Brexit Referendum: So it all begins!

As was fully expected, the UK In/Out referendum will happen on June 23. Which way will you vote?

If the 48 hours or so since this was announced is anything to go by, it promises to absolutely dominate all news headlines between now and then. So expect to be thoroughly bored by it all by the time June comes around.

However, please as students of the economy, don’t get bored and switch off until you’ve worked out what the right decision is on June 23. This is a huge decision for the UK economy, as hopefully what we’ve learnt in Intro Macro has taught you already.

Everything we’ve learnt about has had implications and applications in the EU debate.

We started with economic growth, and the kinds of conditions that would foster higher trend economic growth, looking at the supply side of the economy, and Total Factor Productivity. This is the most fundamental question we have to ponder: what impact does EU membership have on our trend growth rate? At the moment, most commentators are focussed on relative positions in the business cycle (UK better, EU not so good). But (1) the work of Robert Lucas was cited in our lectures to point out that trend growth is hugely more important than business cycle fluctuations, and (b) it’s been far from always this way, and indeed for much of the post-war economic history, European growth has been stronger than UK growth. Is that a reason for thinking about staying then? I’d argue probably not, I’d suggest you should think about why it might be that trend growth might increase or decrease.

We covered unemployment after that. Isn’t unemployment higher because of free movement of labour, meaning that cheap labour from Eastern Europe can come over and take all “our jobs”? This argument covers over a lot of important detail. Firstly, there isn’t some fixed supply of jobs, which we alluded to by thinking about shifts in labour demand curves. Hence it may be that by having Eastern European migrants here, more is produced in the UK economy, and hence more jobs become available.

Which jobs are being taken? By and large, it’s lower skilled (or unskilled) jobs. And the problem with these kinds of jobs is that they are equally the first to go in economic downturns, and are the easier jobs to be replaced by computers and automation. Hence unskilled labour is under threat from immigration, but equally it’s under threat from the machines.

We can carry on going through the course so far, and I’ll be trying in lecture to relate things we cover to the EU Brexit debate, since it matters hugely. At the outset I’ll make it clear: I think, having thought a lot about the issues, and looked at the arguments in favour of leaving in particular, that the UK is much better off inside the EU. That doesn’t mean some killer argument for leaving isn’t lurking around the corner, and I’ll encourage you to find that killer argument – it’s very important you, and we as a class, have considered all possible arguments, and been rigorous about them, before deciding which way to vote.

Brexit – The other side of the coin

The Brexit debate is cast always in terms of what affects us here in Britain, and often very narrowly in terms of actual monetary flows (which are relatively trivial and hence laughable as the Economist points out). But what about those elsewhere that it affects? Of course, our press scoffs at the Polish government complaining about the measures the UK proposes to cut benefits to recent arrivals in the UK, but what about the Brits abroad?

There are 800,000 Brits in Spain alone, and many more elsewhere who have enjoyed the EU’s freedom of movement of labour to work and live elsewhere, where they are most efficient (with efficiency defined liberally, but it must be the case that if you are happiest somewhere, you’ll work best there). Indeed it may even be that there are more Brits elsewhere than EU citizens in the UK. Memes abound about the Brits in Spain who never learn the local language, never engage with the local culture, and so on, all the things that immigrants in the UK are accused of, and so if the UK decides to treat our migrants with a much shorter shrift than we can in the EU, why would other countries behave any differently?

Those not in the UK but elsewhere in the EU cannot vote in the coming referendum either, if they’ve been out of the UK for 15 years (which many have). Has the Vote Leave campaign considered the impact of the return of these workers, thoroughly demotivated by being forced out of the places they chose to live? The return of many older folk from Spain, and their subsequent need for healthcare?

These are all undoubtedly short-term hits, but there’s little reason to believe that by making immigration harder, the longer term hit will be any less. Those coming to this country to work are overwhelmingly young people, fiscal contributors. The UK birth rate is not high enough that there will be enough British young adults in the coming years to support an ageing British population.

And students elsewhere may find it harder to remain elsewhere in Europe, and future generations of young people will be deprived the opportunity current young adults have to spend time studying abroad. The list goes on. Folk from other countries make personal gains from coming to live and work in the UK, just as Brits make personal gains from living and working elsewhere in the EU.

The UK-EU Deal

Today we have found out what all the renegotiation was about: the possibility that the UK might be able to put a stop temporarily to in-work benefits being paid to EU nationals working in the UK (assuming other EU countries are happy with this happening in any particular situation).

If that sounds a little underwhelming, it is probably because it is, which must be both good and bad.

