Economic surplus

For the English, Brexit will mean economic pain

The naiveté of the English!

They have voted for Brexit. Now the debate has turned to the ‘conditions’ of exit. But the English are talking as if they will have a choice. They won’t. Let me use a bit of game theory to explain.

Put yourself in the position of the non-English EU leaders. The Brexit vote is simply the first step of an on-going process. The third and successive steps may be more exit votes – for Frexit, Nexit, and so on.

But before there are any more votes to leave the EU, the EU leaders have their turn. These leaders will set the exit terms for the English. And the success of future ‘exit’ referendums will depend on the expected conditions that face an exiting country. The worse these conditions, the less likely it is that a future exit vote in another member country will succeed. So EU leaders have an incentive to make these ‘exit conditions’ as onerous and costly as possible.

And it is England that will set the precedent.

As the Daily Mail put it:

“There are fears the EU will not offer a good deal to the UK in a bid to deter other Eurosceptic countries following Britain out the exit door”.

Too right! Now that the “leave” vote has won in the UK, EU leaders have a strong incentive to make Brexit as costly as possible. While this may hurt the EU as a whole, the EU leaders will be willing to impose a high cost on England to avoid the much higher cost of a sequential breakdown of the EU.

So what does this mean for the UK?

First, Scotland will have a strong campaign to leave the UK and stay with the EU. The campaign will be jointly organised by the independence movement and the continental EU leaders. It will have “sticks”: stay with the UK and join England in an economic downturn. It will also have “carrots”. Expect the EU to provide generous benefits to Scotland if it chooses to take its independence as part of the EU.

And after Scotland, the EU will target Northern Ireland. From the EU perspective, breaking up the UK will be seen as a significant form of punishment for English defection.

Second, expect England, and what ever else is left of the UK, to face significant barriers with the EU for both trade and the movement of people.

The EU leaders will need to “punish” the UK. This means that pre-vote talk of a Norwegian’ type of solution is going to rapidly evaporate. The EU may offer this type of solution: free movement of goods and services with free movement of people. However, it is clear that the UK cannot accept this. The “leave” vote in England was a vote against EU “migrants”. However, the EU will not offer free trade without the free movement of people. So England will face the highest level of default restrictions on trade with the EU and will have a hard time trying to negotiate any sort of UK-EU free trade agreement.

Third, expect a recession in England and a significant reduction in the standard of living, particularly in the midlands and northern parts of England that strongly supported Brexit. This process has started. The drop in the value of the pound means that every imported product bought by the English has just gone up in price. That means that the wages of workers have gone down in terms of real spending power.

The depth and length of any recession will significantly depend on how the UK treats its existing EU “migrants”. If it let’s them stay permanently, then this will moderate any downturn. But if it insists that they leave, expect major disruption to key industries that depend on this “migrant” labour. And English workers will quickly learn that these “migrants” are a source of demand for the goods and services that they want to sell.

Finally, expect this process of English “punishment” to be extremely popular in the EU. It is already starting with the issue of refugees and border-protection in Calais.

Ironically, this may work against the right-wing anti-EU parties in France and elsewhere. After all, nothing unites more than a common enemy and, for the next few years, the citizens of the EU will delight in uniting against England.

So expect a rocky economic road ahead for England. To paraphrase Winston Churchill, the trouble with committing economic suicide is that you live to regret it.