Sam Seitz

A couple of months ago, I wrote about the deleterious impacts a Brexit would have. However, I also predicted that business interests would ensure that Britons voted to remain. I’m beginning to worry that I might have been wrong. To be clear, I still believe that Brexit will negatively impact the U.K., but I’m less sure that Britain will vote to stay in the E.U. Recent poll numbers suggest that Leave could come out on top, and with just under one week until the referendum, Remain does not have much time to turn things around. However, polls are close, and there is still time to influence people’s decisions. Therefore, I have written this post as a plea to anyone in Britain reading our blog to please consider voting to remain.

Deciding whether to remain or not is indeed a tough question. The E.U. is inefficient and suffers from a democratic deficit. Its single currency is silly without closer fiscal and political linkages, and the European Parliament is full of Euro-skeptics, impeding effective and coherent policymaking. That being said, remaining in the E.U. is very clearly the least bad option. The U.K. already has the best of both worlds. It retains its own currency and central bank but also has access to the European common market. It has a voice in E.U. policy but also has special privileges such as exemption from the Schengen Zone and the right to appeal E.U. decisions. Working within a 28 nation supranational organization is always going to be challenging, but it’s unlikely Britain can arrive at a much better arrangement by leaving.

Economic Costs

One of the most damaging effects of a Brexit would be the damage to London’s financial services industry. Currently, due to the presence of so many E.U. financial institutions within London, London is a powerful financial center even more influential than New York. This will not be the case after a Brexit. Indeed, we are already seeing other major European countries attempt to woo British financial institutions to their capitals. Now, to be clear, I don’t think that British financial hegemony will collapse overnight as a result of the Brexit. It’s unlikely that the entirety of London’s financial power will shift to other cities because most other European cities lack the infrastructure and human capital needed to absorb London’s financial industry. However, certain chunks of the financial industry will likely migrate – for example, Dublin and Luxembourg are strong in fund management and can peel off major firms from London – and the prestige and power of British financial institutions will be permanently and significantly diminished as cross-border services will be harder to provide. With financial services for the E.U. providing the British government $30 billion a year and the financial sector writ large accounting for just over 1% of British GDP, even a relatively modest shift of financial institutions out of London will have a substantial impact on the U.K. Even ignoring the shift of financial power out of London, the immense uncertainty of a Brexit would send shockwaves throughout the global financial system, impacting London especially hard. We are already seeing market jitters, and the vote hasn’t even happened yet.

Britain’s financial industry has a lot to lose (credit: The Economist)

Brexit will also disrupt trade, as Britain will be forced to renegotiate all of its treaties with E.U. members. One of the reasons the E.U. imposes so many restrictions and regulations on the U.K. is that it seeks to create a more linked and unified market. It’s important to remember that before the E.U., Europe was an incredibly protectionist market with each state sheltering its favored industries and sectors at the expense of the free flow of goods and services. Of course it’s frustrating to have bureaucrats in Brussels imposing rules and regulations, but the alternative is each country reverting to relatively closed markets, limiting the flow of goods and resources throughout Europe. Complaining about uniform regulations while enjoying the fruits of economic and financial integration is trying to have your cake and eat it too. Indeed, it reminds me of fringe libertarian groups in the U.S. that complain about taxes but readily utilize services like infrastructure, police, and basic utilities without ever considering the funding source of those public goods. It is a myth that the E.U. does nothing to promote trade integration between European countries; the boost in trade between the U.K. and West Germany after U.K. accession to the E.U. demonstrates the fallacy of that position. Moreover, Britain would not have much trade leverage if it were to sever ties with the E.U., as the The Economist explains, “other countries’ trade negotiators might find the British market of 65m consumers less alluring than the EU’s 500m. The top American trade envoy, Mike Froman, has said his country would not be interested in a bilateral deal with Britain.”

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Clearly, joining the E.U. positively impacted British trade (credit: The Economist)

Where the Brexiters are Wrong

Many Brexit proponents argue that it would be easy to reestablish trade ties, but it is far from clear that Britain could renegotiate a favorable deal with the E.U. in which it gets to retain many of its current economic privileges while avoiding the long arm of Brussels. After all, Norway – a non-E.U. member with special trade deals and economic linkages with the E.U. – is still required to send money to Brussels. In other words, Norway suffers all of the costs of E.U. membership – financing Brussels’ agenda and complying with cumbersome E.U. regulations – while lacking many of the benefits like having a voice in E.U. affairs. It’s also unlikely that Britain could negotiate a deal much better than Norway’s because every other country with strange hybrid arrangements with the E.U. – Norway, Switzerland, Iceland – has still had to accede to the majority of E.U. standards and regulations or receive few of the benefits of E.U. association. Moreover, a British exit will likely result in serious damage to the E.U. Therefore, the odds of E.U. bureaucrats and leaders feeling generous toward Britain when they renegotiate their treaties and trade deals seem remote. E.U. leaders will also be cautious about being too lenient toward the U.K. because they realize that adopting a conciliatory posture with London only signals to other member states that there are no real consequences to leaving. In other words, E.U. leaders have to send a message by punishing Britain. Otherwise, they risk collapsing the entire E.U.

