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!

Bank of England keeps interest rates on hold

On the first Thursday of the month (or the second, it seems, if the first is the 1st), the Bank of England’s Monetary Policy Committee meets to decide on monetary policy in the UK. At midday on that Thursday, they announce what they have decided to do; it’s just been announced that interest rates will remain at 0.5%, where they have been now for over five years. Here’s the entire history of the Bank of England “base rate”, which is the rate it sets monthly:

You’ll note that the rate reached 0.5% before 2011 (right at the end of the chart), and it’s still there. It’s one of the longest spells without a change for decades.

The MPC is a group of economists, both ones that work for the Bank of England, and a group of external members, often university professors and economists that work in the private sector. The idea is that they apply a wide range of expertise and experience on the UK economy to policymaking decisions. They are trying to hit a target of 2% inflation, that the UK government sets for them, but at the moment inflation is around 0, hence below target.

Prior to this, inflation spent a number of years above target, and perhaps as a result, there have been a number who have called openly for a rethink about the Bank of England’s role in policymaking, not least the new Labour Shadow Chancellor of the Exchequer.

We’ll consider monetary policy in about week 8 or 9 next term, once we’ve considered the various constituent parts of what the MPC thinks about when making decisions: inflation, growth, consumption, investment, money, interest rates and banking.