Brexit, how much do we know?
(picture from Wix's library)
Hi everyone! You probably guessed that I’m going to talk a bit about Brexit today. I waited a bit after the referendum (which voted to leave the EU) before writing my article in order to let the experts give their opinions on what that may mean.
As usual, I’m going to take a different approach from my Economist colleagues. I assume most of you have already heard the pros and cons of the United Kingdom leaving the EU. I will quickly mention some of these possibilities to make sure everyone is up to date but I’m not going to spend much of your time on them. Instead, I want to focus on the estimating institutions… those that made their opinions well known when people were debating that question.
International institutions such as the IMF (International Monetary Fund), the OECD (Organisation for Economic Cooperation and Development), and the EIU (Economist Intelligence Unit, from the magazine “The Economist”) produced discouraging economic forecasts of Brexit while political banks such as the World Bank, the European Central Bank (ECB), the Bank of England, and the US Federal Reserve all assured their stakeholders that they were prepared for harsh economic times should the UK decide to leave the EU.
As example: The IMF said that Brexit will create inflation and decrease economic activity by 5.5% in the UK; The OECD estimated that each household in the UK will lose 3,200 pounds on average in the next 14 years due to Brexit and the OECD secretary-general said that Brexit is “bad from every single angle”; The EIU estimated that Brexit will lead to a decrease in the UK’s economy by 1% in 2017 and that it will mean a loss of 106,000,000,000 pounds for the UK economy in the next four years.
Many politicians rushed to suggest that Brexit would lead to considerable losses while pointing out at the permanence of this decision. The EU commission president Jean-Claude Juncker gave a very definitive “out is out” (his exact words) verdict while David Cameron promised an austerity package he had no way to pass.
This is very interesting for me for two main reasons: First because Brexit is consistently shown as a negative possibility by most international institutions and second because most of these same institutions have no idea what will happen in that case. In my view, Brexit is a very clear example of an economic event that can either be good, bad, or neutral… it’s just impossible to know what will come of it in ten years.
The UK leaving the European Union may lead to more countries separating and perhaps to the end of the EU… How much economic impact will these changes have on these European countries and on the world economy? In reality, we don't really know.
Some bad things can come out of this (economic austerity, less trade, less cultural integration, less conjoint effort with refugees for example) but some good things can also come out of this (over-regulation can be reduced, mis-regulation by Brussel’s politicians, which can be blind to economic reality, can be avoided, more trade with other non-EU countries can be found, free-trade can be allowed with members outside Europe). Maybe the bad can be equal to the good and leave almost no perceptible effect in the end.
Just like the ratings agencies were completely discredited in 2008-2009 following the financial crash of 2007, these international institutions have also completely failed to see the signs of what is sometimes called the great recession (a reference to the great depression of the 1930s). Still, a few years after things calmed down people are listening to the credit agencies again, which are still being paid by the same firms they evaluate... and people are still listening to the IMF, which consistently fails to estimate anything. Consistent failure to estimate should be a fairly good sign that their opinion should not be taken too seriously.
Humans seem to feel the need to have someone to reassure them whenever there is a certain level of uncertainty. We listen to others under the pretext that they are "experts" but I am sad to say that they don't know more than you and me. Their official status and international reach make most of us believe that they are correct, that they know... while in reality they have proven time after time that they cannot understand the Economy enough to make credible predictions.
Their track record is clearly available for everyone to see and yet our herd mentality cannot allow most of us to accept this simple fact: we have no clue of what will happen as a consequence of the UK leaving the European Union... wait and see!
Remember guys, my very favorite answer to any complex Economic question: it depends!!!!! I can normally tell you what it depends on, I'm an Economist after all, but this time there are too many things to consider for me to be able to write this in one of my small articles. What I can tell you with a fairly high degree of certitude is that these big institutions have it all wrong! We'll see soon enough!