Sunday, November 18, 2018

Updating Brexit’s Endgame

By Roy C. Smith

Prime Minister Theresa May’s 585-page Brexit deal with the EU has been widely deplored within her own party and by opponents.  It leaves the UK within the tariff-free custom union, still subject to most of its rules, but as a non-voting participant with no say over what the rules are. This is an anathema to the “take back control” Brexit hard-liners who cherish above all the preservation of British economic sovereignty.

And, it’s still not a fixed thing until complex Ireland-Northern Ireland-UK border issues can be worked out over the next year or two, which extends the uncertainty that has crippled the UK economy since the 2016 vote.  The UK GDP growth for 2018 is estimated at 1.3%, one of the lowest in the EU

On balance, this is a very soft Brexit (with a $50 billion exit bill) that leaves most economic elements the way they are for now, thus doing comparatively less harm, but leaves room in the future for creating different trade arrangements with other countries, each a long process. 

May says it’s the best that can be, much better that a no-deal crash-out in March 2019, and its either one of these, or maybe no Brexit at all.

Later this month the other EU member countries will vote on it, and then it has to be put to the UK Parliament in December, where it has about a 50-50 chance of passing.    

Meanwhile a group of Conservative Party members are trying to have her overturned as leader, though so far, no challenger with a different plan has emerged. Labour hopes the government will fall over the Parliamentary vote and Jeremy Corbin will win an election to follow. If either of these seems likely to Mrs. May, she may reverse herself and allow a “Peoples Vote” (what a second referendum on Brexit is now being called) to occur. Large demonstrations have been held in support of a second vote (endorsed by three former prime ministers and many business leaders) and polls now suggest that a majority of Britons would prefer to remain in the UK.

Stay tuned. There is still a lot to happen.

The basic idea of Brexit is that Britain’s economy, culture and social cohesion has been undermined by the EU, and the country would be better off out of it.  Though the government (and many independent economists) presented credible economic data to the contrary, the politics of the case inflamed British nationalism, distrust of immigration and fears of imported terrorism and the government’s case was simply not believed by a majority.

Many British observers have pointed to other factors, principally resentments accumulated by working and middle-class people who have been struggling in the Great Recession that followed the 2008 global financial crisis and have growth distrustful of elite leaders seemingly unconcerned with their deteriorating circumstances. During this time a British austerity program was installed to reduce the huge increase in the national debt to derived from dealing with bailouts and the recession, social services were cut back and poverty levels rose to unexpected levels.  In defiance, Britain voted itself back onto a little island.

Of course, much of the same nationalistic stuff was being stirred up in the US during the 2016 campaign for many of the same reasons. And the resentments and political concerns felt in the UK have been showing up in force in Germany, Italy, France, Sweden, Hungary, Poland and other EU countries, posing further threats to the integrity and solidarity of the EU in the future.  

An irony in all this is that the EU (compared to what preceded it) is the success it is because of a series of free-market, competition-increasing initiatives of Margaret Thatcher that were adopted by the EU in its seminal Single Market Act in 1986. She saw Britain’s future as part of the EU with a key role in formulating policies reflecting and reinforcing liberal economic thinking, i.e. deregulation, privatization, globalization and greater freedoms for the private sector.

It all worked, at least until the first of the two global financial crises in this century. Both were the results of bubbles and busts that, for centuries, have caused unexpected market failures with grievous economic consequences. Because of the vast size of the market economy and its global linkages, these two crises were among the worst, with deflationary effects of the second one lingering for a decade.  

This week’s Economist has a full report on the Brexit endgame but its cover story is “The Next Capitalist Revolution,” in which it blames the low-grow fiz-out of the liberal economic dream of Thatcher and others on excessive concentration of huge companies in major industries, increased barriers to entry from regulation, oligopolistic activity, lobbying and political power, and other maladies of big business. Nearly 20-years of relatively low growth (averaging about 2% in US, less in EU) has led to stagnant wage growth, deteriorated household balance sheets, and an underfunded healthcare and retirement safety net for large segments of the US and EU populations. 

When this happens, elections are bound to reflect the distress.

We may be facing a serious roll-back over the next several years of what was a global consensus in 2000 that economic optimization for all countries could best be achieved by open markets, world trade, a private sector driven by innovation, competition, and inward investment, and governments that intervened in markets as little as possible. 

But capitalism can only survive in a democracy with the consent of the people. That consent may have been eroded and will have to be earned back. For now, the more powerful attraction is economic nationalism, protectionism and pro-active governments intervening in markets. Most of economic history has been in this mode, but the UK and our best years have been in the other one, the liberal economics mode.

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