Don’t Believe Pundits’ Claims About the Cost of Brexit
Experts agree leaving the European Union will damage the British economy, but past performance should make them wary of offering outlandish assertions about an unknowable future.
Embattled British Prime Minister Theresa May put on a brave face last week at the U.K. Conservative Party’s annual conference in Birmingham. Facing pressure from all sides over what has become known as her Chequers proposal for an orderly Brexit, she reiterated her government’s commitment to leaving the European Union as scheduled on March 29 of next year. Ridiculing opponents’ calls for further compromise, she stated unequivocally that “Britain isn’t afraid to leave with no deal if we have to.”
May’s feisty formal address was preempted by an off-program speech the day before by the former foreign secretary and perennial Conservative Party renegade Boris Johnson, who all but called for a no-deal hard Brexit as the only way to avoid bowing to a Brussels dictatorship. Johnson called the Chequers plan “a cheat” of the electorate and likened it to the 14th-century offense of praemunire. (According to the Oxford English Dictionary, that’s “the offence of asserting or maintaining papal jurisdiction in England.”)
In another reference that left watchers turning to Wikipedia for enlightenment, Johnson warned that the Chequers plan would see the United Kingdom “paraded in manacles down the Rue de la Loi like Caractacus.” (For the record, he’s referring to “a 1st-century AD British chieftain of the Catuvellauni tribe, who led the British resistance to the Roman conquest.”)
As Johnson and other hard Brexiteers portray the Chequers plan as an abrogation of British sovereignty, hard core Remainers who want the United Kingdom to stay in the European Union routinely warn that a no-deal Brexit will be an economic catastrophe for their country. With no deal, British GDP growth would end up 8 percent lower over the following 15 years, according to a leaked government report. Some economists have even said that the U.K. has already lost 2.1 percent of its GDP simply due to Brexit fears.
It is certain that Britain’s membership in the European Union has to some extent compromised its national sovereignty, although not nearly on the scale suggested by Johnson. If the U.K. leaves the EU as scheduled next March, it will regain some degree of policy autonomy in areas such as agriculture and arms procurement. But the economic costs of leaving the EU are much harder to anticipate, if they turn out to be costs at all.
It is rare for an expert whose career depends on making long-term economic forecasts to spend much time discussing the enormous uncertainties involved in making them. It shouldn’t be. Economists’ work involves adding up years or decades of small predictions to produce one big prediction. Will the British economy really be growing 8 percent more slowly by 2034 in the event of a no-deal Brexit? Maybe, but getting that answer right is the equivalent of having predicted U.S. GDP for 2018 way back in 2003. Over such time horizons, the imponderables vastly outweigh the ponderables.
Note that a widely reported econometric evaluation from the IMF last month suggested that a no-deal Brexit would cost the EU 1.5 percent of GDP in the long run. The phrase “long run” was never clearly defined, although that caveat was broadly ignored. Read the report itself, and you’ll find that the IMF attached confidence intervals—ranges of likely values based on its statistical models—that run from 0 percent to 3 percent. In other words, in a few years or decades or centuries, the EU might be a little worse off—or it might not.
What’s more, the confidence intervals themselves are based on the assumption that the IMF’s econometric model is a correct representation of the economy. Perhaps it’s worth remembering that as late as October 2008, a month after the collapse of Lehman Brothers, the IMF model was still predicting that the U.S. economy would maintain positive growth in both 2008 and 2009. As it happened, the economy shrank both years.
All this is not meant to knock the IMF, but rather to illustrate that econometric models are not very reliable or meaningful in times of rapid structural change. Projecting economic growth decades in advance requires accepting profound uncertainty. This arises from the fact that people change their behavior in response to rapidly evolving realities.
Strict hard Brexit scenarios often construe “no deal” in the most literal terms possible. So, for example, no dealers suggest that all passenger flights between the United Kingdom and countries in the European Union would be suspended on March 30 because the respective carriers would no longer be licensed to land at each other’s airports. It seems safe to say that this won’t happen under any conceivable Brexit scenario, given that London’s airports handle thousands of EU carriers’ flights every week.
More realistically, a hard Brexit might mean that London-based financial firms would lose their ability to operate in the European Union. Chop off all the financial services business that the U.K. gets from the EU, and that’s a lot of money. Assume that all those firms will relocate to Paris or Frankfurt, Germany, and that’s a lot more. Turn to reality, and there have been only minor personnel shifts as banks adjust to the possibility of a hard Brexit. In the fluid world of high finance, moreover, those shifts could easily be reversed as the legal environment settles down.
Any kind of Brexit will presumably reduce trade between the U.K. and the EU, and with about $355 billion in annual exports at stake, the British government is right to be cautious. But the country also imports about $445 billion annually from the EU. If a reduction in trade is even across the board (say, a 10 percent reduction in both exports and imports), the British economy will actually come out ahead in terms of GDP growth due to a reduced trade deficit.
With everyone forecasting a weaker British pound post-Brexit, it may even be that British exports come out well ahead. Boosted by a weaker pound, the British trade deficit narrowed by more than $18 billion in 2017. Less trade can be a good thing, if you’re a net importer like the U.K. This idea is highly contentious, but in any case, a falling pound could even partially offset any increasing tariffs facing British goods bound for the EU.
Economic experts do have a role to play in informing people about the likely impacts of major policy decisions like Brexit. They also have a responsibility to come clean about the uncertainties underlying their forecasts.
If Brexit were actually certain to destroy the British economy or lead to economic and political disaster, experts would be justified in issuing such dire warnings. But for most people with tickets to fly from London to Paris on March 30, a breakdown in the baggage handling system is a bigger worry than the possibility that all air travel between the U.K. and the EU will be suspended on that day. Similarly, though tariffs might be annoying for businesses, they are not cataclysmic. After all, even a trade war between the United States and China has not stopped U.S.-Chinese trade.
In well-functioning democracies, unpopular outcomes rarely mean the end of the world. Experts should make their cases, and robustly so. But they should also admit the limits of their expertise. As history had it, Caractacus got a last-minute pardon from the Roman Senate and never was paraded through the streets of Rome. Maybe the United Kingdom will make out even better with the European Commission. Or maybe not. Either way, there will be consequences. What those consequences will be, though, is hard to say.