EU and Brexit thoughts- Part II: now

Our new leaders seem to have grouped around the idea that immigration is a problem, and that it represents the unifying factor behind the Brexit result. Hence the current position that free movement with the rest of EU is not going to remain. For the reasons above, I think this position is bad. Free movement is a strength for the economy (in both good and bad times) and enriches cultures.

What is quite perverse is that a few simple policies could turn the question on its head, and should have been acted on in the last decades. Poor people felt threatened? An answer could be better schools, better and cheaper housing in areas where this is needed. Was there evidence that EU migrants were abusing, or being attracted by, specific benefits? If so, maybe one should question if these benefits should be modified anyway; they might not be healthy permanent levers in our society if they remain entrenched in families and neighbourhoods across generations? Maybe new programs should have been rolled out (they might be more expensive, but more effective in getting people to be productive in the economy?). Certainly, major societal problems are not addressed by cost cutting.

What damage is already done ?

We are suddenly poorer. As of today (pound at 1.19) a 9% drop on 1.31 before the referendum. On the mean family annual income of £30K, this means £2700 lost per year (if you think in Euros as the reference currency, and USD is similar). Everything not made in this country, and everything made here that relies on oil or raw materials (that means essentially everything) will end up costing more or less that 9% much more within a short time. If you travel and spend abroad, things are that much more expensive right away.

The 9% loss in purchasing power is just the beginning. This is how the currency market has priced in the period of uncertainty. You can be sure that if Brexit plans lead to the loss of London’s Financial capital status, the damage to the currency will be significant. This is the top of the food chain in our economy: try taking away the whales from the Eskimo village.

What we have already now, I expect, is a period of more volatile exchange rate due to the markets reacting to variable perceived Brexit futures. Volatility is a disaster for small businesses that don’t have the tools and resources to hedge against changes; it can be dealt with in part by larger businesses (essentially by insuring – but this is an extra cost that is not carried by businesses with a stable currency, so it’s a handicap). However even large businesses when making long term investments (think deciding to build a large car plant) will then quite likely choose not to have to bear the price of volatility.

We have significantly messed up both our internal and foreign policy for years to come. Our top people will be spending a significant fraction of their time on this specific point; but these are the same people that we would want to have dealing with our internal affairs (think development policies) and our strategic foreign interests. As well as preparing for and responding to emergencies and challenges that have a habit of appearing unexpectedly.

What are the immediate dangers if Brexit does go ahead?

The economic cost (currency devaluation, increased volatility) will get worse. This will tend to increase inflation. If the economy goes in recession, there will have to be quantitative easing, but this will further cause inflation and currency devaluation. So we have a Bank of England and an independent currency, but they will be under conflicting pressures. If the income from tax revenue drops (from banks moving away) the government will struggle more than now to reconcile the need for investment to promote growth with addressing some of our emerging societal unease.

The structural stability of UK as a country is in danger: Scots voted fairly narrowly to be part of the UK within Europe; they seem likely to vote differently if the UK is not EU member. Even more dangerously (given the more recent historical scars, and troubles) and sadly, one might expect violence to resurface in Northern Ireland. That violence had finally been resolved not just thanks to the work of many people, but also thanks to a sense that the border had ceased to be visible. If that border goes back (and differences and inequalities resurface) then the costs will be huge.