UABS KNOWLEDGE

ECONOMICS

Three takes on Brexit

19 July 2016

Has Britain scored an 'own goal' in Europe? Tim Hazledine, Robert Scollay, and Maureen Benson-Rea reflect on the UK's decision to leave the EU.

Britain's shock decision in June 2016 to leave the European Union (EU) after 43 years reverberated around the world. And when, days later, a football team from Iceland – a country with a population smaller than the London borough of Croydon – knocked the English side out of Euro 2016, it seemed indeed that Britain was on the wrong side of history.

But what does the so-called "Brexit" really mean for the UK, for New Zealand, and for the world. We offer three views from the Business School:

1. Just a little local difficulty?

Nobody truly knows what will happen to Britain and the rest of us as a result of this referendum. Why? For the same reason, as economist John Maynard Keynes so insightfully noted, that holds for all major human endeavours: what happens depends on what people expect to happen, and what they then choose to do. From a narrow economic perspective Britain – or England and Wales – could function perfectly well as a modern, prosperous economy outside the European Union, just as many countries – large and small – already do.

Whether it is allowed to do so, and how painful the process is, depend on how people handle themselves and each other. Of course it will not be a simple matter to unravel much of the UK’s involvement in Europe. But it can be done well or done badly. It is up to the politicians on both sides – however disappointed they may be – to behave constructively.

That said, we cannot ignore the reasons behind this remarkable vote, and its ominous similarities to the even more remarkable support in the U.S. for Donald Trump.  Basically, the indigenous white working and lower-middle classes in both countries are fed up. They are fed up with being told how stupid and ignorant they are by “elites.” They are fed up with almost stagnant real incomes and backsliding employment and deteriorating social conditions over the past three decades. They are, obviously, fed up with foreigners coming in to their country and – as they believe – competing for their jobs.

The neoliberal, forced globalisation model has failed these people. For economists and politicians, the responsible thing to do is to begin building what American economist Robert Summers calls a “responsible nationalism,” that takes nations seriously as economic and social entities, rather than – as now – as standardised grist for the globalisation mill. 

That applies to us in New Zealand too. We aren’t so worried here about immigration, but we do have citizens who have suffered three decades of disappointing wages and employment insecurity, along with spiralling housing and education costs. Given that just 4% of our trade is with the UK, from our perspective events there may appear to be nothing more than a little local difficulty. But the pervasive under-currents of disillusion and despair will soon enough wash against our island shores.

Tim Hazledine, Professor of Economics.

2. A Brexit free lunch for Britain? Probably not.

Boris Johnson, the de facto leader of the Leave campaign, sought to reassure Britons that a post-Brexit Britain would continue to enjoy “free trade” with Europe through its access to the European Union’s “single market”, even as it rejected the EU’s rules on movement of people and opted out of EU laws and regulations, and of contributions to the EU budget.

How realistic is this?

The “single market” is not simply about “free trade” in the widely understood sense of free trade in goods. It includes free trade in services, free movement of capital and free movement of labour. Free trade in services, which Britain needs to retain, itself involves substantial commitments involving free movement of people, for example in many categories of professional occupations. Even free trade in goods requires compliance with EU technical standards and other relevant laws and regulations. And legal disputes related to the “single market” are adjudicated by the European Court of Justice.

It is true that Norway and the other two members of the European Economic Area (EEA) participate fully in the single market without being EU members. But under this arrangement they still must follow all relevant EU rules, regulations, and numerous single-market-related policies, without having any say in the ways they may be changed in future. This includes full compliance with EU rules on people movement. 

EEA members also make contributions to the EU budget that on a pro rata basis may be comparable to what Britain currently pays. Switzerland has a similar arrangement, and for it and the EEA members there is even an EFTA Court that handles single-market-related disputes, in parallel to the European Court of Justice.

Was the ignoring of these realities by the Leave campaign a case of breath-taking naivety, or just plain deception?

There will be intense pressure from business in both Britain and Europe to keep the country within the single market, and the economic costs to both will be considerable if this does not happen. Nevertheless, the costs will undoubtedly be higher for Britain, and this will weaken its bargaining position. 

It will be further weakened if Europe’s leaders are united in opposing Britain’s desire to negotiate the terms of its future economic relationship with Europe before triggering the exit procedures. A negotiation in which goodwill is absent and the EU holds the high cards is not likely to end well for Britain. And pursuit of brinkmanship on both sides of the negotiating table could well deliver the worst of all possible outcomes.

Robert Scollay, Associate Professor of Economics.

3. Still open for business

Europe has long divided British Conservatives. In her memoirs Margaret Thatcher described the European Union as fundamentally unreformable and perhaps the greatest folly of the modern era. The European single market, however, was something Margaret Thatcher did like. The EU was “Open for Business”, as she put it. This has been one of the major achievements of the European Economic Community, and of its successors the European Community, and the EU.

The single market fostered more collaborative, competitive, agile businesses. It created new business opportunities for firms of all sizes, from all over the world – not just via market access but through cross-border foreign direct investment and trade integration.

Removing cross-border barriers in the single market enabled economies of scale. It made acquisitions and mergers, and collaboration in joint ventures and strategic alliances, suddenly viable.

Firms doing business in the EU market have developed strategies to balance a pan-European approach and single country localisation. Successful firms deploy Europe-wide objectives with market-by-market adaptation and coordination. A prime home-grown example is Icebreaker, which is headquartered in Auckland, with offices in Germany, France, Switzerland and the Czech Republic.

A 2010 Ernst & Young survey of industry views on Europe’s attractiveness as a business location identified three key measures to stimulate growth: support for SMEs, high-tech industries, and innovation. Respondents valued Europe’s research and innovation capacity, its emphasis on green business, the diversity and quality of its labour force, and its development of world-class business clusters.

Business people the world over will be hoping that all this will not change. The single European market is a prize worth fighting for.

But whatever happens, the relationships New Zealand firms have built with partners and customers across Europe won’t disappear overnight. In fact, Brexit may bring opportunities – for example, firms serving the Continent and Britain from a single location may decide to set up a second office in the other location.

If the single market is curtailed, New Zealand firms will have to build new relationships in Europe. But we know how to do that.

Maureen Benson-Rea, Senior Lecturer in Management and International Business, Founding Co-Director, Europe Institute, University of Auckland.

Tim Hazledine

Tim Hazledine is a Professor of Economics at the University of Auckland Business School.

t.hazledine@auckland.ac.nz
Robert Scollay

Robert Scollay is an Associate Professor of Economics at the University of Auckland Business School.

r.scollay@auckland.ac.nz
Maureen Benson-Rea

Maureen Benson-Rea is a Senior Lecturer in the University of Auckland Business School's Department of Management and International Business.

m.benson-rea@auckland.ac.nz

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