A Facebook friend recently posted a video of a well-known economist explaining the ‘facts’ about Brexit, which show indubitably that it will be a disaster for the UK economy. Is he right?
Adam Posen may be in the majority of ‘top’ economists who take a similar view, or maybe he is amongst a group that the main media prefer to ask or to reference. Either way, there are other opinions and a majority view does not equate to a fact in economics (nor in science). There are many examples of conventional opinion being overturned by experience, such as the gold standard, leaving the ERM, not joining the Eurozone (EZ) and the UK not going bust after the People’s Vote in 2016.
Posen has worked for some fairly august institutions, including the Bundesbank, but in March 2011 while employed by the Bank of England he forecast inflation of 1.5 per cent by the middle of 2012. At the time, he said: “If I have made the wrong call, not only will I switch my vote [for QE], I would not pursue a second term. I am accountable for my performance.” In April 2012 he did switch his vote, triggering speculation that he would quit when his first term ended on August 31. Well, anyone can make a mistake. Naturally he wasn’t actually wrong, it was just that the Bank had upped its QE spending – how was he supposed to take that into account? Exactly, things happen that economists can’t foresee. Maybe our next prime minister and his team will make some brilliant decisions, or some dreadful ones, or take few decisions, or get kicked out, or…
In March 2017 Posen predicted that the US was facing a downturn within the next two years, six months later he changed his mind (this time he was right of course). “First, like a lot of people … I got wrong the timing of tax cuts. I couldn’t believe they would spend this long before getting to a budget…” Again, it wasn’t his fault that he was wrong, others messed up his predictions. Of course Posen doesn’t always get things wrong and it’s virtually certain that the US will hit a downturn sometime. Then he can claim he was right after all; we’d take whatever odds a bookie would offer that he’s going to be right sooner or later. In fact with the way things are looking right now he wouldn’t even need to specify which country he was talking about, we’d still take the bet and expect to clean up before long. Except there’s a risk Trump might reach agreements with Xi, Khamenei and Merkel (sorry, Junker) – maybe we shouldn’t bet our houses.
Posen will be able to tell us 10 years hence (if we leave the EU) why our economy was so successful, or such a failure or why we bobbed along indifferently. As historians, economists are pretty good at looking at past data and events the showing how one thing led to another. Like astrologers they take every success as proof of their predictive powers and every failure is ignored or explained away with hindsight.
Imagine that a computer model had been programmed in 1973 to predict the state of the UK economy in 2003, in or out of the EEC/EU. Would it have been remotely close in the former case to the actual outcome 30 years on? Surely only by chance. What about the latter case? There is no way of telling, even if we’d had the prediction back then we wouldn’t have the outcome data to compare it with today.
So what will the UK economy be like thirty years hence? Nobody knows but it’s a fair guess that the EU will have been transformed or destroyed, most likely because of the Italian bank crisis or a combination of similar economic time-bombs. There could then be a residual, or rump EU, comprising a number of northern nations, inheritors of some of the current rules, responsibilities and institutions, but not all. A shrunken Eurozone2 containing only reasonably compatible economies for example, but it is most unlikely this will have assumed responsibility for the others’ debts. Some of the outsiders might bond together too but in both cases the bonds would probably be looser.
Many economists warned the EU of the dangers the Eurozone created but were ignored because this is a politically-driven project rather than an economic one, designed to bring the nations ever closer together but in practice creating cracks, or rather crevasses, between them. Even the German chief architect of the eurozone structure, Otmar Issing (see The Future of the Euro – 2), admitted later that he had acted because of political pressure (from Helmut Kohl and others) rather than from personal conviction. Outside the EZ the UK’s influence within the EU was always limited and is now diminished close to zero by Brexit; inside the EZ it would have been (and would in future be) devastated, like Italy and others.
As to the future, there are examples where countries have thrown off restrictive and risk-averse policies and thrived. Singapore and Hong Kong spring to mind, both with strategies almost the antitheses of the EU’s. But these are small territories very unlike the UK and times may have changed. We cannot base our economic models securely on these or other examples but they can give us ideas we can test and then change what isn’t working, given the freedom.
The EU is resistant to adapting to changed circumstances, or indeed to evidence of failure, instead it places blame on members not trying hard enough and doubles down on the plan. This is typical of autocratic governments that cannot be removed by discontented citizens.