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Brexit: 100 days on … and where’s the economic Armageddon?


Brexit: 100 days on … and where’s the economic Armageddon?


Most economists argued against Brexit. Actually, pretty much every single economist argued against Brexit except the eight Economists for Brexit. This extraordinary near consensus emerged because a full range of models, methods, and assumptions yielded similar conclusions. Their message was clear: if the UK leaves the EU, it will face severe short-and-long-term costs.

One convention in political science is that the honeymoon periods of new governments usually last 100 days. Well, it has been a hundred days since the vote and the post-Brexit economic Armageddon is nowhere to be seen. So what happened with all those dire predictions? Is it a case of lousy experts all over again?

There are three caveats I have to get off my chest before even contemplating this question. The first is that, more than three months after the vote, with a new government and prime minister, the British electorate has not yet been told what Brexit means, let alone when Brexit will take place.

The second is that the timespan of all those forecasts was years – not days, weeks or months. All serious forecasts, such as those from the UK Treasury, Bank of England, and London School of Economics were talking about the impact Brexit would have on Britain in the period between 2020 and 2030.

The third caveat is that the aftermath of the Brexit vote has led to massive changes in the government’s economic policy stance. Maybe the most enlightened observers could see glimpses of the Bank of England’s stimulus “sledgehammer”, which included the first cut in interest rates since 2009. But the abandonment of fiscal targets was nothing but unthinkable a few months ago. Moreover, it has opened the door to the very highly anticipated “resetting” of economic policy by new chancellor Philip Hammond.

So this explains in large part why there has been no “post-Brexit Armageddon” in the three months since the vote. The predictions relate to what would happen after, not before, Brexit. All the predictions assumed unchanged fiscal targets. Who in their right mind would assume these plans to be summarily dismissed (as they were) given that they have largely been responsible for keeping the Conservatives in power since 2010? Weren’t they a manifesto pledge? And besides, all those predictions were for three to 15 years down the line, so evidently it is too early to tell whether they are right or not.

When it does happen …

But what will be the economic consequences when Brexit actually takes place? Armageddon is not not what most economists foretold. A common forecast was not that the UK economy would collapse, but that it would be better off (and grow at a faster rate) if the country remained a member of the EU.

Here, history is valuable. It may not repeat itself exactly, but similar actions tend to yield similar consequences. (Isn’t the definition of insanity doing the same thing over and over again and expecting different results?) The UK’s decision to delay entry into the European Community in the 1950s offers a valuable insight into the potential benefits and costs of not having EU membership. Two lessons are particularly relevant today.

One relates to Britain’s economic decline in relation to other countries. Between the end of World War II and the 1973 accession to the European Community, the UK grew faster than the US, but slower than France or Germany. It joined the EU to avoid economic decline: its per capita GDP relative to that of the EU founding members declined steadily from 1945 to 1972. It has been relatively stable since 1973.

Percentage difference between the UK’s GDP and EU founding members’ (EU-6) and EU-5 (excludes Luxembourg), 1950-2011. Nauro Campos, Data: Penn World Tables 8.0

The Brexit forecasts say that outside of the EU, Britain will grow more slowly than France, Germany or the Netherlands. They do not say that the British economy will shrink. If it ends up in a “hard Brexit” (leaves the single market), by 2030 UK incomes are estimated to be about 8% lower than if the UK had not Brexited.

Britain created and led the European Free Trade Association in the late 1950s. Just a few months after EFTA started, the UK applied to join the European Economic Community, the precursor to the EU. EFTA increased trade, but the EEC increased it many times more. Brexit would be a reversal of this so one should expect a reversal of these gains.

This is partly because most gains from deep integration are from increased productivity. Deep integration also increases state capacity to enforce law and order, provide public goods, and regulate economic activity. EU membership empowered British entrepreneurs to capitalise on growth in Europe – without their support, Thatcher’s reforms would have struggled.

It is true that Brexit Armageddon simply hasn’t happened. But the forecasts published in the run-up to the Brexit vote are still valid. The UK has not yet left the EU. When it does, what these forecasts predict is not that the economy will collapse, shrink or self-destroy. They predict that because the UK will grow more slowly the gap with respect to the average EU member will increase. That may not be Armageddon but is unlikely to be something that most people will celebrate.