EU referendum

If Brexit, then what economically?

As someone who studied history, economics has always been an interesting yet utterly baffling discipline. While there are many approaches to history, I happen to think that it is impossible to reconstruct the past fully, since we – not just historians but all of us alive at present – do not have complete data and sources from the past enabling us to do so. And historians’ task is not necessarily or not only about retelling what happened in the past: their task is to make sense of it, in other words, put the past in a narrative. I also am of the opinion that history does not repeat itself, even if many people believe so and act based on that belief. Historians, then, write about the past, trying to make sense of it, fully aware that there are huge areas of uncertainties. I suspect many historians are hesitant about predicting the future: the past is full of failed prophecies, and historians often cannot fully explain the past adequately. If you cannot explain what has already happened, how can you even contemplate forecasting the future? Sometimes historians like to play with what if scenarios, but that is still in the past, imagining a fictional past: what would have happened had this or that occurred or not occurred? Economists, or rather their caricature that I am familiar with due to my ignorance, are very ambitious and confident people: they seek to extract factors that led to particular economic occurrences in the past, distil them into a model, and apply such model together with some fundamental assumptions to the current day in order to predict the future. Rather like historians who debate how best to understand the past, there are many economic models predicting often contradictory things, and some economists get things spectacularly wrong. Perhaps that is the reason why scepticism towards experts has so much currency for the leave campaign.

Understanding economics is hard: it’s certainly beyond my capabilities. As mentioned above, experts get it wrong often. The economy has been one of the main issues in the current EU referendum campaign, but I doubt anyone has the foggiest idea what would happen in case of Brexit. I think remain will win the referendum just because the bookies seem to think so, but the following lists my worries were leave to win. The pound would depreciate against other currencies in case of Brexit, even if it would not be possible to forecast by how much, how quickly, and for how long. In addition to the currency issue, there would be immediate political crises, since David Cameron’s position as the prime minister would become untenable in my view, and possibly that of Jeremy Corbyn as well. Constitutionally, Brexit would revive the issue of Scottish independence. A fall in the value of the pound might be welcome news to exporters, however that would be plagued by a prolonged period of negotiations and renegotiations of accesses to markets. Such would mean businesses delaying investment. Households would also delay consumption. Lower investments and weaker demands would lead to higher unemployment and to a recession. The pound in my pocket would buy less, given the UK has a deficit in trade in goods. This could in turn result in inflation. A weakened confidence and higher inflation would present the Bank of England with a dilemma. It might have to raise the interest rate to rein in inflation, which would have huge repercussions to the housing market and mortgages, when the economy might still require or at least benefit from continued or increased liquidity. I cannot see how a central bank can raise the interest rate and print money (quantitative easing) at the same time. If things could not be done on the monetary side, the burden would fall on the fiscal side. The government – whoever forms the government post-Brexit – would have to borrow more: neither taking drastically more from a shrinking economy in taxes nor spending drastically less in public expenditure would be beneficial. Such borrowing would add to the layers of uncertainties: how much more and how much longer could the UK borrow, and at what condition, especially if the Bank of England had to raise the interest rate?

In the long long term, seen in the spans of decades, I do not think the UK membership of the EU matters that much in economic terms, since the world and its economy will in my view continue to become more and more integrated, through agreements within and between trading blocs, however I do think the short to medium term the economic effects of the UK leaving the EU would be severely negative which could result in a lost decade or a lost generation. So if Brexit were to happen, how much of what I’ve written above turn out to be accurate? Or will it prove to be an idle what if piece, an imagined past that is at this moment not yet the past? We will know soon enough.