Good, since there is no dramatic altering of the right of free movement of labour within the EU, as was hoped by some in the Conservative Party. As we’ve just covered in unemployment in our lectures, labour mobility is a good thing. Yes, it does lead to more uncertainty for us since there’s a larger pool of labour potentially for any job we do, but equally it gives both us, and firms, great opportunities to move into new jobs that are better suited to us, and better suited to firms. Workers aren’t restricted simply on the basis of a passport within the EU from taking their ideal job, and equally, firms aren’t stopped from recruiting the ideal worker for the post they’ve advertised because the ideal worker doesn’t have the right (European) passport.

Bad, since those hoping for big reforms in order to vote to remain may well be unhappy with this rather weak deal. Those seeking the UK’s exit claim that the UK gets little back from the EU, and simply gets told what to do. Rules and regulations we just have to accept are made in Brussels, not Westminster. This outcome, which reflects on Cameron’s inability to get what members in his party would ideally have hoped for (ability to stop inward migration unilaterally, plus other grabs back of national sovereignty). As I’ve written before on this blog, and mentioned in lecture, such issues regarding sovereignty clash with the reality of a common market – we can’t be involved in a common market without a common regulatory structure determined by some central regulatory body.

On balance, will it leave the UK any closer to the exit door? This is obviously impossible to say; even opinion polls can only give so much insight.

Will it even matter? Clara Sanderlind makes the point here that since most EU migrants working in the UK don’t claim in-work (or out of work) benefits, the deal will make no difference whatsoever to actual flows of migrants.

This week in lectures we’re covering trade and globalisation, topics which have so many obvious applications into the current UK relationship with the EU. See you later in the week!

Remaining in the EU “disastrous”

It seems increasingly likely that the EU referendum we’ve been promised is going to happen sooner rather than later – potentially this year, not 2017 as originally expected.

Given that, the messages being put out by ministers are becoming louder and louder. A prominent Eurosceptic in the Conservative Cabinet, Chris Grayling, yesterday wrote in the Telegraph that staying in the EU would be “disastrous” for the UK.

It’s not clear exactly what it is about “more Europe” (vaguely defined) that would be particularly disastrous as far as Grayling is concerned – this isn’t made clear. Reference is made to immigration, although again immigration is simply implied to be a bad thing, since apparently the current levels should not be sustained moving forward (only half of our net inward migration flows are actually from the EU, it’s worth bearing in mind).

Grayling talks about some aspects of the economic idea behind the EU: the single market, or common market: common standards across countries so that exporters aren’t having to match a whole range of different standards for different countries. There then appears to be a misunderstanding about exactly how that would be achieved, because Grayling complains about “giving the EU more and more scope to involve itself in matters that were once the preserve of national governments.”

If a group of countries all have different product standards and regulations, and they agree a common market where these must be harmonised, then clearly each of those countries must give up powers that were once their preserve. It cannot be that a common market can exist where each country can still decide to set its own regulations a bit different for a bit for some reason or another – that would then cease to be a common market.

Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very¬†open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

The EU Referendum

The news this morning is that a new anti-EU group, “Vote Leave”, has been announced. This is apparently the second such group to be formed in recent weeks ahead of the EU referendum that will happen before the end of 2017.

As you’ll be no doubt aware, the UK is part of the EU, what Wikipedia describes as a “politico-economic union of 28 countries”. It’s what economists would refer to as an institution, and it’s supra-national in that it acts above national governments, overriding their ability to make their own decisions (sovereignty) at times.

That is the prime criticism of the EU, namely that it dictates things we must do here in Britain, rather than allowing us to make our own decisions. That does seem like quite an appealing argument – we should surely be able to make our own decisions as a nation?

We’ll have only about a lecture and a half to think really about international economics during EC114, but you’ll get plenty of chances in your second and third years to study this further, should it interest you; see the blog post earlier today, “You’re doing Intro Macro: what comes after it?”, for the options ahead of you.

The UK is a very open economy, which means we trade a lot, both in goods and in (financial) services. This means that what we do as a country affects countries around us for better or worse. It also means that what countries around us do affects us, particularly if those countries are economically powerful. Economists talk a lot about the Prisoner’s Dilemma, which illustrates a situation where by not co-operating, all individuals/groups in that situation can be made worse off, and points towards co-operation as allowing us all to be made better off.

These considerations have led macroeconomists to think about whether co-ordination between nations might be a good thing, and the EU is one example of such attempts at co-ordination. But in order for co-ordination to work, it must be that nation states forgo the ability to do what they want in all situations – they must accept less sovereignty.

The decision we as a country make in 2017 about our EU membership matters a lot, and it will be good to make sure you’re informed about what it means. That means looking at the objective facts as much as you possibly can; this will be difficult given that pro- and anti-campaign groups will attempt to convince you without necessarily using those facts properly. This is where learning the tools of macroeconomic analysis can help you, and we’ll start after Christmas!