The History Man

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 PosenAdam 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…

Change mindIn 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.

Don't believeImagine 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.

Otmar IssingMany 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.

Resist changeThe 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.


11 thoughts on “The History Man

  1. The referendum on Brexit divided British society (52% versus 48%).
    After more than two years of indecision,
    Why not hold another referendum on the final agreement of the Brexit, with the option To Remain?


    1. The main reason that you and Remainers want another referendum is based on the belief that British voters will come to their senses, after the deluge of negative ‘facts’ they have been fed. One problem is that this deluge ignores much other evidence concerning the EU and another is that there is no withdrawal agreement that has been approved by our Parliament (see our next post in a day or so). We guess that there may be another referendum once there is an agreement, but that will bring yet another problem; a majority of voters last time wanted the UK to leave the EU. That majority will ask, “why were we given a vote if it was just going to be ignored?”


      1. Suggestion about a possible solution:
        October 31 Brexit with agreement.
        Subsequently, a new referendum on re-entry to the European Union.


      2. Thanks Antonio for keeping in touch. But your solution is only for those who like the EU and want Britain to stay in. The draft agreement has been rejected three times by members of the UK Parliament and leaders of the EU have said that they are not going to change it, so I wonder where the agreement you wish to see will come from. Assuming that the UK does leave the EU, in other words that Brexit happens, then I’m sure there will be pressure for a referendum to re-enter, which we will oppose for the reasons given throughout our blog.
        If it was just a matter of democracy then the first referendum would stick but we are discovering that democracy can be by-passed if senior politicians want to do that.


      3. In the September 2014 referendum in Scotland, the “No” vote for independence was won with 55.3% of the vote, compared with 44.7% of supporters of secession.
        The Scottish Chief Minister, Nicola Sturgeon, undertook to promote the call for a new consultation before the end of 2019 (when the current term ends), to hold a second independence referendum in Scotland before May 2021.

        In the September 2014 referendum in Scotland, the “No” vote for independence was won with 55.3% of the votes, compared to 44.7% of supporters of secession.
        The Scottish Prime Minister, Nicola Sturgeon, undertook to promote the convening of a new consultation before the end of 2019 (when the current term ends), to hold a second independence referendum in Scotland before May 2021.


      4. Nicola Sturgeon wanted a second referendum on Scottish independence because she didn’t get the ‘right’ answer, the one she wanted, from the first referendum. This is the same reason that Remainers want a second referendum on Brexit. If they get their way – one majority for Brexit and one against, will they ask for a third referendum on the grounds that it should be decided on the ‘best of three’, not just on the one that gave them the answer they wanted? I don’t think so. All this pressure is about overturning the majority decision, which the UK government said it would make happen, though it now seems to be changing its mind on that.


      5. Michelle O’Neill, leader of Sinn Féin in Northern Ireland, called for a referendum for the reunification of Ireland in the next five years.


      6. If such a referendum were restricted to Northern Ireland then it would surely be lost, as surely as it would be won if, impossibly, it could be offered across the whole island of Ireland. I think there are some parallels with the situation of Catalonia in Spain, though there are many important differences as well. Neither offers a way out of the Brexit dilemma.


  2. Sorry to enter the debate rather late.
    Antonio, it is pretty clear that a large section of the British public is sceptical about the benefits of EU membership or vigoursly opposed to it. Aside from polling (not always reliable as we’ve seen) the number of votes cast for the brand new Brexit Party in the recent MEP elections is clear evidence that many would vote again to leave the EU. We don’t know who would win but it seems unlikely that the division would be healed and Leavers would be meekly reconciled if they lost a second vote; more likely they would feel cheated and rage against the ‘Establishment’. Would Remainers take two knock-downs as a final defeat? A second Referendum is unlikely to bring a resolution.
    Ideally there will be a reconciliation between an independant Britain and the EU, however their respective futures turn out. Agreements on trade, defence, research and the environment are really quite likely in time; none of these things require a commitment to political union, a common judicial system or identical regulations for things that are not traded. Only ideology stands in the way, for now.


    1. Perhaps it would be advisable to extend the Brexit Transition Period, scheduled until December 2020.
      The experience gained could be useful to achieve mutually beneficial agreements.


      1. As I recall the transition period is already scheduled to end on that date; to extend it would need the approval of the EU (all 27 members and the Parliament), which they could do but probably wouldn’t. However, the main problem is the unsatisfactory nature of the draft withdrawal agreement, which sets unacceptable conditions on any future relationship between the EU and the UK.


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