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Tuesday, July 5, 2016

Why Brexit Is (Probably) A Bad Thing

The decision of British voters to leave the European Union (EU) will probably be a bad thing, not only for Britain, but also possibly Europe and the rest of the World. Why? Well, aside from the fact that Russia's Vladimir Putin thinks it's a good thing, no doubt because he thinks it will weaken Europe and help Russia, here's a few reasons:

1. Capital investment: Economic uncertainty reduces capital investment, which is necessary for economies to grow, innovate, and thrive. In fact, on July 1st The Financial Times reported that deals worth £650m had been pulled as a result of the Brexit vote. And uncertainty will continue to reign until Britain and the EU negotiate the terms of their divorce. The best case scenario is for EU members to quickly agree to keep Britain as closely tied to the EU as possible without being a member. It would be similar to the relationship that Norway and other countries in the European Economic Area (EEA) have with the EU. Such a relationship would have its costs: EEA members make large payments to the EU, and they have to observe all EU single-market regulations without having a say in drawing them up. However, this would also mean accepting the free movement of labor, which the Brexiters campaigned against (see below). Thus, a more likely scenario is that the negotiations will drag out, which will prolong uncertainty, reduce investment, and hurt Britain's economy.

2. Free trade and open markets: Although open markets have deleterious effects, there is little doubt that they contribute to an economy's long-term growth. The answer isn't to restrict trade, but to put in place social safety nets (e.g., single-payer health care) and educational advancement options that help those displaced by a rapidly changing economy. To be sure, Brexiters argue that by leaving the EU, Britain can negotiate its own trade agreements with non-EU countries and not be subject to EU trade regulations, which Brexiters argue restrict free trade, thus making it easier for Britain to trade with the rest of the world. That argument, however, is problematic. First, almost half of Britain's exports go to EU countries -- not having access to the EU single market will hurt the very people the Brexiters claim to be protecting. Second, Europe has negotiated scores of trade agreements that Britain would need to redo, and as The Economist notes ("Divided We Fall"), Britain "would be a smaller, weaker negotiating partner. The timetable would not be under its control, and the slow, grinding history of trade liberalisation shows that mercantilists tend to have the upper hand."

3. Free movement of labor: Research has found that immigration positively affects a nation's economy. Immigrants contribute more to a country's GDP than they take away, but they are often seen as the problem. As The Economist noted a couple of weeks ago ("Divided We Fall"):
Leave has warned that millions of Turks are about to invade Britain, which is blatantly false. It has blamed strains on public services like health care and education on immigration, when immigrants, who are net contributors to the exchequer, help Britain foot the bill. It suggests that Britain cannot keep out murderers, rapists and terrorists when, in fact, it can.
And, as FiveThirtyEight recently reported ("The U.K. Can't Block Immigration If It Wants To Keep Its Finance Industry"), Britain will not remain one of the financial capitals of the world if it insists on restricting immigration. Why is that important? Because Britain's financial services industry accounts for about 11% of all tax revenue.

4. Scotland and Ireland: Scotland voted to remain in the EU and now is considering another referendum to gain independence from the UK, so that it could rejoin the EU. That would probably be bad for both economies. And in Ireland, the 1998 Good Friday Peace Accord, which has helped reduce the tensions between Northern Ireland and the Republic of Ireland over the last 18 years, "required" that both the United Kingdom and the Republic of Ireland remain in the EU. Many see the sharing of British and Irish national sovereignty within the EU "as an important softening of the bipolar choice between British and Irish dominion in Northern Ireland... [a decision to leave the EU] will be seen by many nationalists as a reconstruction of political and even physical barriers between the north and south of Ireland, which the Good Friday agreement was designed to reduce" ("Troubles Redux: Brexit Would Put the Good Friday Agreement in Jeopardy").

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