By Roy C. Smith
The stunning events depicted in the movie Dunkirk, one of the summer’s top sellers, was short on context so possibly not everyone understood that it was Britain’s worst military defeat in its long history, however heroic the effort to recover the soldiers from the French beaches on which they had been suddenly pushed by the German army in 1940. The British were unprepared for the war, despite plenty of evidence that one was coming.
Brexit is another effort by Britain to pull its troops out of Europe, despite plenty of evidence that it could trigger an economic disaster for the UK and probably the rest of Europe. The UK and the EU are mutually bound together in important (if troublesome) ways; breaking this link is a political failure by the Conservative government of David Cameron that threatens to strand Britain on the beaches again.
Brexit was the outcome of a public referendum last year on whether to remain in or to exit the European Union. Turnout was 33 million (72% of the electorate), with 51.9% voting to leave. Conservative politicians (including Donald Trump) acclaimed the result as creating new opportunities for Britain to separate itself from an expensive, low-performing economic club they would be better off without. Most observers believe that the voters (and Mr. Trump) had little understanding of what was really at stake.
Some of the troubling effects of Brexit are just starting to come into focus: About 50% of the UK’s $700 billion two-way trade in goods and services will be subject to new tariffs, Northern Ireland’s politically and economically essential open border with Ireland will be closed, and the City of London (Britain’s – and Europe’s - financial center which exports more than $20 billion to the EU) will be weakened and some of its functions and personnel will be forced to relocate within the EU. Britain, which has received nearly half of all EU foreign direct investment to date, will attract much less of it in the future.
The EU has insisted that before negotiations on “transitional” and “final” relations between the UK and EU can be started, the UK must agree to a “divorce” settlement in which the UK pays it share of all outstanding EU liabilities, which some have estimated to be as much as $100 billion. Further, the already weakened Pound, which has dropped 17% relative to the Euro since the vote, will likely slump further.
Britons will no longer have free access to, or employment opportunities in the 27 remaining member countries of the EU where 1 million Britons now work, and EU residents of the UK will leave, as many have already begun to do. Indeed, Brexit will deprive Britain of a modest but necessary immigration of willing workers from other EU countries, many of them skilled, which the UK needs to maintain its labor force and growth rate. The birth rate in the UK is 1.8, higher than many EU counties but still well less than the natural population replenishment rate of 2.1. It is true that open immigration was one of the more controversial things that UK voters disliked about EU membership, but most voters did not understand that the annual net immigration, though having risen slowly since 1993 to 248,000 persons in 2016, is only 0.4% of the UK’s population of 65 million.
Britain’s departure will weaken the rest of the EU. The UK is the EU’s second largest trade partner (just behind the US), generating a net trade surplus for the EU of $135 billion. The UK, fortified by its long traditions of liberal economic policies, was always the free market champion of the EU, without which Europe may slide back to becoming the over-regulated, under-performing “Eurosclerotic” economy it was before 1986 when, with help from Margaret Thatcher, it adopted the Single Market Act that made the EU into the world’s largest free trade zone of 500 million people and a GDP today of $16.5 trillion. The Single Market Act (1987) was followed a few years later by the Maastricht Treaty (1992) that created the ultimate in unification, a common currency and monetary policy, even though each member was free to conduct its own fiscal policy. The UK, with Sweden and Denmark, opted out of the Euro to preserve its independent monetary policy.
The Single Market and the Euro were significant achievements that Europeans hoped would return the world’s economic center of gravity to Europe. However, despite twenty-years of initial success, the financial crisis of 2008 caused serious economic trouble within both the broader EU and the narrower Eurozone. Countries such as Greece, Ireland, and Portugal received significant (though reluctant) bailout assistance; having to assist larger countries like Italy and Spain would be hugely expensive and cut deeply into the resources of other member countries experiencing their own difficulties. Intra EU infighting and dissent blossomed. Economic growth dropped and unemployment rose.
