The Damage a Brexit Would Do to the UK and Europe

Adam how do you see the impact of the shock that this would be as sebastian says both on the UK economy its external balance that's already rather fragile and more generally on the economy of the eurozone yes thank you Michael thank you all for coming out aye aye very much agree with Sebastian which will probably not surprise you but but let me try to give a slightly different perspective on why he's right and why it isn't just a bunch of us CFR types in conspiracy with everyone who loves the Queen trying to preserve us from from the godless the voters the first point to be recognized is this becomes a huge downturn in the attractiveness of investment in the UK and this comes from multiple sources the first is the uncertainty that Sebastian articulated which is absolutely right we're already seeing it in the data we're already seeing a full stop to house building in the UK we're already seeing a full stop to corporate investment in the UK we're already seeing foreign investors of large multinationals saying I can't go forward and this uncertainty will only get worse we're also seeing uncertainty because this is a regime shift now the UK has prided itself for centuries now and not really having a written constitution but this is effectively a changing Constitution this is this is of that level of seriousness and so the and that and as we know for those of you seen the musical Hamilton as well as other versions of American history constitutional shifts reflect the interests of who's in power when you write the Constitution and if it is Boris Johnson Michael Gove Nigel Farage and their ilk who are in power writing the Constitution they are essentially writing a nativist as Sebastian rightly says fantasies of deregulation and not all regulation is bad by the way Constitution that will be very harmful to economics the third point is the specific EU relationship as Prime Minister Cameron said while I was at the Bank of England you know the total amount of tray that the UK had with the now but knighted bricks was less than the total amount of trade they have with Ireland so this additional fantasy that somehow the UK can completely reorient in the face of history and geography that it doesn't matter somehow that they're going to throw up at a minimum uncertainty and almost certainly extra trade barriers with their huge market for centuries is absurd so this is why sort of going back to something Michel said the campaign has become really about immigration versus economics sort of status quo are you shooting yourself in the foot or the head versus do you care about people who don't look like you making sure they don't come to your town and sadly that is very much what this is about two other points if I could on the economic shock in the short term there is a sense and some people in the Bank of England has been very careful not to say what they would do understandably there is a sense that among some people that owe the bank of income right to the rescue and the currency may drop a lot but that's okay it'll be stimulative and the Bank of England well maybe they can't really cut rates but they can print more money and it'll be okay I think this is a very bad bet I think there are very few examples in history we have of countries pulling themselves out of peaceful trade relations and integration with other countries very few usually when there's been a revolution or a right-wing coup or something you have to go to like Latin America Mercosur and things like that so the number of examples of this are very few but the record is you get a currency crisis you get a crash in the currency and the central bank basically has to put up interest rates to keep inflation from going out of control and to keep from a downward spiral in confidence that no one's minding the store and my bet is that the Bank of England might initially try to hold off or possibly try to do more stimulus but in the end they would have no choice it would be going back to Michael and the point about a current account deficit your rerunning some of the bad 1870's now obviously you don't have a fixed exchange rate peg so that buys you something obviously the UK is a far more competitive place now than it was 40 years ago nonetheless the odds are instead you get a capital flight and interest rate hike in a recession the final point I raise is longer term so as Sebastian indicated there is a longer term growth effect here and if this investment just fails for a few years that already compounds the recession and the cost of the forgone investment we already had due to the crisis that's bad enough but if you are fundamentally changing the UK the question comes what is your economic model going forward my concern is in part based on comments by the leadership of the pro brexit vote is that they essentially double down on being a financial center there they say we want to be the offshore financial Central Europe oh look the Chinese are going to start trading renminbi denominated in London it's going to be great well there are three major problems with this the first is that's actually not done very well for the UK in recent years as Mervyn King used to say this has completely unbalanced the British economy that's why you have such wealth and such concentration in London and such relative improvisation of other industries in other regions of the UK it's just a huge distortion it tends to overvalue the currency it tends to move things in the wrong way on the current account it's very bad second despite what governor Carney said a couple years ago about being willing to have bank balance sheets at nine hundred percent of GDP the fact is as Iceland and Ireland and Portugal have shown it's not a good idea