The Brexit referendum takes place on Thursday. And it’s weird, because this particular debate seems to be endlessly circular. It’s ‘very important’, and I meet a lot of people who care an awful lot about it – but when it comes down to facts and economic outcomes and actual pros and cons, it feels like they’re all a bit blurry.
Here’s the debate summary (which hasn’t really changed since I posted it back in February):
And basically, for anyone that’s voting, I think the biggest problem is that everything is so esoteric. It’s all based on what might happen if it all goes wrong (Remain) and what could happen if it works out alright in the end (Leave). Everything is speculation, and the only thing that both sides can agree on is that the initial post-Brexit period is going to be really rough. And only the Brexiteers think that it’ll be worth it.
So to assist in making this story feel less esoteric, I spent the weekend trying to come up with an appropriate analogy. And I think I have one, so here goes.
The Great EU Housing Estate
Let’s say that the whole of Europe is actually one large village; and within that village, there are streets and quarters. The French district is cosmopolitan; the former-Hapsburg neighbourhood is where all the Germans, Hungarians and Austrians live (and it’s very neat and orderly); the Italian and Spanish sections have good food; the Portuguese and Greek sections are small and raucous. And in the UK quarter, there is a lot of prime property and a large shopping centre.
In years past, each of these sections had strict access controls to their streets. There were walls and large checkpoints, and new homeowners and renters had to go through a strict vetting process before they were permitted to live there (if they were permitted at all). The residents of each section would elect their own community councils, who’d be responsible for setting rules and by-laws, as well as for organising rubbish collection, street-cleaning and security.
Occasionally, there was friendly rivalry between the precincts to see who could have the best gardens. Unfortunately, there were also some really dark times when the village descended into chaos, and large sections of it were destroyed by gang warfare.
Over time, through a series of agreements and summits (made in order to stop the gang welfare and improve the overall standing of the village), many of the mini-councils agreed to band together into a progressively larger housing estate. The councils could nominate their own representatives to sit on the Housing Estate committee, and these representatives could then vote on rules and by-laws that the entire Housing Estate would abide by. To fund this new initiative, instead of charging an extra Housing Estate subscription fee for every household, the individual councils would pay in a portion of the levies paid by their members.
In the early years, this worked well. The walls and checkpoints came down. Many people moved between neighbourhoods freely to eat meals and dance til dawn. Some of the poorer sections received subsidies to improve their streets, while many of the more upmarket residents received the contracts to make the actual improvements.
Residents were also free to buy and rent property wherever they liked. Some complained that this resulted in an influx of riff-raff from the poorer neighbourhoods into the upmarket ones. In practice though, the high cost of property and rents meant that it was mainly the well-educated and hard-working who could afford the move. And these new arrivals paid their levies, and their neighbourhoods had more money to pay for better verges and more pleasant community parks. Some of the poorer neighbourhood councils borrowed money for improvements from the other neighbourhoods, and then couldn’t pay it back. This is still a problem, but it’s not a problem that really affects the UK Quarter too much.
In fact, the UK quarter has it particularly good. Somehow, the UK council has managed to wangle all kinds of special exemptions:
- The UK quarter had a large rebate on their Housing Estate levies, which meant that they were often a net recipient of the Housing Estate benefits.
- It was permitted to keep many of its access controls in place.
- It was able to restrict some of its member privileges (like painting allowances AKA social welfare benefits) to residents born and bred there.
- When many of the neighbourhoods adopted a new and universal format for signposts and tarmac preparation (the Euro), the UK quarter was exempted.
- Ironically, they got this exemption even though the UK quarter is home to the largest road and transport companies (ie. the Financial Hub AKA the City).
But there were still UK residents that felt they were strongly over-burdened by all the EU Housing Estate rules. Because how dare they? As they keep pointing out: do the UK residents own their own property or not? Surely they should have a right to do with it what they will, without having to pander to the collective thoughts of all these other neighbourhoods?
It almost isn’t worth pointing out that 87% of all EU rules were actually supported by the UK Council (and that the UK council often imposed stricter rules atop them), because this is about neighbourhood sovereignty, which doesn’t seem to concern itself with facts.