Popular support for the EU and its principles were fading fast, but then really collapsed with the appearance of 1.3 million Syrian and other refugees finding their way into the EU through weak external borders in Greece and Italy. Once inside the EU, passports were not required to travel within it. Until, that is, individual countries began objecting to the unwanted flow of refugees and closed borders anyway. (The UK agreed to accept 20,000 Syrians, far lest than most of the larger EU members, but so far has only admitted 4,400).
About this time everyone of voting age in the UK was invited to vote for the UK to remain or exit the EU.
The Cameron government that called for the referendum to appease backbenchers always assumed that the voters would elect to remain in the EU; they lost largely because the voters did not really understand what they were voting for, seeing it, some observers said, as an opportunity to show their dissatisfaction with the government in place, which opened up opportunities to express dislike of immigrants, their distrust of globalization, and their longstanding grumpiness about giving up British sovereignty by letting a bunch of “foreigners tell us what to do.”
Since the vote in June 2016, the Cameron government has been replaced by one led by Teresa May, who officially began the two-year negotiation process with the EU in March 2017. She then called a snap election in June 2017 to fortify her majority, only to lose it. May’s government is now part of a coalition with the Democratic Unionist Party of Northern Ireland whose 10 seats in Parliament provide a very slender majority.
During the past year, the British economy has performed about the same as it had been before the vote. Growth in 2017 is expected to be about 1.5%, versus 2.0% for the EU as a whole. This is down from 1.6% in 2016. Some forecasts through 2020 show growth remaining at about this level. UK unemployment, however, is 4.4%, much lower than the EU average of 9.1%. The FTSE stock market index is up 8%.
But the UK is still in the EU and will be for another two years. The real impact of Brexit won’t happen until then. Richard Portes, a prominent economist from London Business school, says both the EU and the UK will be worse off than before Brexit, but the impact on the UK will be greater than that on the EU. Fears are beginning to develop that in anticipation of Brexit, consumers will hold back and corporations will invest less and relocate facilities and personnel to the EU, which will slow growth in the UK further.
The May government, having committed itself originally to a hard-line “Brexit means Brexit” position, has argued for the past year that no deal was better than a bad one. Negotiations have now begun and many obstacles have emerged, but if no agreement is reached by March 2019, the UK “falls off the cliff” as all the benefits of EU membership are suddenly lost, tariffs are imposed, and hundreds of rules affecting Britons’ ongoing relationships with the 27 individual EU countries will have to be sorted out one at a time.
Businesses with global supply chains and customers in the EU, and the Mayor of the City of London are among those lobbying hard for a less rigid approach. So, Mrs. May is now allowing talk about a “softer Brexit,” which would hang on to a “customs union” (access to the EU markets without tariffs) but avoid some of the other regulations imposed by Brussels. Norway is not a EU member but it was granted custom union status in exchange for adopting the EU’s principle of free movement of people across borders. For the UK to do the same would require it to give up its resistance to the EUs free immigration rules.
The best thing might be to admit that the Brexit vote was taken without voters having a good understanding of it, as former prime minister Tony Blair has claimed, and have another one after an educational period in which credible and knowledgeable people debate the pros and cons. But that would be a very heavy lift for the May government, so it seems unlikely. The opposition parties, of course, probably will try to defeat a weakened Mrs. May in a vote of no confidence in Parliament, to bring on another election before 2019. If that happened and the Conservatives were defeated, a second referendum or some other way out might be achieved.
In the meantime, the British people are hostages to the results of their ill-considered and poorly managed referendum. Being cut off from Europe and stranded on their little island will bring unnecessary hardship to the UK, but there is still time to minimize it, or better yet, to have another vote that at least would enable people to know what they are in for. Otherwise, the old British “bash on regardless” approach begun by Mrs. May is likely to end up having fallen off the cliff, which would be the worse of the possible outcomes.
Well, they survived Dunkirk, and they will survive Brexit too, but at what cost?