After the workers ‘ uprising in East Germany in 1953, the playwright Bertolt Brecht sarcastically suggested that, “once the people did not justify the trust of the government,” the government is probably easier to dissolve the people and choose myself new ones.” After the June referendum on leaving the EU (Brexit) similar thoughts come to mind for many in the UK.
In the midst of the campaign ahead of the referendum Michael Gove, at the time he was Minister of justice and one of the leaders of the camp of the supporters of the exit, said: “I think the people of this country have seen enough of experts from various organizations with titles-abbreviations, which are always wrong”. It was the target of the IMF, OECD, LSE (London school of Economics) and all other “gatherings” economists, arguing that leaving the EU would cause the UK economy harm.
Unfortunately, Gove was right, but not the quality of the economic forecasts, but the fact that British voters do not value economic experts. Ignoring the almost unanimous opinion of economists that Brexit would cause in Britain the recession and will lead to long-term reduction in the growth rate of the economy, voters voted with their heart, not the wallet. The camp of supporters of continued membership in the EU was accused of trying to use an alarming warning of economists for intimidation and subjugation of the voters.
It is sometimes said that the blame for the outcome of the referendum lies with the economists because they are unable to speak the language, who would understand the simple people. Similar accusations are voiced and address of bankers and other financiers that were as convincing: many believed that they defend narrow, vested interests of the industry.
It seemed self-evident that EU membership brings to Britain’s favor. The problem is that this rosy picture did not find a response from voters living outside London
In this criticism, of course, is the truth. But the problem was not only in too complex language or incomprehensible jargon. All economists have assumed that the UK all right: GDP growth in the country above the EU average levels, and the unemployment rate is much lower. It seemed self-evident that EU membership brings to Britain’s favor, especially considering that we were able to avoid joining the Eurozone, and, thus, were not bound by monetary and fiscal knots that weave in Brussels and Frankfurt.
The problem is that this rosy picture did not find a response from voters living outside London and the South East of England. The reasons for this very clearly stated in a recent speech, Andy Haldane, chief economist of the Bank of England.
Haldane cites statistics according to which the GDP of Britain rose by 7% above the pre-crisis peak, employment for 6%, and the fortune – 30%. But, he adds, the size of per capita national income is unchanged. The median real wage (adjusted for inflation) virtually stopped increasing in 2005. The population of the country increased, including because of immigration.
A statistical increase in wealth is due primarily to the growth in property prices in some regions of the country, especially in London, and an increase in non-state pensions. But if you are not lucky enough to own property in the South East of England and you do not participate in the pension programs, which involve payments equal to your last salary, then the size of your wealth either stagnated or decreased. The breakdown of GDP figures by region shows that London and the South-Eastern part of the country is the only areas of Britain where people have become on average live better than in 2009, i.e. the peak of the crisis.
It is highly likely that Brexit will only increase this inequality. If you will be introduced intra-European trade barriers, if the company decides that it is better to invest in other European countries, to gain access to the common market, then low-paid jobs in depressed regions either disappear altogether, or they will be paid even worse. However, it sounds like the reasoning of “expert” on that ex-agitators over Brexit has a ready answer: economists denigrated Britain, to prove the correctness of his gloomy forecasts. If the experts could not be trusted before the referendum, then they obviously can’t be trusted now.
If you jeopardize the city of London, there will be risks for the whole of the British economy
This unfavorable background, will soon begin negotiations on future relations of great Britain with the EU. It is particularly unfavorable for the city of London. It is obvious that a compromise between access to the common market, which wants the majority of the financial companies and one of the main conditions of this access – the freedom of movement of EU citizens, which is perceived as a factor that contributed to the stagnation of wages in many regions of Britain. The result will be favourable to London (it is no wonder that the majority voted for continued membership in the EU), it is necessary to defend very accurately and carefully, so it does not look like sacrifice the welfare of the many for the interests of the few.
The strongest argument in favor of preserving the General market is as follows: if to threaten the city of London, then there will be risks for the whole of the British economy. The share of the financial services sector accounts for only about 3% of jobs in the country, but it generates 11% of all tax revenues. To kill the goose that lays the Golden eggs recklessly. When the economy slows (and it’s probably the best scenario that awaits us), the country really need these revenues. In addition, the balance of payments deficit of Britain is more than 5% of GDP (according to this indicator, it is in second place among OECD countries), therefore the surplus of the financial sector in the amount of 3% of GDP is critical to prevent external shock.
Is it any wonder that the British pound fell sharply after the vote for the Brexit. Claim that currency devaluation will help to reduce our trade deficit, so as to improve the competitiveness of British exports. But as the experience of 2008, when the pound also fell sharply, devaluation does not have significant effect on the size of the external deficit. Britain has not so much price-sensitive export products, whose production can be quickly increased.
As a result, the financial markets of London, it’s nervous times. We need new experts not associated with the discredited acronyms (IMF, etc) to explain to a very skeptical audience some unpleasant facts of our economic life. Should not be taken as an ironic proposal of Brecht seriously. The British people have spoken, and now we have to find a way to fulfill his wishes with minimal economic costs.
Howard Davies – Chairman of the Royal Bank of Scotland
Copyright: Project Syndicate, 2016