Brexit: Where Do We Go From Here?
Public policy isn’t always intuitive, and understanding complex economic issues will take time.
I’ll be in London this week as the British vote on whether to leave or remain in the European Union. (It will be nice to be in a country more obsessed with its own politics than US politics!) Like many economy-watchers, at Hamilton Place Strategies (HPS) we’re keeping a close eye on the vote and its consequences. Here’s an HPSInsight Interview I participated in ahead of the big vote…
HPSInsight: First off, do you have a view — do you think the UK should remain in the EU or exit?
Tony: Much of the Leave campaign is fueled by concerns about immigration, and as someone who is very much pro-immigration, and aware of the economic and cultural benefits of immigration, I find myself pulling for the Remain campaign. I understand the frustration with the EU — it’s an imperfect union and will remain so whether Britain stays or goes. But, on balance, I see Britain benefiting from the arrangement.
The EU also benefits from UK participation, which is the way these things should work. Without a doubt, if I’m considering your question from the standpoint of America’s self-interest, we see Britain as having a positive impact on EU policymaking and would rather it remain in.
HPSInsight: It seems like financial markets have tracked pretty close to betting markets on Brexit. As of today, where do we stand?
Tony: Financial markets seem to be signaling that they slightly favor the Remain campaign. We’re seeing that in some late polling indicating that Remain is a more likely outcome. That’s why there is a bit of a rally in the pound and equity markets.
HPSInsight: In the lead up to the June 23 vote, the Bank of England has held two additional liquidity auctions. Yet the amount sold — £2.46 billion on June 14 and £370 million on June 21 — isn’t that large. Why?
Tony: Because Brexit has been on the calendar for so long, I get the sense that market participants worried about liquidity have mostly prepared themselves. This isn’t a surprise event and they have access to ample liquidity. The Bank of England has met the market’s anticipated need for liquidity for now, and if there’s liquidity tightness following the referendum due to a successful “Leave” vote, it has signaled its capacity to step up.
HPSInsight: Some analysts are predicting extreme volatility, even the spark of a financial crisis, should the Leave campaign prevail. How are economic and financial authorities responding?
Tony: The Treasury has done an excellent job communicating, as has the Bank of England. Not everybody agrees with the positions they’ve taken, or the cautions they’ve announced, but I think they’ve tried their best to be right down the middle of the fairway with their views and predictions, even if it’s clear that they have a point of view on whether Britain should remain in the EU.
HPSInsight: You were intricately involved in policy communications during the 2008 financial crisis. In what ways will the response to Brexit be similar, or different, to the US response eight years ago?
Tony: The biggest difference between now and 2008 is that the Brexit vote was planned! It’s literally been on the calendar for years now, so market participants and authorities in the UK, in Europe, even in the United States, have all been able to plan for the event. They communicate and prepare the market for a range of potential consequences.
Now, that doesn’t mean policymakers have accurately predicted all of the consequences from Brexit — that’s the hardest thing. People sometimes don’t act in rational ways. I think British and other officials have actually communicated very well with market participants, regardless of the outcome. They’ve produced analysis on potential outcomes. They’ve indicated where they can provide support. But we won’t really know how well they’ve done until it’s tested.
HPSInsight: You’re not alone in your view that Brexit would have a negative impact on the British economy. That seems to be the consensus among economists, yet the polls are relatively close. Some experts have attributed the strength of the “Leave” campaign to anti-immigration sentiment. What explains the appeal of these policies?
Tony: There’s definitely a core that has very strong antipathy towards migration. They believe that migration has a net negative economic impact. Some are concerned about security. And, for some it’s a very strong and worrying clash of cultures — cultural friction, racial friction. Clearly this isn’t unique to Great Britain— we see it in the US as well with the rise of Donald Trump.
On the economic question, we have a lot of work to do. If you believe the economy is essentially a fixed pie, and as more people come to the table there’s less for the rest of us, then this isn’t an irrational view. Helping people understand the benefits of growing the pie, and the economic contributions of immigrants, is really one of the great challenges of our time. We have to do a much better job.
HPSInsight: If the answer is better understanding of economic policy, why haven’t we just done that already?
Tony: This is gross a understatement, but election campaigns probably aren’t the best venues for explaining complex issues!
Trying to explain concepts of, say, trade policy, or monetary policy, or the benefits of labor mobility and capital mobility in the midst of a campaign isn’t easy, especially when the loudest voices are using deliberately simple and demagogic rhetoric. These are concepts that need time to explain. The simple answers of the populists actually sound more intuitive than economic arguments we know to be sound.
For example, in the trade debate we’re all very good at talking about the benefits of exports, but we’re horrid at explaining the benefits of imports. Most people believe in their gut that exporting is good and importing is bad. A lot of the criticism of — and even advocacy for — trade reinforces that belief: we should “beat” our trade partners by forcing them to accept more of our exports while we also take in fewer of their imports. And when we accept imports, we do so begrudgingly because they’re probably the result of cheating!
It sounds intuitive, but it’s economically backwards. There should not be winners and losers in the aggregate from trade.
There are great benefits to importing and exporting. Both economies can perform better and create greater value and elevate standards of living. That’s the benefit of two-way trade. But it’s hard to teach in a very short period of time. We need to spend a lot more time helping people understand the benefits of trade.
HPSInsight: In the long run, what will motivate politicians and policymakers to spend greater time addressing the substance of issues?
Tony: The winners in the future are going to be the countries that most aggressively adhere to that view of openness: allowing goods and services to get to customers, allowing foreign direct investment, and allowing cross-border flows of financial capital, of ideas, and of talent. The countries that best manage that, and allow for more of it, are going to be the winners in the long run.
HPSInsight: But in the meantime, the global economy continues to sputter. Some experts, such as Mohamed El-Erian, have suggested that until we deliver high, inclusive growth, citizens will continue to distrust the institutions of globalization. Your thoughts?
Tony: There’s a lot of truth to what Mohamed El-Erian wrote about citizens’ expectations not being met, and the fears that citizens may have.
But, their expectations may be a bit outsize as well. This isn’t an easy economy right now to generate growth. The United States is the sole locomotive in the global economy. You need more than one engine of growth in order to achieve higher levels of growth globally, and right now we don’t have that.
We have depressed levels of growth in South America, especially in Brazil. Southeast Asia has slowed because of the slowing of growth in China. The EU has been dealing with financial and other crises.
HPSInsight: Bottom line, you’re saying that the conversations about economic policy aren’t going to end any time soon, regardless of Brexit?
Tony: Even if the UK remains in the EU, that doesn’t stop the imperative for the EU to continue to reform and transform itself in ways that better meet the expectations of citizens across all of Europe.
It’s certainly not going to be the end of it in the UK because I think the UK is unique in being an island. It’s always going to have a large segment of its population that is fiercely independent and unhappy with its relationship with Europe.
Regardless of Britain, Europe needs to achieve greater understanding from its citizens about their expectations for the union, what it means to be in the union, and to reform it in ways that they understand as beneficial. There’s a lot of work to be done.
HPSInsight: Thanks, Tony.