to have banks that are many many times larger than your GDP because you're left holding the bag as taxpayers when something goes wrong and so if the UK goes down this Avenue they are just exposing themselves more and more to future risks the third reason why I'm concerned about this is because I think they'll be desperate if there is this kind of recession we're talking about even in the short term if they do after promising oh this is going to help the queue times at the NHS but actually they end up having to cut further the NHS they're gonna be desperate to do something and the banks the investment banks the major commercial banks are already talking about pulling out of London and they're going to lose some business to probably Dublin not Frankfurt because the euro area trading and stuff in the euro zone will want to take place inside Europe but so then if you're anti-regulation fantasy's to begin with you start going down the path of oh we can become an even more offshore center we can become the Cayman Islands writ large a Panama writ large and this frankly is a way I think it also spills over to the rest of the world is that the UK decides hey regulatory arbitrage letting AIG financial products run in London actually destroyed the US financial system didn't hurt us made us a lot of money let's continue down this path let us be the the race to the bottom financial center and I think that that's where this is going because they're not going to have any other good option it's not good can I pick you back on some more narrow economic transmission mechanisms because I think I think consensus dissolving marriage analogy is very apt as well as very lively its integration is a word we toss around a lot but the degree of integration of the UK with the EU economy is very large and so it is a lose-lose I completely agree with Sebastian that and and Constanza that both the game theory logic and the actual statements in private and public of senior European officials is we cannot let this be easy for the UK if there's not going to be a nice divorce here we need a settlement that is that pays me alimony for all that I gave up all those years and putting it very crudely I mean it's it's if you have 27 nations think of it in congressional terms any deal is gonna have to basically be approved by all 27 so each one is going to just simply take its own little veto point and say if if I'm fine Denmark I want something on agriculture if i'm ireland i want something on border control if i'm italy i want something god knows what i want money but whatever it is they're each gonna try to extract something as well as having this desire to deter others and that is logical but it's also harmful to europe it's harmful to europe itself it may not feel it has a choice and this may be where it comes out but it's harmful to european trade and european economies it raises the level of uncertainty about investment and integration excuse me within europe and then you start having to think through all the things that have to be untangled so let me give you a couple examples so we've mentioned Ireland as Sebastian pointed out as my colleague Jacob Kierkegaard appears Peterson stitute was among the first to point out you're going to reinstitute this border between Northern Ireland and Ireland that reopens entirely the peace process the questions all that but you also are doing huge damage to Northern Ireland economy and some major disruption to the Irish economy at the same time you probably have a non-trivial number because remember Dublin's kind of small a non-trivial number of financial services and other industries who want to move their headquarters from one to the Dublin because it's english-speaking rule of law short flight they can even still live in London if they want but so Ireland gets completely whipsawed in different ways Spain there are a million UK mostly retirees living in Spain they are not going to have access to the health care in Spain paid for anymore what happens to that do they all move back to the UK which is an interesting form of not my immigration but which is going to do more to bankrupt the NHS than any sort of polish plumber of working-age do they dump their real estate on the market in Spain because they can't live there and count on health care anymore or what happens to the Spanish real estate market which is just recovered from all the terrible Poland this gets more into the kinds of things Sebastian was talking about you have a right-wing government that has been increasingly going right-wing they took off on this overhyped anti neoliberalism thing from the IMF and made a public statement well we read basically recanting everything we've done for the last 30 years even though that made us the best performing economy in Eastern Europe you start getting this momentum between Poland and Obama and Hungary of not just populism which I frankly it's the more serious part I agree but of anti anti liberal economic policies and then of course in the financial markets you start pricing back in breakup risk in the euro area so it does come down to what Constanza mentioned can the EU turn this into some whole new integration project and that has been the theory of functionalism that we've always had with the EU there's a crisis we respond by doing more I am very scared that this time at least it will be a long lag before that happens and there would be a lot broken as a result let me be more boring and more optimistic with one exception the historical record including the Scotland both the Parti québécois vote pass votes on the front Nationale and in France in general is you do go back to business as usual I think you get a brief run-up in Stirling and the stocks in the UK and whatever nothing material of