In the wake of the 1953 workers’ uprising in East Germany, the playwright Bertolt Brecht mordantly suggested that “if the people had forfeited the confidence of the government”, the government might find it easier to “dissolve the people and elect another”. It is a sentiment that resonates with many in the United Kingdom today, in the aftermath of June’s Brexit referendum.
In the heat of the referendum campaign, Michael Gove, then the justice secretary and a leading member of the “Leave” camp, said: “I think the people of this country have had enough of experts from all kinds of organisations with acronyms, who have consistently got it wrong.” His targets were the IMF, the OECD the LSE, and all the other covens of economists who argued that leaving the European Union would damage the British economy.
Unfortunately, Gove was right – not about what would happen to the economy, but about UK voters’ low regard for economic expertise. Despite the near-unanimous view of the economics profession that Brexit would tip the UK into recession and lower its long-term growth rate, voters went with their hearts, not their wallets. The “Remain” campaign was accused of using the economists’ warnings to try to frighten voters into submission.
Some have argued that the blame for the referendum’s outcome lies with economists themselves, because they were unable to speak a language that ordinary people could understand. A similar charge is made against bankers and other financiers, who, widely perceived to be arguing from narrow sectoral self-interest, were equally unpersuasive.
There is undoubtedly some truth in this criticism, but the problem was not simply over-complex language and impenetrable jargon. The economists all began from the assumption that the UK was doing fine, with GDP growth well above the European average, and unemployment well below. It seemed self-evident that EU membership was good for Britain, especially as we had avoided joining the euro and were thus not tied up in monetary and fiscal knots designed in Brussels and Frankfurt.
The problem was that this rosy picture did not resonate with voters outside London and the Southeast of England, for reasons set out with great clarity in a recent speech by Andy Haldane, the Bank of England’s chief economist.
Haldane cites national statistics showing that Britain’s GDP is 7% above its pre-crisis peak, employment is 6% higher, and wealth is 30% greater. But, he adds, national income per head is flat. Median real (inflation-adjusted) wages have barely risen since 2005. The UK population has grown, partly owing to immigration.
The recorded increase in wealth has come about mainly from increases in property prices in favoured areas, especially London, and in the value of occupational pensions. If you are not lucky enough to own property in the Southeast of England, and are not in a final-salary pension scheme, your wealth has stagnated or fallen. The regional breakdown of GDP figures shows that London and the Southeast are the only areas of the UK where people are better off, on average, than they were in 2009, at the trough of the recession.
It may well be true that Brexit will exacerbate these inequalities. If intra-European trade barriers are imposed, and companies choose to invest elsewhere to access Europe’s single market, lower-paid jobs in disadvantaged regions may disappear altogether, or wages will fall further. But that sounds like “expert” talk, and the former Leave campaigners have a response to it: economists are talking down the UK to prove that their gloomy forecasts were correct. If the experts couldn’t be trusted before the referendum, they certainly can’t be trusted now.
That is the inauspicious background against which talks on the UK’s future relationship with the EU will soon begin. It is especially unfavourable for the City of London. There is clearly a trade-off between access to the single market, which most financial firms greatly desire, and one of its main conditions: freedom of movement for EU citizens, which is seen as having contributed to wage stagnation in the rest of the UK. So an outcome that benefits London (which, unsurprisingly, voted overwhelmingly to remain in the EU) must be advocated with subtlety and care, lest it be seen as sacrificing the well-being of the many to the interests of a few.
The strongest argument in favour of remaining in the single market is that putting the City of London at risk jeopardises the entire UK economy. Financial services may account for only 3% of employment, but they generate 11% of tax revenues. Killing the goose that lays the golden tax egg would be foolhardy: if the economy slows, which seems the best we can expect, those revenues will be sorely needed. And at a time when the UK’s balance-of-payments deficit is over 5% of GDP (the second largest in the OECD), the financial sector’s 3%-of-GDP trade surplus has been essential to prevent an external blowout.
It is no surprise, therefore, that sterling has dropped sharply since the Brexit vote. Some argue that exchange-rate depreciation will narrow the trade deficit by making British exports more competitive, but the experience of 2008, when the pound also fell sharply, is that the impact on the external deficit may not be great. The UK has few price-sensitive exports for which there is significant spare capacity available to expand production.
So these are nervous times in London’s financial markets. We need new experts, unadorned with despised acronyms like IMF, to explain the unpleasant facts of economic life to a highly suspicious public. No one should take Brecht’s ironic suggestion seriously. The British people have spoken, and a way must be found to achieve their desires at the lowest possible economic cost. - Project Syndicate

*Howard Davies is chairman of the Royal Bank of Scotland.