gordon mentioned that those are where the growth is of course we threw that away first I want to strongly support and associate myself with Desmond's response to mr. Gordon on the idea that this isn't neutral it isn't neutral in two senses one strongly echoing Desmond that has I predicted a year and a half ago or you can read my column in the FT from a year ago at June 26 in which I said the dangers of an offshore Britain are that economic desperation will lead to races to the bottom and lead to bad favoring of industries and all these other things which we know as desmond rightly points out promote populism the second thing which I'll say and not implicating anyone else which I directly contradict mr. Durden is it is naive at best to pretend that there is no racial component to this if you look at the voting patterns in the UK there is a very strong statistically significant positive correlation between the diversity of the voting districts and the share that voted for brexit . it's almost a sufficient statistic to explain the vote and you can say well that's something else but I'm afraid I didn't look at fact the final thing I would say and I don't get it to the process stuff like a master O'Sullivan did let's talk about effects for anyone who's talking about the freedom of Eastern Europe or the freedom attained by US military preventing and the NATO preventing Soviet incursions talking about the transition to democracy from Spain and Portugal and Greece as ambassador O'Sullivan rightly did or the u.s. past to talk about somehow political oppression of people in Britain in the last 20 years is shameful all of you have been all you have seen there is no meaningful political oppression again you can decide as a British citizen that the symbols of what you vote on are very important to you legally that you're right but let's not gussy this up as though some great blow for freedom we have all seen in our lifetimes what's going on we are all seeing what's happening in Poland and Turkey right now and Hunter and Venezuela that's oppression there's nothing the EU is doing to oppress the people of the UK I have a little bit of political science background so forgive me if I raise a different tack which is referendum democracy is not the only way to do democracy there's a reason why the US was Republic there's a reason why in Britain even though they've chosen to ignore it now Parliament is sovereign not the popular vote the popular vote is binding in the political sense but is in no sense legally or constitutionally binding in Europe in guk so putting it differently a poll just came out in the German press the third of Bavarians would like to secede from Germany I think came out yesterday indeed cite no Indy belt you know you don't want elected officials or the appointees of elected officials completely ignoring popular opinion but there's a reason why constitutions get drawn up with less degrees of responsiveness to popular opinion I thank you very much for the stimulating discussion I'm lilah Foss with Toyota I think one of the interesting impacts of brexit was that you saw the pound the value immediately and typically an economic theory that leads to an increase in exports what we haven't seen that happen and a lot of the college that many suspect is because of the global supply chains and although the pound may be lower they still Britain restorable eyes upon so many components what other impacts do you think coming out of brexit will sort of defy traditional economic theory and also Adam as you said the withdrawal was a protectionist measure what other protectionist measures maybe UK look at to protect itself given the sort of prognosis that you provided and other things that they might do or other mechanisms they may put in place as well I think that part yes thank you so I want to provide a tiny bit more context to this you're absolutely right there is this weird phenomenon pound declined a lot and the trade gap in the UK hasn't appreciably change much but actually when I was in the UK we saw a similar thing at the start of the crisis where the trade-weighted Pound declined by 25% roughly and over the course of 2008 to existence over the course of 2009 and the trade gap didn't change very much and at the time the staff at the Bank of England and I was kissing on that was very concerned by this because it seemed weird and what we decided at the time as a tentative explanation was there were several factors one was what you mentioned that the UK is as a sort of is at a high intermediate point in a lot of supply chains so whether it's autos or expertise on oil extraction or various even financial services of certain kinds it they require a bunch of inputs literally imported inputs whether it's people or car parts before they can be exported and so the net gain you get is limited and the same is true of Japan and we see this in Japan that the decline in the value of the yen in recent years has not had as big an impact as we expected a second point is that there was a secular hit meaning a lasting targeted problem for the financial services industry the financial services industry in the UK is was at its height about 15% of GDP it's now damned fluctuating between 10 and 12 percent that's a very big change for a major economy and very sup and this had to do with the combination of the financial crisis scandals and problems within the UK over reliance on this and now of course compounded by the shift of some of those financial services to Ireland Germany Netherlands where and so that's something that the exchange rate isn't good entirely so it's less a phenomenon I think of economic theory not working and more phenomenon of the usual economist excuse and I'm sure the Nadi Carson the panel can make fun of this you know that's true terrace purpose everything else equal not everything else was little constant but in this case that's what's happening let me turn Forex and worry

Channel: Peterson Institute for International Economics

Views: 673,552

Keywords: United Kingdom

Id: EcIkIz98zXU

Length: 26min 48sec (1608 seconds)

Published: Wed Jul 19 2017

Reddit Comments

[u/Complex-Downtown]

A well spoken gentleman. He believes the vote was racially motivated by little britian and has resulted in growing personal debt, increasing government debt, and less commercial investment. He argues that the EU and Germany specifically will not allow the UK to become Singapore on the Thames. He said that the UK does more trade will Ireland than it does with BRIC countries combined (brazil, Russia, india, china) because it is a simple fact of economics that you do more trade with those you are geographically closer to. The EU will successfully apply pressure to the UK.

On a personal note I cannot concieve of an EU that will let the UK carry out european financial services. They will not stop them they will just make it fractionally cheaper and less hassle to go through an EU country and build roads around the UK. Why fight the UK when you can just ignore it and work around it, until it goes away.

[u/DenuvoSuks]

key points: uk's trade deficit will only get worst with or without a deal, but worst if it is without. The US will bully the UK in a trade agreement.

[u/forced_majeure]

"To talk about somehow a political oppression of people in Britain in the last 20 years is shameful. There is no meaningful oppression."
"We are all seeing what's going on in Poland and Turkey right now, and Venezuala, that's oppression. There's nothing the EU is doing to oppress the people of the UK."

[u/Paquebote]

This has been posted before. Interesting but repetitive

[u/AdamY_]

Posen is a very capable international economist and makes good points re the economics of Brexit. I'd say perhaps a couple of things he didn't explicitly mentioned (though I'm sure they were implied) were:

• The UK can never logistically replicate the corporate income taxation regimes of places such as Singapore, not only due to divergent economic realities (economic structure, trade as a % of GDP, market concentration, economic size, etc.) but also because of potential legislative complications and issues concerning the already-existing tax havens in some Overseas territories.
• Financial passporting is a major trump card the EU holds that would effectively neuter any UK illusions about setting up a Singapore-on-the-Thames anyway.

Otherwise very sound points and many things have unfortunately come to pass, and that's without considering the effects of COVID-19.

[u/[deleted]]

It was mostly racially motivated the hatred towards Eastern European’s in the UK is crazy.

[u/Kohanxxx]

The whole video is more interesting. https://www.youtube.com/watch?v=on1KzBvSONQ

[u/Ikbeneenpaard]

This man is aggressively American and therefore somewhat annoying but he's clearly very smart and well informed. He is spot on about the economic theory he's discussing.

TLDW clinical explanation about why project reality is coming true from a former Bank of England economist. From when May was still PM.

[u/[deleted]]

That is all fine and good. But, according the historian Robert Tombs, who is a Professor Emeritus at the University of Cambridge and currently works for Briefings for Brexit, a consortium of academics and educators who support Britain's withdrawal from the European Union, "Full membership of the SM [...] has brought little benefit to Britain or most other members. [The UK] have a huge deficit in goods, and [the Single Market] hardly covers services, our strong point." https://letter.wiki/conversation/968

Who are we suppose to believe?

PS: of course Robert Tombs just says nonsense in his letter. But I want to highlight the problem of communication and how British people were let to believe that Brexit will benefit them.