long lasting significance I think the status quo bias is at least as strong for businesses as it is for voters there will be a sigh of relief I don't gain say anything Sebastian says about internal British politics where I want to pick up on konstanz and then she can correct me is I think that the real fraying is UK intra UK EU that maybe there's not distrust maybe there's a sigh of relief maybe it's an agreement to live separately but not fight in front of the kids but essentially there ain't going to be that many more special deals for the UK I mean there may be a little bit of if the UK aligns itself with Denmark and Poland and creates a euro out block maybe something but there's just not going to be much there the final thing I would say is I think the biggest positive upside is I've been very worried obviously about the Trump scenario both Donald and I will be in London the day after the vote I assume he will get more press coverage than I do he has a better tan but you know I am very afraid that a bread should vote essentially legitimizes nativist populist movements so if you go back to history and you look at Malini roughly 1929 there were a lot of people including in the UK including in Germany including the US has said the classic it makes the trains run on time it was legitimating for Hitler and the Nazis in the 30s that oh yeah these people say that in office out of office and they're terrible but in the end they come in nothing horrible happens and so to me the the big effect a big affair and say they a big effect of a remain vote is we can continue to say these for our people outside the spectrum there and that applies to Trump adament better than the question about the micro impact the EU is very often seen as a top-down project but what would people at the factory floor level or those that the more popular level what would be different yeah it's unfortunate our colleague from our court chose to phrase it is I don't need higher level I need micro yeah because it that means one of two things it means either that one and this may be the reality one needs a set of attractive lies to appeal to people who are nativist and who are making their decision on completely bogus basis or it means that Alcoa and other business leaders are not being Frank enough because the reality is I can't obviously speak for your company but the auto industry will centrally shut down in the UK if it's not an export model to Europe if they're not part of the single market if they're not part of the same regulations if it's always been a lot cheaper to move to Eastern Europe to move to southern Europe high-value-added you know it's not that hard to find high value-added skilled workers of manufacturers throughout Europe so it's hard and then if we talk about a pound that declines by say I don't know 10 20 percent a Britain that imports vast quantities of food clothing entertainment everything except fuel that's a huge hit to the people's standard of living NHS as people have pointed out who've done the real numbers the migrants because they're younger and hardworking are essentially net payers into NHS and as I mentioned there's more than a million because it's not just Spain closer to 2 million older Brits living in Europe whose health care needs are being taken care of by European health systems and they're gonna have to come home or the UK is gonna have to start paying those foreign health services for they for the cost I mean it's a huge material hit to the average working person I know you didn't mean it that way but I just I'm just it is it is ultimately the same question as with trauma has was marine lepen the facts campaign that Sebastian I think has been part of my friend Jonathan Portis who's been out there doing this I mean at some point whether it's journalists or politicians or us in the suppose that elites you know there there is a problem when you say these are the facts and the people who stand up in lie can't be contradicted in the in an effective way so the stuff they say about migration for example I'll end here again I know you know this but I don't know how this isn't micro you're living in the middle of England and you say I really am sick of having a Polish deli in this town and a group of people who don't look like me and speak and I think it's bad fine so you pass this law you put up more immigration barriers what's gonna happen is you then still are going to have huge pressures for illegal immigration because the French are just gonna stop policing the border at Calais the Irish are gonna be not very happy and the Danes and all the people close to coastal to the UK you have all the non EU migration that's been coming for decades and it's much bigger than the intra EU migration because the intra EU migration people go home during the recession a lot of poles went home to Poland it's just not gonna work the only way it works is if you do truly get intrusive in draconian ways in the UK and change huge numbers of laws I mean again it's like the reductio ad absurdum of trumps wall you know you can literally deport millions of people you can literally build walls but it destroys your society and so in the end I don't view that as high level I view that it's very real and it is of course and I completely sympathize with you and I feel this unable to sleep at night whether it's here or in brexit that things that are common-sense realities somehow cannot be communicated and maybe it's because people of us like a CFR are inherently bad messengers but somebody has to be able to say the other stuff is a lie

Channel: Peterson Institute for International Economics

Views: 61,362

Keywords: United Kingdom, European Union

Id: pa-ZFKzzMvQ

Length: 19min 33sec (1173 seconds)

Published: Thu Jun 16 2016