At the Tattersall’s race meeting at Eagle Farm today, I was fortunate to run into Morgans Chief Economist Michael Knox, and we had a good chat about, unsurprisingly, what everyone else is talking about, Brexit. Michael reminded me that he wrote a note on the topic back in April, which I read when I got home, and have posted a link to below, as I think it is one of the best pieces on Brexit I have read:
After the financial markets settle down over the next week or so, after there is a realisation about the extent of the over-reaction, attention will focus on exactly how Britain will extract itself from the EU, which is the crucial issue, as argued by Michael in his note. Michael wisely observed:
“The economic damage done by Brexit would be determined not by Brexit itself, but by the kind of deal that Britain does with the European Union after it leaves. Britain is the second largest economy in Europe. It is strong enough to get almost any kind of deal that it wants.
The more restrictive on trade and immigration the deal is, the greater the damage would be. The real problem is that the populists who might rule the British economy after it leaves the European Union might negotiate restrictive deals on both trade and immigration. They might manage to shoot themselves in both feet.”
This is certainly true, and there is the prospect of a reactionary clamp down on immigration, as it appears that one of the factors behind the successful leave campaign was dissatisfaction with high levels of immigration. This is regrettable because, at appropriate levels, immigration is good for the economy and society. That said, immigration does not necessarily benefit every member of the community in the short-term, and immigration can depress the wages of some domestic workers through increases in labour supply. Over the long-run, the beneficial impacts of immigration through expanding the economy should, hopefully, offset any short-term absorption problems. But, in the long-run, as Maynard Keynes said, we are all dead. Many British people are obviously unhappy with the present consequences of open borders in the EU and have consequently voted for Brexit. It is a most extraordinary result. The weeks and months ahead will give us a clearer idea of how greatly we should be concerned about its ultimate consequences.
A very important message in these uncertain times
The most interesting questions may be political and what happens in Scotland. A quite impressive speech actually from the SNP leader including that they will now prepare legislation for a second independence vote. What would an independent Scotland with a Euro and English border look like?
Yes, that’s a terrific speech from Nicola Sturgeon. Thanks for the comment, Mark. It’s incredible we’re seeing the disintegration of the UK.
Whenever I look at that I think about what separation of an FNQ state would look like. Somehow I just cant see either Bob Katter or Warren Entsch in the same boat.
Very impressive speech from Sturgeon. Makes it pretty clear that this English decision to Leave is just the start of the end of the UK as a united kingdom.
Yes, indeed. Cameron played this very badly. He will suffer immense criticism from future historians.
The wonky economic question is going to be how Scotland would deal with the currency in any independence. HK style currency board to stay with the Pound? This was probably the biggest question in the last referendum which was all a bit vague and in the context of the time a reasonable reason to vote against independence. Probably the most critical question.
I would envisage the EU would try and be as restrictive as possible from a political standpoint, the more favourable the deal for Britain the more likely other countries would also look at leaving. Any deal would have to weigh up the financial implications v political and social implications, I think the EU will play hard ball, to survive long term it has no choice.
Very good point, Glen. Merkel has said she won’t be nasty but that still leaves plenty of room for playing hardball.
I’m going to go out on a limb here and say that a lot of this dissatisfaction is attributable to the ongoing failure of modern economists to tackle ‘distributive’ issues in their models, discourse and advice to policy makers. It needs to be addressed one way or the other. Immigration can grow an economy but if the pieces of the bigger pie only get bigger for a few then this is the kind of discontent that will arise and surprise us all. Ken Henry thought it was a worthwhile consideration during his tax review:
Thanks for the comment, Toby. Economists often analyse distributional impacts at least in my experience. Maybe not as much as they should perhaps. But it’s up to politicians to make decisions regarding equity as they involve value judgments.
As a pom living in Oz, I was disappointed but not surprised by the outcome.
Social class has played a large part in the outcome. Middle and upper class people, who (very generally speaking) live in London and the surrounding areas, voted ‘remain’. However many working class people, who live in the Midlands and north of England, feel their lot has not really improved in recent years. They especially resent the rapid influx of EU migrants starting during the last decade – how quickly it happened, how it disrupted social cohesion and the pressure it put on already-struggling public services like schools GP’s practices. This map is interesting: http://www.bbc.com/news/politics/eu_referendum/results
I don’t doubt the benefits of immigration, but if you’re a low-paid worker facing even more competition for a job, a place at a decent school for your child and a GP appointment you’re unlikely to think immigration is helping you.
I still think Scotland would be stronger being part of the UK than being a small nation in the EU and presumably using the Euro (the single European currency is surely one of the worst economic ideas of the last 20 years, I am so glad the UK did not join it!).
I understand the points Michael makes in his paper about Turkey and Switzerland being able to negotiate reasonable outcomes for themselves. However, they started from very different points to where the UK is now and I don’t think the EU will be kind to the UK in the exit negotiations. As noted above, it will rightly take a hard line on the EU, to discourage any other nations from thinking of leaving.
I feel for the younger people, who mostly voted ‘remain’, but were denied by older voters, many of whom don’t need to worry about job security or getting a mortgage. Seems a tad unfair.
In my view, more important than the Scotland situation is what happens to Northern Ireland – it too voted to remain. Will it push to form a unified island of Ireland?
I must also add my disappointment at the standard of the arguments presented by both sides, as well as the press and media. To make an informed decision on such a complex issue people need access to credible information, which unfortunately was lacking.
Some very good points, James. Thanks for the comment
I think this is a good post from Ken Rogoff. A simple close majority vote for nation changing events at a point in time is not wise and not necessarily democracy either. https://www.project-syndicate.org/commentary/brexit-democratic-failure-for-uk-by-kenneth-rogoff-2016-06?gclid=CPenzu3Tx80CFUmVaAodOqwA-w
Yes that’s a good piece. I saw it in the AFR today. Thanks
The democratic hurdle for the UK to leave the EU is lower than that required by a strata body corporate in Queensland for capital improvements!
Haha, great observation! Thanks Mark
Scotland’s future prospects will depend on the price of oil and the level of reserves it has. The price of oil will be a case of ‘what you see is what you get’, simply hovering at a new average of $50 per barrel. That will limit Scotland’s tax revenue from oil. The there is the question of how much oil is left. There will be political push and shove, but I doubt that Scotland will leave the union.