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“Brexit means Brexit”, but what does Brexit mean?

Professor Mark Stephens

Professor Mark Stephens

Although the Prime Minister has emphasised that “Brexit means Brexit”, we don’t really know what Brexit means.

This uncertainty is in large part attributable to the mis-use of a referendum as a means to settle a divide within the Conservative Party, and a Prime Minister whose chutzpah allowed him to forget the rule familiar to lawyers never ask a question unless you in know what the answer will be.

Referenda are best suited to the endorsement (or otherwise) of a major constitutional change that is supported by the Government. The SNP won an overall majority in the Scottish Parliament in 2011, with a manifesto that committed it to hold a referendum on independence. The Scottish Government then produced a detailed White Paper that detailed its preferred set of institutional arrangements in the event of a “yes” vote, which could be (and were) held up to scrutiny during the campaign. Partly because many people were unconvinced about the Scottish Government’s ability to secure EU membership and a currency union with the rest of the UK, independence was rejected.

In contrast, the UK Government did not support Brexit, and a majority of MPs oppose it. This means that for the first time in history, the House of Commons will be expected to vote for a policy that it does not support. This extraordinary situation goes a long way to explaining why the Government has no agreed position on what its preferred relationship with the European Union will be – and precisely because “Brexit” could mean whatever the electorate wanted it to mean, the “Remain” campaign could not convincingly scrutinise what was in effect a hollow proposition.

Some “remainers” having lost the referendum have suggested that the outcome should be void because the electorate were either misled and subsequently expressed “buyer’s remorse”, or just wrong. Whilst the referendum is legally non-binding, this is a strategy that is so profoundly undemocratic that it would confirm the view of much of the electorate that the “Establishment” is out of touch, and simply not interested in listening to them because it regards them with disdain. The rejection of this fantasy is what the Prime Minister implied when she said that “Brexit means Brexit.”

But what does Brexit mean?

At least four models of Brexit are possible. Supporters of “Remain” hope that the UK will become a part of the European Economic Area, as is the case with Norway, whereby the UK would abide by the rules of the Single Market. This would be logistically straightforward, since we already abide by these rules. A series of bi-lateral agreements along the lines enjoyed by Switzerland, would be likely to take longer to agree, but would allow negotiation on detail. Switzerland does not, however, have full access to the market in services, and the EU will retaliate if Switzerland implements restrictions on migration from the EU. A looser relationship implied by the pending free trade agreement between the EU and Canada, which will lead to tariff-free trade for most goods, but not in all services. And it is important to remember that the UK is primarily a service-based economy. Turkey is part of a customs union with the EU, but again services are excluded from the agreement. A still looser arrangement would arise from the so-called “World Trade Organisation Model” which would grant no preferential access to the Single Market. Each party would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world.

We can get a better feel of what is likely to happen, if we consider what we are “brexiting” from.

The European Single Market was established following the passing of the Single European Act in 1986. Ironically, this was proposed by one of the UK’s Commissioners (Lord Cockfield, who was appointed by Margaret Thatcher). The Act extended the range of decisions that could be decided by qualified majority voting (rather than requiring unanimity) and aimed to remove so-called “non-tariff” (i.e. regulatory) barriers to the trade of goods and services. It therefore moved the EU beyond the customs union model (the “Common Market”) that had previously been its defining characteristic. Indeed it embraces the other two “freedoms” – namely free movement of capital and people. One of the motivations of the Single Market was to improve the competitiveness of the European economy in an increasingly integrated global economy. This is a point that is often lost: the Single Market is not just about the free movement of the goods and services that companies want to sell, it is equally about the free movement of the “factors of production” that are used to produce them, namely capital and labour.

It was in this context that concerns about the possible competitive erosion of workers’ rights led to a “social charter” being incorporated into the Act (which later became the Social Chapter in the Maastricht Treaty. The UK initially opted out of this, but joined in under the last Labour Government.) Hence a “social” element was introduced into the Single Market, and it was at this point that the European Economic Community became the European Community. It is of course the resultant labour market regulations to which many on the Conservative right object.

And here is the rub. The UK is only likely to gain full access to the Single Market if it agrees to free movement of people. This is because, as we have seen, free movement of people is a fundamental part of the Single Market. Yet, it is clear that the wish to regain control of migration from the EU was one of the main motivating factors behind the “leave” vote. (Lord Ashcroft’s poll found that it was the second most important factor for leave voters, behind the general principle of sovereignty.) Migration also seems to have been the red line for supporters of Brexit within the parliamentary Conservative Party. Indeed David Cameron’s failure to secure concessions on this point was the tipping point for some MPs who supported “leave”.

It would therefore seem likely that politics will win over economics, and the UK will form one of the looser possible relationships with the EU. It usually does. This means that the UK is likely to trade economic wellbeing for “taking back control” over migration. It is easy to see why the overwhelming majority of economists believe that Brexit will damage the UK’s economic prospects. (It is a shame that the Treasury papers and George Osborne’s threat of a “punishment budget” did so much to damage the credibility of the case for “remain”.)

But it is important to recognise that Brexit is not simply about the growth rate. It is also about the qualitative nature of the economy. The evidence suggests that migration has a small downward effect on wages. However, impacts on labour markets in some localities where levels of migration have been higher may have been greater, and have combined with perceived pressures on services (although lack of funding has also been blamed). On the other hand, many Conservative Brexiteers wish to use it to take the opportunity to dismantle regulations designed to protect workers’ rights, as a means of boosting economic growth – which even if successful would be at the cost of lower workplace standards

Brexit is often taken as meaning that we are living in extraordinary times.

But we have been living in extraordinary times for at least eight years. We are still living through the effects of the Global Financial Crisis, and the policy decisions that were taken to mitigate its impact, and indeed the policies adopted subsequently (i.e. “austerity”). The UK economy is fragile, as it is throughout the EU and indeed the rest of the world.

But if the uncertainty triggered by Brexit pushes us to recession, the authorities have less scope to respond due to the aftermath of the GFC. The fiscal target was an early casualty of the Brexit vote, suggesting some loosening of the fiscal stance. The Bank of England seems likely to cut interest rates in August – probably to 0.25 per cent. But this is a relatively small difference given the historically low base rate that has prevailed since 2009 – far longer than was anticipated at the time. This suggests that interest rate policy has pretty much reached its limits – it has the effect of “pushing on a string”. So the Bank is likely to undertake another round of quantitative easing, although it seems that the effect is to increase debt (for asset purchase) rather than to boost consumption. A recent Radio 4 programme mooted negative interest rates (subsequently written into the corporate contracts of some banks) and “helicopter money” (money transfers to everyone as a direct way of boosting consumption).

So the impacts of Brexit cannot be read in isolation from the context in which it occurs.

These will also include knock-on impacts, such as the prospects of a second Scottish independence referendum (the likely subject of a future blog).

When asked about his opinion on the impacts of the French Revolution during President Nixon’s visit to China in 1972, the Chinese Premier famously replied that it was too soon to say. The story has been spoiled by claims that he misunderstood the question and was in fact referring to the protests that took place in Paris in 1968. Nonetheless, it is certainly too soon to say what the long-term impacts of Brexit will be.

 

This blog is based on a presentation given by Mark Stephens to the “Building Beyond Brexit – what now?” conference hosted by the Chartered Institute of Housing Scotland on 26 July 2016

One Comment Post a comment
  1. Ian Harden #

    Thank you for an interesting and insightful analysis.

    July 28, 2016

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