Economic Consequences Of Brexit

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Here are my two pence on some of the consequences of Britain's vote to leave the European Union.

A key goal of the EU was to allow freer movements of goods, services, and people across countries. The potential economic benefits of such freedom are well known. Access to a broader market means both buyers and sellers can secure better deals than would be available domestically. Relocation of workers to a place where they can be more productive should mean a larger size for the total economic pie.

But that's very different from saying that everybody's piece of the pie gets bigger. Some individuals are better off and others are worse off as a result of free trade or migration. For example, employers clearly benefit from hiring cheaper foreign labor, and for the foreign workers, it is also a better opportunity than they had before. But this arrangement means a lower wage for the domestic worker who used to have that job. For those Britons who have seen themselves falling farther behind each year, the benefits of staying in the EU may not have seemed all that clear.

Balancing the competing interests of winners and losers is one of the goals of EU regulation. But getting free from the tens of thousands of EU standards, laws, and court decisions became the number one reason voters gave for exit. Some Britons questioned whether free trade should mean being forbidden to buy items such as incandescent light bulbs or powerful vacuum cleaners,

There will surely be some loss to UK GDP as a result of the move. But it is not as if leaving the EU suddenly tosses Britain into a trade war with the rest of the world. The US and Canada have a huge volume of trade with Europe without being part of the EU. Notwithstanding, adjusting will be costly. Here's Paul Krugman's take:

Yes, Brexit will make Britain poorer. It's hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others' exports) are low and other traditional restraints on trade relatively mild. But everything we've seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn't any kind of trade war. And Britain will become less productive as a result.

Where I have bigger concerns is what happens next. Our term "Brexit" for Britain's exit from the European Union was preceded by discussion of "Grexit" - the possible exit of Greece from the euro. And although Greece's economy is 1/10 the size of Britain's, Greece's exit from the euro would have been a huge, huge deal. Negotiating new trade agreements is one thing; abandoning a currency is altogether different. If Greece were to exit the euro or fail to honor its debts, it would mean big capital losses to banks and lenders. Fears that this might happen drove borrowing rates sky high in 2011-2012 and sent Greece into a depression from which the country has yet to recover. And in the case of Grexit, too, the worry was that not just Greece but a number of other countries might be forced to abandon the euro and default on their debt. Those fears put broader Europe into a second recession in 2011-2012 at the same time that the rest of the world was recovering.

My key concern therefore is whether Britain's exit from the EU is just the opening volley of something much bigger. Immigration has been a huge strain and politically divisive issue throughout Europe. Which might be the next country where the possibility of opting out will move closer to reality? If that question and the future of the euro itself are actively put on the table, destabilizing financial flows are likely to follow.

Editor's note: This article was originally published on June 26, 2016, by James Hamilton here.