Thee haughty tyrants ne’er shall tame; All their attempts to bend thee down will but arouse thy generous flame. But work their woe and thy renown. Rule, Britannia! Britannia, rule the waves! Britons never, never, never shall be slaves. Such states the fourth verse of Rule Britannia, a 1740 song with lyrics from a poem by the same name written by James Thomson and set to music by Thomas Arne. It is fitting that we begin our post with these lyrics, as this week the people of Great Britain stood up to attempts to bend thee down, and decided that after a 43-year experiment it was time to leave the European Union (EU).
This decision was not something to be taken lightly. Even with all of the opt outs that Britain had with the EU, the country was firmly integrated into the European economy. In fact, when I was in London last year for my anniversary, I was surprised to see that the majority of people working in my 5-star hotel were from Spain. This integration of the countries of Europe has had, and will continue to have, many economic benefits. First and foremost, integration of markets has greatly reduced transaction and trading costs between the countries of Europe. Lower costs have led to a massive increase in trade between the EU countries – from 12 percent of GDP in 1992 to about 22 percent by 2011. In addition to helping to increase trade, the integration of European labor markets have helped to reduce overall levels of unemployment by providing at least some limited flexibility to workers.
But while the EU has bestowed benefits on its member countries, this has come at a cost. As with any government structure, the EU has imposed extensive regulatory burdens on businesses and workers. Think about the government structure in the United States, where firms are subject to regulations at the municipal, county, state and federal levels. Now suppose that a second federal government was added on top of the bureaucracy already coming out of Washington.
In addition, the common market has helped to ensure that bad economic policies of one member country are shared by all. So when the government in Greece decided to borrow heavily, tax lightly and … well … make up economic statistics, financial markets in all Euro countries had to pay to help keep the Greek government from going bankrupt.
And let’s not forget that with relatively open borders, when one country (say Germany) decides to accept millions of refugees, then all of the member countries will have to accept refugees.
Since much of the benefit of open markets occurred years ago, voters in many countries are focusing more and more on these negative aspects of the EU and they don’t believe it when they hear politicians or other “elites” tell them how important it is. According to the BBC, (Eight reasons Leave won the UK’s referendum on the EU: http://www.bbc.com/news/uk-politics-eu-referendum-36574526) the reasons why Leave won the referendum in Britain were all about trust and about politics – not about the relative merits of the EU.
First, proponents of staying in the EU overplayed their hand, and basically lied to the voters about the importance of Brussels to the UK economy. According to the BBC, the public was bombarded with warnings about how they would be poorer if they voted to leave the EU. This may or may not be true, but the arguments made by “an alphabet soup” agencies and experts representing the BOE, CBI, the IMF, the OECD, the IFS all issued ridiculously dire warnings, almost claiming that the sun would burn out were the Brits to vote against the EU. Donald Tusk the President of the European Council suggested that a Leave vote would bring the end of Western civilization.
By overplaying their hand, the “elites” neutered their own voice. Neither of the two big political parties in Britain had any credibility, and according to the BBC, the public simply stopped listening to them. Prime Minister David Cameron put his reputation on the line, claiming that he could negotiate changes with the EU to reduce voters’ concerns. But the reforms he negotiated were not meaningful and he was not able to persuade enough voters to give him the benefit of the doubt. At the same time, the Labour party which was highly positive toward the EU, misjudged its voter’s contempt of the organization (think the Democrat party in the United States and its relationship with Bernie Sanders’ voters).
On the other hand, the Leave campaign was able to build on the fact that the British economy has been stagnant for some time. Since most of the benefits of integration occurred far in the past, voters felt, as the BBC said, left behind and untouched by the economic benefits of five decades of EU involvement being trumpeted. The Leave campaign was able to claim that leaving the EU would lead to £350 million a week in reduced subsidies for Brussels. Add in a couple of terrorist incidents and there was enough fear among voters to help move them past the normal levels of voter inertia. The fact that turnout was nearly 80 percent suggests that this was an important part of the Leave momentum.
To be honest, when I look at the Remain talking points, I too don’t see much to hang a hat on. If I were a British voter I would really not care that the UK leaving would set a precedent and that other countries in the might also split off. I don’t think that many British voters cared that Germany would have a more difficult time propping up Greece or Portugal, particularly since the UK was never part of the troubled Eurozone in the first place.
I also think that the Remain campaign basically made up the idea that a split in the EU would lead to a financial crisis. While there may be volatility as traders who had bet on remain vote unwind their positions, over the longer term this will likely be positive for the British economy. In addition if this vote serves as a wake-up call to Brussels, maybe, just maybe, the EU will recognize that a giant rulemaking machine is not really all that good for economic welfare.
While Britannia may not rule the waves anymore, this vote does show that Britons never, never, never shall be slaves not to inertia, not to political elites, and definitely not to a failed system that is in massive need of reform. I, for one, congratulate them on their decision.