I guess it’s time to weigh in on an issue I have mostly been avoiding: Britain’s vote on whether to leave the EU, aka Brexit.
Not to keep you in suspense: if I had a vote, I’d vote “remain.” But I wouldn’t be as enthusiastic as I’d like – and if “remain” wins, as I hope it does, I’ll still feel a sense of dread about what the future holds.
Why? Some notes on the issue:
1.Conventional trade analysis says that unless Britain can make a deal that essentially preserves full access to the EU – which seems unlikely given what a “leave” vote would do to relations — Brexit would make Britain poorer, on a sustained basis, than it would otherwise have been. I’ve done my own back of the envelope calculation, and come up with a sustained 2 percent of GDP loss; this is in the same range as other calculations. The number isn’t at all a hard fact – it could be smaller, but it could also be bigger — but the direction is completely clear.
2.On top of these conventional losses, there’s the special issue of the City of London, which looms very large in the British economy thanks to huge exports of financial services to the rest of Europe. The City’s role, like that of other financial centers, rests on hard-to-model agglomeration economies. Would the frictions and extra costs of Brexit hurt the City sufficiently to undermine its role, at big cost to the UK? Nobody knows, but if so that could add a lot to the economic costs.
3.Pay no attention to claims that Britain, freed from EU rules, could achieve spectacular growth via deregulation. You say to-mah-to, I say voodoo, and it’s no better than the US version.
4.On the other hand, I would greatly discount claims about dramatic financial crisis or whatever. Maybe the pound would fall – but for a country that borrows in its own currency and has an excessive current account deficit, that’s a good thing.
5.It’s also true that the economic impact of Brexit would fall quite differently on different groups within Britain. The City and those whose incomes are tied to its fortunes would probably lose badly, but some regions of the country might actually benefit from a weaker pound.