It also ignores the fact that many of these rules would have to be applied whether the UK quarter is part of the housing estate or not – because the other neighbourhoods would expect the UK quarter to follow the rules if they want to have a say in the security protocols for the entire area, and if they want their residents to continue to get all the contracts (especially the road and transport companies AKA the City).
Instead, the UK quarter separatists feel that they’ll be more than covered by the rules that all neighbourhoods everywhere have to follow (like the WTO regulations).
In the face of this minor groundswell of discontent, the most recent chairman of the UK Quarter council, David “Peepee Pigmouth” Cameron, foolishly promised residents a neighbourhood-wide vote on potentially leaving the Housing Estate. Not his first foolish promise on this front, as he also promised the residents of Scotland Close an option to leave the UK Quarter and set up their own mini-council (which, fortunately, failed – despite a lot of neighbourhood drama in between).
And this would probably have been fine, had the chairman’s old school chum Boris not decided to campaign against him (and Boris’ own dad) in a skeevy attempt to usurp the chairman’s job.
So now we sit waiting for the outcome of this vote.
And according to David Cameron:
- Leaving will come with a cost.
- And what’s the point of leaving when the UK quarter will have to follow all the rules anyway, and will have to pay the levies contribution anyway? All the other neighbourhoods that have opted out of formal membership of the Housing Estate (Swiss Square and the Norwegian community) have to do exactly what the UK Quarter does already, just with less of a say.
And according to Boris:
- Yes, leaving will come with a cost. But it’ll be worth it. Because the UK quarter will be able to chart its own course without any concerns about EU rules about lawn height and parking.
- Also, he’ll probably be captaining the UK quarter forward to this great new destiny if he wins.
- *keeps silent on the specifics*
- *quietly asks everyone to ignore that last part about captaining*
At least, that’s my take.
And if you were asking my personal opinion, I’d be coming out against Brexit. If only because it all seems a bit pointless at this point – with a lot of turmoil for not a lot of upside.
For more, I strongly recommend having a look at the Economist’s Brexit briefs here. It’s a 20 page free pdf.
Some ‘optional reading’ extracts from it.
On Trade, and the likelihood that the UK could rely on the WTO treaty:
Leaving the union would not interrupt trade with the continent for long, [the Leave camp] suggest, since a new free-trade deal could be swiftly agreed. Yet the EU’s single market is deeper than a free-trade zone. It dismantles both tariffs and non-tariff barriers involving standards, regulations or rules of origin. That explains why joining the EU boosted Britain’s exports so much.
The EU is clear that non-members like Norway can have full access to the single market only if they accept most of the rules, including the free movement of people, and contribute to the EU budget. Switzerland has less access (its banks, for instance, are restricted in the services they can offer within the EU), yet it still accepts most rules and pays into the budget.
Brexiteers argue that Britain, as Europe’s second-biggest economy, would use its clout to get a better deal. They say Britain’s big trade deficit with the rest of Europe means the EU needs the British market more than the other way round. And if no deal were done on single-market access, they reckon relying on World Trade Organisation (WTO) rules or having a free-trade deal like Canada’s would be good enough.
Yet the atmosphere post-Brexit would be frosty. The EU would have a big incentive to be unhelpful, for fear that other countries might copy Britain in leaving. Even at the best of times, the EU finds it easier to deal with small countries; protectionist interests within Europe resist deals with bigger ones. Any trade offer from the EU requires the approval of all 27 other member countries, plus the European Parliament.
On the subsidies for all the pro-Brexit farmers, who think that they’ll get the ‘savings’ from those funds that won’t be paid over to the EU:
…some pro-Brexit farmers take heart from the Leave campaign’s promises to cut red tape and maintain or even increase farm subsidies. Yet promises to reduce regulation should be taken with a pinch of salt. The British government has been at the forefront of those calling for green rules and DEFRA has shown that home-grown regulation can be as burdensome as anything from Brussels.
Promises of more money rely on the claim that leaving the EU will save Britain’s EU budget payments of £350m ($510m) a week. But when the rebate and EU spending in Britain is accounted for, the net payment is only £120m a week. Moreover, Brexiteers have promised help to many others who are worried about losing EU cash: universities, scientists and researchers, and regions like Cornwall, Wales or Scotland (agricultural policy is a devolved responsibility). And the official Leave campaign wants to divert EU budget payments to the National Health Service.
On EU regulation, and how a post-Brexit Britain will be having none of it (not!):
Carolyn Fairbairn, director-general of the Confederation of British Industry, says such rules should really be seen as standardisation, not regulation. More will be needed to extend the single market to areas like digital, energy and services. Brexiteers have often made fun of extensive rules on road haulage, only to realise that road hauliers find them helpful.
It is also misleading to claim EU rules are always imposed on an unwilling government. Analysis by the London School of Economics finds Britain siding with the majority in 87% of EU votes. On climate change and financial regulation, Britain has led the push for tougher action. When businesses complain about red tape, they even find that the government has added extra rules to “gold-plate” those from the EU. The costliest burdens are home-grown not EU-inspired, notably tight planning controls, the new living wage and the apprenticeship levy.
Were Britain to seek close links to the single market from outside, like Norway and Switzerland, it would have to observe most EU rules without having a say in them (Norway applies 93 of the 100 most expensive EU regulations). Even if it left the single market and traded from outside, exporters to the EU would have to comply with most EU regulations—and that includes small firms that supply big exporters. If EU talks with America on a transatlantic free-trade deal succeed, most of the world is likely to have to adopt their joint standards.
In short, even if Britain left the EU, it would not find it easy to scrap many of its regulations. Open Europe puts the maximum feasible saving at around £12.8 billion. And Raoul Ruparel, its director, concedes it would be politically challenging to realise that much. Most of the gains would come from ending EU climate-change, financial-services and employment rules. Yet Britain has long supported the first two; and it seems fanciful to expect workers and un- ions to accept a dilution of employment rights that business is not even calling for.
Finally, on the mechanics of leaving the EU:
If there is a Brexit vote, David Cameron has promised that Britain would “straightaway” invoke Article 50 of the Lisbon treaty, which sets a two-year timetable to agree the terms of departure. The other 27 EU countries would decide (by majority vote, without British participation) what offer to make. There would almost certainly be parallel negotiations on a new trade deal, which would need unanimous approval by all 27 countries and their national parliaments. The European Parliament would have to endorse both deals. If no agreement is struck within two years, the timetable can be extended, but only by unanimity—if that is not done, Britain would have to leave with no deal at all.
If this seems designed to give more bargaining power to the EU than to a post-Brexit Britain, that was part of the intention of Article 50. Worse, the EU in its current fragile state would not wish to be generous, for fear that others might follow. The argument that the big British trade deficit makes the EU more dependent on Britain than the other way round might carry some weight with big German or Dutch exporters, but not with countries like Romania or Slovenia that export little to Britain.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.
JD June 20, 2016 at 15:40
The comparison between the EU Budget on the graphic doesn’t seem to be a true comparison, or am I being a bit thick?
On the In side, it states that the payments per household are required whether the decision is In or Out and that there is a significant benefit to being In.
On the Out side, there is mention that the money could be spent on research and new industries.
If the payment is required regardless of In/Out status, then the funds aren’t available to spend on any alternatives, and the Out site argument completely ignores that the net effect of the payments and benefits is a rather large surplus for the UK.
Have I missed something or is the Out argument just really weak on this point?Reply
Jayson June 20, 2016 at 18:15
Yes, it seems that the Out argument is just really weak on this point. As in: all you’ll ever hear from the Brexit crowds is that “We won’t have to pay any money in.”
And when a Bremain person says “But other European countries that want favourable trade terms with the EU have to pay in, like Norway”, their only response is “Yeah, but, we’re not going to have to pay in.” As though saying it proves it?
And yes, it seems that Britain does actually receive more in benefits than it pays.Reply