At the two-year anniversary of the Brexit vote, officials are engaged in fractious debate on the terms of Britain’s exit from the European Union.
They are wrestling with several thorny problems, including the fate of the customs border between Northern Ireland and the Republic of Ireland.
But the political and media focus on the deal to be struck has obscured the real message of British voters. The vote for Brexit was a cry for greater opportunity from those who feel that they and their children are mired in lives that offer little hope.
Brexit is a done deal, and the exact parameters of exit from the European Union will have limited and short-term bearing on the UK’s economic performance.
The basic facts are uncontroversial. Britain will trade somewhat less than before, at least until British businesses redirect some of their trade away from the EU to more dynamic Asian and US economies.
The expected decline in the extent of international trade will, for a while, reduce Britain’s overall economic welfare. But, as the Harvard economist Dani Rodrik has repeatedly emphasized, citizens’ economic welfare changes only modestly when countries with extensive trade relationships increase or decrease the extent of their international trade.
Estimates of large (sometimes very large) costs of Brexit rely on the wildly unreasonable assumption that British productivity will decline precipitously and permanently.
True, the UK has been growing slower than other advanced economies since the Brexit vote; but that slower growth is almost entirely explained by senseless fiscal austerity being pursued by Prime Minister Theresa May’s government while other countries have neutral or even expansionary fiscal policy.
There has been much handwringing about the depreciation of the pound triggered by the Brexit vote. Currency depreciation normally makes citizens poorer: they pay more for foreign products and receive reduced prices for their exports. But the UK was running a large (and growing) current account deficit.
Put simply, the UK was not richer; it was living beyond its means. Prolonged current account deficits would eventually have caused a sharper and, therefore, potentially more disruptive exchange rate depreciation. For now, the depreciation has helped narrow the deficit (precisely by making British exports less expensive for trading partners – stimulating demand for British goods – and making imports dearer for British consumers). Britain is on a more sustainable growth path.
Moreover, as I noted at the time, the pound’s depreciation reflected an abrupt decline in “hot money flows” into the UK These foreign funds were being used by Russian oligarchs and Indian billionaires to bid up prices of property in London. After the Brexit decision, the rate of rise in London property price increases slowed markedly; recently prices have actually dropped.
Thus, Brexit has had several salutary economic effects.
Since the modest trade costs of Brexit are at least partially offset by favourable developments, it is crucial to recognise what is really at stake. The Brexit vote expressed the anxiety of those who felt that their prospects of rising up the income ladder were vanishing. In her October 2016 address to the Tory party conference in Birmingham, Theresa May seemed to understand that the vote was a plea for greater opportunity and fairness. But she seems to have lost track of that insight.
As my student Rachel Lurie and I find in ongoing research, those who voted against Brexit were predominantly low-skilled workers stuck in dead-end jobs or unemployed in Britain’s rust-belt areas. As former Prime Minister Gordon Brown wrote in the days after the Brexit referendum, unable to face Asian competition, British manufacturing “collapsed,” and industrial towns “hollowed out,” leaving semi-skilled workers “on the wrong side of globalisation.”
But rust-belt parents had a deeper reason to worry. They were bequeathing poor education and work opportunities to their children. Thus, not only were they themselves stuck, they also felt powerless to create more opportunities for their children and grandchildren.
The children, for their part, are as dispirited as their parents. Commentators commonly point out that young British citizens voted more so than their elders to remain in the EU. This ignores the large numbers who did not vote: these were young citizens typically unemployed in socially dysfunctional urban communities.
For example, in Greater London, the voter turnout was 79 percent in affluent Kingston upon Thames borough but only 65 percent in Hackney, where large pockets of deep poverty and alienation persist. The non-vote of the young living in bleak urban areas was as much a sign of hopelessness as the exit vote of older rust-belt citizens.
Theresa May’s early reading was right: UK citizens were indeed pleading through their vote (and non-vote) for a fair shot at the future. They were urgently calling on British leaders to revitalize decaying industrial areas and bring hope to failing urban communities in which they were trapped.
The message of the Brexit vote – and of similar protest votes in other western democracies since – was that if citizens do not feel economically secure at home, they will reject international commitments.
That crucial message has been lost amid the frenzied Brexit negotiations. Until it is heard, it will continue to haunt, and be repeated again and again.
Ashoka Mody is Visiting Professor of International Economic Policy at Princeton University and former deputy director of the International Monetary Fund’s European and Research Departments. His new book is Eurotragedy: A Drama in Nine Acts
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