5 Hard Truths about Brexit

British secession from the EU would be messier than anyone can imagine.

The outcome of the forthcoming referendum on Britain leaving or staying in the EU seems more and more unpredictable, raising the prospect that the majority will vote for leaving. This warrants a hard look at the consequences for Britain, Europe, the United States and the world.

1. Irrespective of who wins, Britain will be ungovernable for at least a decade.

The Conservative Party will be engulfed in an internecine, vociferous civil war. A number of its MPs including leading members will quit politics. It is highly unlikely that Prime Minister Cameron can continue with a battle for party leadership taking no prisoners. It is not too much to predict a kind of political chaos with the Tory party not capable of playing a leading role as it has done for 250 years and no viable alternative in sight. The Labour Party has put itself on the sidelines selecting Jeremy Corbyn as leader. The Liberal Party is out of the game. UKIP is not capable of governing.

Over the last thirty years the balance of payments current account has only been close to balance three times, and the deficit is now running at more than 5 percent of GDP, the highest figure since 1948. The last time government finances recorded a surplus was in 2001; the deficit there currently runs at close to 4 percent of GDP. These figures tell volumes about an economy out of tune with reality, requiring hard and drastic actions to redress the balance. It is more likely than not that these imbalances will grow, bringing Britain’s economy closer to the brink of disaster. Just for comparison, the eurozone runs a sizeable surplus on the current account (2.8 percent of GDP) and a much lower public deficit (1.9 percent of GDP).

Should Britain vote to leave, treaties provide two years for negotiating terms for the future relationship between the country and the EU. If no agreement is reached, Britain will be a WTO country vis-à-vis the EU, which means giving up its status as member of the single market and becoming a third country like, inter alia, New Zealand. But it could be worse. Many WTO countries have concluded free-trade agreements with the EU. Britain, as an EU member state, has not, and it will take years to do it. Much of Britain’s trade with the rest of the world enjoys preferential treatment granted to EU member states, which will no longer apply.

A Norwegian or Swiss model (access to the EU’s single market on a reciprocal basis) is praised by many Brexiteers, but these two countries should serve as a warning to Britain. In reality, it means application of EU rules without any influence on what they prescribe, plus a sizeable financial contribution. It is palatable for Norway and Switzerland, in view of their size and economic strength, but it would be odious for Britain. One of the arguments for leaving is refusal to “take orders” from Brussels, but the rules are decided by the Council of Ministers among representatives of member states (statistics show that Britain has voted for more than 80 percent of these), while access to the single market is only granted to outsiders if they conform to the rules laid out without their participation.

There are approximately three million foreign EU citizens in Britain. Studies show that they contribute more in taxes to the British economy than they get in welfare payments. Approximately two million Britons live in other member states. The majority are retirees enjoying lower living costs and better weather. They do not work. If as a consequence of a Leave vote these people have to go back to their own country—the single market’s provision for free movement of persons is abolished—Britain will say goodbye to three million people paying taxes, and two million people who do not work but ask for welfare services will return. That could well be a major drag on the public finances in the future.

Proponents for Leave point to the virtues of deregulation, especially of the labor market, as a way to improve competitiveness. That may indeed be a hidden agenda for some in the Conservative Party wanting to shift the burden to the working class. The price would be an even more divided nation. From 2008 to 2013 real wages for the typical worker fell by almost 10 percent and real family income for families of working age with the same percentage. Britain is number twenty-three among twenty-six OECD countries’ real hourly earnings growth 2008–13. Germany and France recorded a 5 percent rise. According to the OECD the British economy is the least regulated among G-7 nations. If a Brexit government tries to squeeze that orange harder, social divisions will aggravate, sowing doubts about social coherence.

After forty-three years of membership, a big share of British economic legislation is either EU regulations (directly applicable as domestic law in member states) or legislation meant to cast EU directives in British law. Brexit would mean that EU regulations would be abrogated, producing legal and administrative chaos. The number of such regulations is difficult to estimate, but it may be as high as ten thousand, indicating that close to one-third of British economic legislation is linked one way or another to EU rules. An administrative option is to transform them into UK law, but if so, why leave? Those advocating deregulation would cheer about this vacuum, but those doing business will ask which rules will apply and, with no answers, shy away from new projects. Uncertainty is already impinging on investors, but this is peanuts compared to what will happen when it dawns on the business sector that no one knows which laws and regulations will apply when doing business in Britain.

2. The consequences for eurozone economies, and even more so for the rest of the world, will be limited.

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