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Economists never agree. That is almost a given. For virtually every issue imaginable there will be a real divide within the profession; from how high taxes should be levied to the best ways to tackle poverty; from the size of government to the economic effects of immigration. Yet it would appear that there is one issue that sees economists united.
88% of economists believe that Brexit would be likely to damage Britain’s growth prospects over the next five years. This is according to an Ipsos MORI poll commissioned by the Observer, in which over 600 economists responded. For a discipline that is so renowned for its lack of consensus, this poll is significant. It would appear that the economic consequences of Brexit are practically unambiguous.
The clear economic case for Bremain is not just reflected in this poll, but is also demonstrated by interventions by juggernauts like the IMF, IFS and OECD, as well as the signed letter by nearly 300 economists to The Times saying that Brexit would ‘entail significant long-term costs’.
The Brexit camp defends its blatant lack of economic credibility by appearing to ridicule the economics profession altogether. They state that economists have been wrong in the past, and are wrong again. Indeed, leading Brexiteer Michael Gove suggested that ‘people in this country have had enough of experts’! Essentially the Brexit camp is asking people to disregard the opinions of experienced professionals, and have blind faith in the economic omniscience of Messrs Gove, Farage and Johnson on this gargantuan decision. And to simply write off the entire economics profession on the basis that they’ve made mistakes in the past is a huge disservice to the vast contribution made to public discussion, knowledge and policymaking by generations of economists. It also overlooks the fact that, whilst there were economists who advocated UK membership of the Eurozone not so long ago, there was no economic consensus on the issue, as there seems to be on the question we’re being faced with on June 23rd.
What disheartens me most about the EU debate is that the arguments made by the Brexit camp seem to be cutting through to the public. The polls suggest that the outcome of this referendum is on a knife-edge, and accusations that the Bremain camp is employing scaremongering seems to be winning people over. For me, to warn people of the genuine economic risks of leaving the EU seems to be the responsible thing for the Bremain camp to be doing. In fact, I despair that in a debate where so many people are longing for facts, any facts regarding the threats to our economy if we leave are simply disregarded as fear tactics.
The economic arguments are clear.
Firstly, in the short-term, leaving the EU would be a massive economic shock that will reduce investor, consumer and business confidence. Mark Carney, Governor of the Bank of England, has warned of the effect on economic growth in the short run of such a shock. As our future trading relationship with the EU would be plunged into jeopardy, companies will halt major investments and consumers will delay purchases. According to the Treasury, this is highly likely to send the UK into recession, and could even have global economic consequences; Janet Yellen has warned that Brexit could affect the rate of US interest rate rises, and EU growth may falter. The pound is also predicted to weaken considerably- maybe falling as low as $1.20, which will have far reaching consequence beyond just making our holidays more expensive!
Secondly, long-term economic growth is likely to be impaired by lower inward investment and trade barriers. To quell a Brexit myth; we are more reliant on the rest of the EU in terms of our exports than they are reliant on us; exports to EU countries account for a whopping 44% of UK exports, whereas EU exports to the UK only account for between 8% and 16% of total EU exports (depending on your source). By the same token, as a proportion of GDP, we are more dependent on exporting to the EU than they are dependent on exporting to the UK. Brexiteers tend to argue that the EU economy is more dependent on us than we are on them simply because we have a trade deficit with the EU. If we extend this logic, then the US economy is more reliant on the Dominican Republic because the Dominican Republic has a trade deficit with the US. This is obviously ridiculous as the US accounts for nearly half of Dominican Republic exports, but the Dominican Republic accounts for a negligible share of US exports. By extension, the Brexiteers’ argument that we would have a more favourable negotiating position with the EU upon leaving, on the basis that they need us more than vice versa, is simply delusional.
To continue with the issue of trade, many industries benefit from our membership of the Single Market. If we leave, we have just two years to negotiate a new trading arrangement whilst remaining a member of the Single market. After that, we would have to leave and we would trade on the basis of WTO trading rules- rules that would see import tariffs erected against UK business. Even if we negotiate a better deal than the WTO trading arrangements, this will take many years and will almost certainly lead to trade being less free than it is currently. It is also important to note that trade negotiations are as much about geopolitics and international relations as it is economics. From a political perspective, the EU will have little incentive to treat us favourably through fear that Eurosceptic parties across the continent will gain momentum and other countries might follow the UK out of the EU.
We would also have to renegotiate trading arrangements with all 50 of the non-EU countries that we enjoy trade deals with through our membership of the EU and we’d be excluded from new trade deals being negotiated between the EU and the USA, Japan and India. In all cases, we’d be negotiating deals as an economy of 60 million people, rather than 500 million people; obviously giving us less clout to negotiate a favourable deal.
Another cause for concern is that we are likely to see a mass exodus of financial services firms from the UK. Financial institutions in the UK benefit from passporting rights that allow financial institutions in the UK to conduct business across the rest of the European Economic Area (EEA) without having to set up there. It is why the UK is home to the European headquarters of so many foreign Investment Banks, and one of the reasons why the City has been so successful and has been an attraction for so much Foreign Direct Investment. The UK is a gateway into Europe for financial institutions. If we leave the EU then the implication is we leave the EEA (unless we want to abide by EU regulations and free movement without any say, as is the case with Norway- a prospect that most Brexiteers would be opposed to). This could cost us passporting rights, as well as London’s dominant share of euro-denominated trading and settlement, and so financial institutions are likely to move some operations to other EU countries, costing jobs in the UK. JPMorgan CEO Jamie Dimon has already outlined how they may have to cut as many as 4000 UK jobs in the event of Brexit, and Lloyds of London has warned of many thousands of job losses in the insurance industry.
Now these arguments are far from exhaustive; there are dozens of legitimate economic reasons for voting to remain in the EU on June 23rd. There are also very many non-economic reasons for staying: greater global influence for the UK, standardised minimum workers’ rights, the free movement of people principle, and a greater ability to collaborate closely on issues such as global tax avoidance and evasion, global warming and human rights. But the economic case is clear. The LSE motto is ‘to know the causes of things’. Whilst we cannot know the exact of effects of leaving the EU, we can say, with a high degree of certainty, that it would cause damaging economic uncertainty in the short run, and will hold back economic growth in the long-term. This is likely to be a once in a lifetime choice; let’s make sure we make the right choice, for its consequences will be felt for decades to come.