Blog: June 2016
A week is a short time in economics. So what , if anything, have we learned about the economic impact of the UK’s vote to leave the European Union? I would highlight four key points.
Uncertainty has gripped financial markets in the UK and around the world. The immediate response this morning has been unprecedented in the post Bretton Woods era. In the space of six hours sterling has fallen around 10 per cent against the dollar to the lowest level for 31 years. Stock market futures indicate that the equity markets will fall by around 10%. Further gyrations are expected over the coming days and weeks as market participants grapple with the implications of the results. The response so far reflects a weaker expected economic outlook at home and abroad.
The Prime Minister's foolish pledge to reduce net immigration to the tens of thousands has come back to bite him. It ensured that the key question for the referendum was whether the ability to "take control" of immigration policy was worth the risk to the UK economy from Brexit. The electorate have given their verdict.
The economic consequences of leaving the EU have naturally been a central focus of the referendum campaign. As June 23 draws near we bring together the conclusions from our research on the likely consequences, and reflect on some of the claims made.
It is difficult to overstate the damage that has been done to UK politics and policy by the Prime Minister’s foolish pledge – made against the advice of almost anyone who knew anything about the subject – to reduce net immigration to the tens of thousands. It has proved to be an act of economic self-harm; as well as unnecessarily excluding tens of thousands of skilled workers from outside the EU, we are actually losing global market share in a key export sector – higher education – where we have a strong comparative advantage. But it has also reduced trust in politics and politicians; vot
We are fortunate to have a consensus of views on the negative impact of leaving the EU. This note explains how a rational agent should "consume" this advice. Theory tends to say that we should be wary of the motivation of those who forecast at the extreme but that we should still put weight on the central case.
There is now little doubt that immigration will be the issue that will decide the referendum result. But it is danger of being decided on fiction rather than facts about its impact. We have never needed evidence about migration more. We do know a lot. We know that any statistical effects of migration on jobs and wages are very small. But statistics are often mistrusted.
In our recent report here we assessed a potential effect of Brexit on low income families. In particular, the potential changes to welfare payments that might follow after Brexit. We combined projected changes in national income with the spirit of the Government’s Fiscal Charter. Our results suggest that the effect on the incomes of the low income families could be substantial.
Is immigration from the EU pushing down the wages of British workers, especially the low paid? This has become a central theme for the Leave campaign. The Sun reported:
Do you prefer wine to whisky, but whisky to beer; and, perhaps, beer to wine? If so, you have intransitive preferences (that is, preferring A to B and B to C does not mean you necessarily prefer A to C. Rock beats scissors beats paper beats rock!). In fact.
If you boiled this referendum down to what is really being asked it is whether to stay in the Single Market, or leave and negotiate a Free Trade Agreement with the EU.
The Single Market and a Free Trade Agreement sound pretty much like the same thing – they both allow us to trade. But, in fact, they are quite different.
The Single Market is about creating a large and level playing field. The idea goes back 250 years to the great Adam Smith who said that productivity, and therefore our standard of living, depends on the size of the market.