Brexit will cause economic devastation – or not

And neither will a vote to Remain solve the EU’s political problems

On Thursday the Brits will decide whether their future lies in or outside of the European Union. As the spectre of Brexit (short for “British Exit”) looms large in opinion polls, many in the Anglosphere wonder what the world will look like if Britain turns its back on a politically integrated Europe. Much of the debate has been technical and opaque. But common sense, instead of economic mysticism, may give us a glimpse at a likely future after Brexit. Intelligent speculation, if you will. 

David Cameron, the British Prime Minister, warns that Brexit will put a bomb under his country’s economy. It being the fifth largest economy in the world, the rest of us are bound to feel the aftershocks. For one, the Brits are heavily invested in South African bonds and equities. Apparently a Brexit-induced panic may prompt a sell-off of these holdings. Further afield a pantheon of economists, bankers and international institutions have endorsed Cameron's warning to a greater or lesser extent. And so international coverage of a possible Brexit has been very gloomy. 

It’s important to note that the success of the Remain campaign depends heavily on the authority of these experts, but especially on their worst-case scenarios. People the world over vote on impressions, not policies. The most compelling of such impressions have a distinct emotional quality. But given that ordinary Brits have almost no emotional bond with the somewhat aloof European Union and its institutions (as opposed to the European continent), Remain cannot possibly win the referendum on the battleground of hope. The deployment of ‘Project Fear’ on the side of Remain is thus a strategic necessity, and a perfectly reasonable one at that. 

But how credible are the disaster predictions beyond the rough and tumble of British politics? Trade is the schwerpunkt. All of the dire warnings seem to be predicated on one worst-case scenario: the EU erecting punitive trade barriers to British imports in the aftermath of a Leave vote. It would then become very expensive for British businesses to trade with their EU counterparts. Multinationals will leave London for bases inside the EU.

British exporters will become less competitive. And many jobs will be lost. So economic devastation will domino forth. All the while EU leaders will point to the British peril to warn their member states about the consequences of mutiny. 

But one economic fact defuses Cameron’s warnings about the Brexit bomb. Although the Remain camp have rightly argued that trade with the EU accounts for almost half of all British trade, Britain currently runs a substantial trade deficit with the EU. In other words, the cost of EU imports to Britain exceeds the value of British exports to the EU.

The Brits are very good customers of German, French, Dutch, Belgian and Italian producers. Even folks outside the priestly craft of economics can discern this. So whatever uncertainty may arise after Brexit, there is a vested economic interest on both sides of the English Channel to maintain a relatively free trading relationship.

If, in the worst-case Brexit scenario, the EU raises punitive trade barriers against British goods, Britain will retaliate. This is one trade war that continental firms with a strong share of the British market would want to avert. At stake is an economic interdependence that predates the EU. It is a force stronger than the current institutional design of the European project.

If the enlightened elites of Europe can be trusted to act in their self-interest as indeed they have done since the end of the Second World War, they will let Britain go in peace. After all Brexit, if it happens, will not be about abandoning Europe. It will be about opting out of a particular model of European political integration.

So if Britain votes to Leave, expect the financial markets to panic. Expect the Pound to take a pounding. Expect the overheated British property market to cool down considerably. But don’t expect economic devastation, as the Financial Times has warned. And don’t expect the beginning of the end of Western Civilisation, as the president of the European Council recently exclaimed from the summit of Brexit alarmism. 

Referendum rhetoric will probably give way to rational self-interest within the first few months of the two-year EU exit period. Britain’s independent and professional state institutions, including the Bank of England, will have remedial plans in place.

Brussels will get over the affront. A new EU-UK trade relationship will eventually be negotiated. And Brexit politicians will have to explain to their disappointed constituents why immigration, essential to the British economy, can’t be drastically curtailed even by an independent Britain. As for South Africa, a Britain outside of the EU and necessarily committed to a free trading world, will need all of the friends it can keep. 

Far less dramatic but no less significant will be a narrow Remain vote. If indeed such strong doses of scaremongering are needed to keep the Brits inside the EU, the pro-Europeans will need to do some serious aftercare. The strongest argument of the Leave camp is that the EU lacks democratic legitimacy, despite accumulating ever more domestic powers from its member states in one treaty after the other.

This is no longer a factional claim inside the ruling Tory party, but the rallying cry of mainstream political movement with strong working class support. They see the European Union as government by consent of experts, but in contempt of ordinary folk. If this grievance is not redressed, it will pose a far bigger threat to European cooperation than does Brexit.

Cilliers Brink is a Policy Fellow at the IRR, a think tank that promotes economic and political liberty. Follow the IRR on Twitter @IRR_SouthAfrica.