Brexit, two weeks out

As expected, the last two weeks following the UK’s EU referendum have been marked by significant political and economic volatility. Both major English political parties are in a state of upheaval: within Labour, Jeremy Corbyn dramatically lost a vote of confidence, yet refuses to resign (it recently appeared that he would retain popular support in a leadership election, although it is impossible to say how the recent swell in Labour membership registration would impact this; Corbyn assumes it will add to his support); among the Conservatives, Theresa May now appears to be the front runner for David Cameron’s replacement, after enough in-fighting among the Leave campaign’s leaders to make British politics appear to be a modern-day recreation of Game of Thrones. Leave’s wall of false promises came tumbling down remarkably quickly, and all of its most prominent leaders have disappeared from the scene. Scotland has begun to negotiate its status with both the UK and the EU.

Economically, the pound sterling has dropped even farther from its initial post-referendum plunge, hitting lows against the US dollar that have not been seen in three decades. Unsurprisingly, importers (particularly in the tech sector) have begun to increase prices on products sold in the UK. Property prices have dropped, while the Bank of England has been very active in implementing its post-referendum plans (perhaps the only government body to actually have one). One aspect of this has been to loosen regulations covering bank lending, which may promote consumption and investment, but also runs the risk of further weakening the financial positions of the banking sector, reducing resiliency in the face of another shock (such as, say, the actual triggering of Article 50).

Looking ahead, obviously a great deal of uncertainty still remains. What is clear, is that if the British government does begin to move forward on the task of disentangling its laws and regulations from those of the EU, the task will require the hiring of a large number of skilled workers, most of whom will have to come from outside the UK, potentially increasing net immigration.

Two recent political developments are especially noteworthy. First, a lawsuit has been filed with the aim of ensuring the government abides by constitutional rules which would require full Parliamentary debate over triggering Article 50. Most MPs favor remaining in the EU, so many will face the issue of balancing personal ideologies with electoral concerns (particularly in districts with heavy Leave support), along with lobbying interests. Business lobbies are heavily skewed towards remaining in the EU and broadly represent the most internationalised and productive industries in the UK, so while little regulatory oversight applies to these activities, their influence cannot be underestimated. The financial sector can be expected to publicly pursue both voice and exit options, balancing demands to retain access to EU markets with threats (at the very least) to move staff and positions to the continent. It is likely that if Parliament votes against triggering Article 50, it will have to come with policies along the lines of implementing the concept of embedded liberalism: improving the lot of globalisation’s losers through policies aimed at improving job training, infrastructure, and attracting investment to British cities outside of London and Manchester, many of which have experienced significant economic decline over the last several decades. If Parliament does trigger Article 50, then the pound is likely to fall farther, and the British economy will face a very extended period of little or no economic growth.

The second is the emergence of May as potential PM. As a (somewhat tepid) Remain supporter, she is better positioned to negotiate effectively with EU officials than anyone associated with the Leave campaign. This may be partly down to The logic of two-level games in international bargaining may apply here, but the application is a bit messy (or not as set out in the seminal research on the topic). If there is a second referendum (unlikely), the expectation of a slight majority of Leave votes places May in a relatively good position to extract concessions from the EU (Britain’s negotiation position overall is fairly weak). It is more difficult to predict the potential impact of Parliament as a veto player, as the weights placed on constituent support versus overall welfare or lobbying support by individual MPs (or the average of these across Parliament) is something that, for now, can only be guessed.

Brexit, two weeks out

Quick Thoughts on Brexit

My colleague Alan Renwick has a nice post covering the legal logistics surrounding Brexit. What about the economic implications?
The domestic economic implications of Brexit began to play out while votes were still being tallied, as the British pound dropped rapidly in a depreciation reminiscent of Black Friday, eventually settling at a level not seen in three decades. Uncertainty over the exit negotiations with the EU, where the UK holds a fairly weak hand (one fact the Leave campaign conveniently ignored), means that investment and employment will be suppressed; these will, in turn, suppress consumption. The weak pound, at least, will stimulate tourism and exports, but the cost of living within the UK will increase. Perhaps ironically, the regions and groups of voters (typically less educated, older, outside London or Manchester) who were the strongest supporters of the Leave campaign are going to be hit hardest by recessionary forces over the next few years. This should make things interesting for the incoming administration, particularly since Boris Johnson will have to go on TV to apologise for promising no recession (if he keeps to that; Leave has been quickly renouncing the lies and false promises they made prior to the referendum, such as spending £350 million saved on EU transfers on the NHS).
Politically, the distributional effects of the recession will be profound. David Cameron has already resigned as prime minister, and the Tories are far from free of internal strife. Labour faces a massive shake-up as well. Both the Lib Dems and SNP appear to be relatively unscathed, despite the Remain campaign’s failure. Instead, a second Scottish independence referendum looks likely to happen in the next couple of years. There’s similar pressure in London for a city-state-like exit from Britain. The generational divide between Leave and Remain supporters is particularly salient: Baby Boomers denying to Millennials the opportunities from which they themselves benefited; this seems to be a bit of a global phenomenon (there is certainly a lot of room for more research on the political implications of employment life cycles). At the supernational level, there are clear divides between the key Leave voices and EU officials over just about all essential issues, not the least of which is the preferred timing of Britain’s exit. The EU would like Britain’s exit negotiations to begin and end as soon as possible (the official lines read something like ‘GTFO’) to minimize uncertainty and volatility; Leave’s voices would prefer a lengthier timeline.
It will be interesting to watch UK negotiations with the EU over trade, investment, and migrants. All of this will take years to resolve, and the end result will not be the unfettered access to the common market without unrestricted migration that Leave promised. A number of fledgling British industries, like watch manufacturing, will suffer greatly from decreased access to inputs. The financial sector and multinationals with large employment bases in the UK will be watching closely; jobs will probably be lost along the way as risk-averse businesses move to the Continent. There will be a great deal of political pressure on the UK government from these sources, which will counteract the populist, nativist and xenophobic elements that led to Leave’s success.
With respect to UK relations with countries outside the EU, there is actually a bit of a silver lining. Without requiring all EU member states to be party to trade agreements, the UK should have less difficulty successfully navigating negotiations. With the US, this may lead to an alternative to TTIP, which has attracted significant popular criticism (although this seems a bit unlikely for now). With China, the greater flexibility may make agreement on a deal more likely to happen when compared to the delays in resolving issues in the proposed EU-PRC FTA. However, these agreements and others are unlikely to make up for the hit to economic growth that will result from loss of access to the common market.
One thing is for certain: it will be a bumpy ride.
Quick Thoughts on Brexit

Hello world!

In lieu of updating the ‘About’ page, this blog will focus on topics relating to international and comparative political economy. The aim is to emphasize the policy implications of ongoing research and to provide a research-informed perspective to current events as they unfold.¹

International political economy (IPE) explores the inter-relationships between politics and economics, with a particular emphasis into the ways in which institutions – both formal and informal – influence actors’ behaviors. IPE also examines the redistributional impacts of transnational economic flows and the consequences for politics and policy. As a discipline, it straddles the fields of economics and political science, as well as borrowing from others.

Traditionally, IPE has focused on international trade, foreign direct investment (FDI), and monetary policy. Over the past few years, research has increasingly expanded to portfolio investment, international migration, systemic risk, the environment, offshore outsourcing, and a number of other topics.

(1) The former goal is too frequently ignored in academic publications, while the latter is too often rendered a moot point by the length of the peer-review process. In economics, where there are high quality working-paper distribution networks and short-form/policy-oriented journals, but in international relations and political science, these outlets are still lacking.

Hello world!