Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Did Brexit Happen?

Popular Economics Weekly

The shortest answer is the Great Recession and austerity policies of EU policymakers. The result will be a Lessor, or Little Britain, which was inevitable given the austerity policies holding sway in the EU. What austerity policies? In the UK’s case, it was raising taxes in 2010 while cutting government spending in an attempt to pay down debt incurred during and by the Great Recession. In doing so it has kept the UK close to recession level growth ever since 2008.

But standard economic theory tells us the opposite is needed. A recession or economic downturn of any kind is when private business (and consumers) begin to hoard (i.e., save more, and spend less), which the Great Depression and (WWII) taught US means governments have to spend more to preserve jobs and productive capacity, which will ultimately bring a more robust recovery and the means to pay down that public debt.

Nobelist Paul Krugman has been one of austerity’s most vocal critics. “By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.”

Graph: Trading Economics

But the Brits did just the opposite, with predictable results—near zero GDP growth since 2008. “I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere,” said Krugman. “George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world.”

This led to the scapegoating by demagogues quick to take advantage of diminishing economic prospects of working class whites in (formerly) Great Britain, and that Donald Trump is taking advantage of in the U.S. as well. Hence the Brits came to blame immigrants for taking away lower and mid-level jobs, when it was Cameron’s government that was downsizing itself at the same time of diminished private spending.

The scapegoating of Mexican and Muslim immigrants is really the only way Trump knows how to scare those people that don’t have another way to understand their predicament after his anti-Obama birther movement failed. I once wrote about the reason for the Tea Party supported by many of those same middle-aged US white voters who felt disenfranchised with a fast changing economy.

The Ted Cruz-led rebellion and 2011 government shutdown (while holding the confederate battle flag) brought in those still fighting the Civil War 150 years later. Big Government to them was the Northern Yankees bullying the Southern, more conservative states.

The EUs overall predicament has been the same, as ours—which is a poor growth record due to the austerity policies of political elites—both in Europe and unfortunately, the U.S. as well, where the Obama administration also allowed taxes to rise and government spending cut after the 2011 shutdown and consequent spending sequester that downgraded the U.S. sovereign debt rating.

Such policies have prevented the massive spending and investment programs that occurred during President Roosevelt’s New Deal, a New Deal that employed those many who could not otherwise have had the dignity of work during the Great Depression.

The result of our own austerity policies has been our failing schools, highlighted in Michael More’s latest film, Where To Invade Next, and Detroit’s toxic drinking water, the result of Michigan’s cutback in government services—which in Detroit’s case meant taking over control of Detroit’s government and replacing its elected officials with a state-appointed ‘manager’.

So can anyone blame the Brits wanting to become Little Britain again; or so many Americans that want to close our borders in order to Make America Great Again, because their predicament has been ignored for so long by those same Austerians?

Unfortunately, it is a lesson lost to European elites and even most American politicos, it seems, so a history of wall-building is on the cusp of repeating itself. Only this time, we have to find a better way than another World War to rescue our economies (and break down those walls).

Harlan Green © 2016 

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen