Wednesday, June 29, 2016

Details-Schmetails!: Brexit And Uncertainty

An FB friend of mine skeptical that Brexit will have much of a negative economic impact has put up a post entitled "Brexit-Schmexit!"  To this I say, "Details-Schmetails!" because the widely varying possible impacts of details of that exit have induced a massive increase in uncertainty over the future around much of the world that itself can cause considerable economic harm.  Just for the US alone, Jim Hamilton at Econbrowser documents the sharpest increase in measured policy uncertainty since the debt ceiling crisis of 2013 (also linked to by Mark Thoma at Economists View), and this is the leading complaint by most EU leaders against the plan by David Cameron (and Boris Johnson too apparently, as well as many in the UK hoping for an eventual Remain outcome)  to delay invoking Article 50 of the Lisbon Treaty that would trigger the two year divorce negotiations, even as I sympathize with those in the UK hoping such a delay might lead to no Brexit at all in the end.  The Europeans want the negotiations to start sooner so as to  end the uncertainty sooner, which they see as hanging over the heads of their economies and damaging them, which seems a fair point.

Circumstantially, yesterday Marina and I led some students to visit the European Commission and the European parliament in Brussels.  At the Commission last night, the Council of Europe heard David Cameron say good-bye and how much he loved Europe, even as he declared that he would not invoke Article 50 and would not leave office until at least October.  Other EU leaders rejected this and called for immediate invocation of Article 50 to minimize uncertainty, including Germany's Angela Merkel, France's Francois Hollande, and Italy's Matteo Renzi.   We visited the plenary hall of the parliament a few hours after a contentious debate in which one member denounced pro-Brexit Nicholas Farage as engaging in "Nazi propaganda," while Farange declared that his critics had "never held a real job in their lives."  We heard speakers defending these institutions, but it became clear that details matter.

Something that struck me that EU critics would note is the massive ponderousness of the complex of buildings in this "Europe City" zone.  Although Tyler Cowen recently compared them, they put to shame the structures in the  zone in Washington that houses the headquarters of the Fed, World Bank, and IMF.  A full 50,000 Eurocrats work in them, with it not at all clear that many or most of those are doing all that much useful.  But then again, details matter. Much of what these folks do is related to the much hated regulations that the EU promulgates in its single market, with pro-Brexit campaigners declaring drag Britain down.  How awful are these regulations?  This is not clear.

Some are for environmental quality; some are for safety; ome are posed as unifying standards.  Some of  this may be useful, but some may not.  Our speaker at the commission spoke about how the EC is cleaning up its act and doing better with standards.  An example had to  do with safety in relation to cosmetics.  At one point there were sixteen different sets of standards relating to different cosmetics, running to 25,000 pages.  More recently there has been an effort to simplify this and the sixteen have been reduced to one, with the number of pages involved down to 500. Is all this worth it?  I do not know, although I do know that there have been safety issues regarding cosmetics and that this is s pretty big industry in the EU.

An especially controversial one involving the UK has involved fisheries policy.  One of the more dramatic moments in the Brexit campaign in Britain in the last weeks involved a flotilla of fishers floating up the Thames in London calling for Brexit, with a competing flotilla led by Bob Geldof contesting them, with near violence breaking out between the two.  Some of the fishers spokesmen were especially vehement about their alleged suffering at the hands of the EU regulaters, but this is far from obvious.  That it is taken seriously shows up in that a major fishing area, Cornwall, voted strongly to leave, even as it is one of the parts of UK receiving the most amount of regional development aid due to its great poverty.  They are getting lots of aid from the EU, but there has been no love there for it, given their attitude towards the fisheries policy.

So mostly they do not like quotas and other limits put on when and where and how much they can fish.  But the hard fact is that open access renewable resource markets are subject to over-harvesting and collapse, with fisheries around the word most subject to this. Iceland has fought "cod wars" with British fishers invading their  territorial waters.  The British contest mostly with the Spanish fishers in the EU and feel that others are getting into waters they should control.  There is no simple answer to  this, but in fact there is strong evidence based on rising incomes for fishers, albeit smaller numbers of them, that the quotas and limits imposed by the EU have helped to preserve and even revive damaged fisheries that the British fishers use.  Brexit may well lead to them being worse off, much worse off, even as they believe otherwise.  This may well be how it will turn out for quite a few in UK.

In  any case, whether declining foreign direct investment tanking the UK economy has a greater impact than some gain in reduced import competition and rising exports due to  a devaluing pound, it looks from most in the EU that the greatest damage to their economies and the British one, as well as others around the world, will arise from the uncertainty associated with how all this will work itself out and how long it will  take.  In this regard I agree with the Europeans: whether or not the Brexit vote by the British was wise or not, they must minimize the damage of it to the rest of the world and get out ASAP to reduce all this world-economy-wrecking uncertainty.

Barkley Rosser


Tom Lowe said...

Well said, except for the references to the uncertainty index, which I suspect is neithern reliable nor valid. The "Lemming index" would be a better description.

Bill H aka run75441 said...


Interesting commentary on Europe.

Sat at the Stuttgart October Fest downing litres of beer. Not the great Munich one; but, it was fun and I was not paying.

Across from me sat a couple of Irish talking about the collapse and complaining how the country need several hundred million or so to get out of trouble (honestly I forgot the amount so I will not quibble if you call BS). It is a story of my wandering a month or so around Tuttlingen, Weilheim, Freiburg, Konstadst (Lenk's Imperia still guards the harbor) while working for a German company.

I offered to pay the Irish debt on the spot as it was small in comparison to what the US was dealing with at the time ($7 trillion?).
I suspect the English departure from France shores in comparison after the hundred years war leaving only Calais in possession.

Can it be so bad with England out?

Myrtle Blackwood said...

The price of civilisation entails constant miscarriages of power and organisation. It's not surprising that many people want to opt out. Look what the EU did to Greece.