Another major argument used by pro-Brexit advocates is the stifling red tape emanating from Brussels. It’s unclear what regulations, in particular, are so stifling, though. The Leave campaign is deliberately vague about exactly which regulations it finds so odious. One particular regulation that Brexiters cite is a rule preventing live animals from being transported for more than 8 hours at a time, but it’s unclear to me that basic animal rights hurt the British economy in any meaningful way. In fairness, there are certain E.U. labor restrictions that seem overly draconian and in opposition to the free market principles of British economic philosophy. That being said, most E.U. economic regulations have support from the British government and they serve important purposes in regulating the common market. Indeed, the British government estimates that economic regulation and standardization contribute 59 billion pounds to the British economy. It’s also important to weigh the economic costs of these allegedly severe regulations with the costs of a Brexit. The fact that not a single economic institution has come out in support of the Brexit should give British voters pause. Just think, when was the last time every major economic body agreed on a major, consequential policy decision? I can’t remember it ever happening. Finally, Britain will not be able to repeal most of the legislation and regulations Brexiters find so troubling. As mentioned above, most regulations will have to be retained if Britain hopes to maintain a meaningful trading relationship with the E.U. Furthermore, The Economist argues that most regulations are domestic in nature and there is no political support for repeal.

In short, even if Britain left the EU, it would not find it easy to scrap many of its regulations. Open Europe puts the maximum feasible saving at around £12.8 billion. And Raoul Ruparel, its director, concedes it would be politically challenging to realise that much. Most of the gains would come from ending EU climate-change, financial services and employment rules. Yet Britain has long supported the first two; and it seems fanciful to expect workers and unions to accept a dilution of employment rights that business is not even calling for. One more point is lost in this debate: that the EU is proposing far fewer rules now. The European Commission’s better regulation agenda limits new regulations and even withdraws existing ones. Most EU members want less red tape. It is ironic that Britain should consider Brexit just when the EU has come round to a more competitive, less intrusive approach.

Many Brexiters also contend that Britain pays a disproportionate amount to the E.U. – this is completely false. As The Economist explains, “Leavers claim that Britain pays an unfairly large amount of almost £20 billion ($28 billion) a year to Brussels, or £55m a day. In fact this is the gross amount before deducting both the rebate won by Margaret Thatcher in 1984 and the money the EU spends in Britain. Adjusting for these, and for the funnelling of some foreign-aid spending via Brussels, the net payment is less than one-third as big, at £17m a day—and Britain is only the eighth-largest contributor per head.” Furthermore, just focusing on the costs of membership biases the analysis because it fails to recognize all the benefits of the common market. It also ignores the E.U. subsidies directed at British government agencies like the NHS that many Britons appreciate. One can certainly gripe about sending millions to Brussels every day, but one must also properly acknowledge the welfare subsidies and economic integration that those millions fund.

Finally, I want to address immigration. Immigration is arguably the biggest indicator of whether someone favors the Brexit, and fear of immigrants is a central argument among Brexit advocates. It is a bit puzzling, though, because Britain is largely winning on the immigration front. There is a relatively minuscule risk of radical extremists using the Schengen Zone to infiltrate the U.K. because Britain is not part of the Schengen Zone. Thus, the security-related immigration concerns are mostly just exaggerated nonsense. The economy-related immigration worries are also bizarre and not supported by any data. For example, the claim that hordes of uneducated foreigners are driving down wages and leading to housing shortages is utter nonsense. The average immigrant is better educated than the average native-born Briton, and housing concerns are largely a result of inane planning constraints. Claims that immigrants are “stealing” jobs is also utter rubbish, as the incredibly low British unemployment level demonstrates. Furthermore, immigrants are a net boon for the British economy, putting more money into the system than they take out. In other words, immigrants aren’t draining the British welfare system, they are replenishing it. Xenophobia and anger towards immigrants are nothing new. Indeed, it is a phenomenon that has become increasingly prevalent in both Europe and the U.S. – simply look at the recent Austrian presidential election and the emergence of Donald Trump. Just because fearmongering over immigrants is an effective political strategy, however, does not mean it’s a sound policy decision. It’s also a tad rich for Brexiters to argue that they want to reposition Britain closer to the U.S. laissez-faire economic system yet simultaneously oppose free labor competition. You can’t be a proponent of free market economics and decry the “socialist” continental economies while simultaneously attempting to block the free flow of labor without tripping over the inherent contradiction.

Not exactly uneducated masses… (credit: The Economist)


Not all of the impacts would be economic, though. Britain would also suffer in terms of geopolitical clout. Currently, Britain is an influential and powerful member of the European project. Only France and Germany have as much influence and say over Europe’s path. If Britain were to leave the E.U., however, it would lose much of the sway that comes with being a leader of one of the world’s most advanced, economically powerful, and militarily overwhelming regions. It would become nothing more than a small, if economically significant, country on the periphery of Europe, ceding all decision-making power to France and Germany. Britain would likely also lose its “special relationship” with the United States. As Jeffrey Stacey argues at The Duck of Minerva, “Britain would be less geopolitically useful to America. Moreover, the admiration Americans hold for Britain would falter, as the openness and tolerance of our British cousins would increasingly be called into question. The UK would be less recognizable, and a whole lot more bewildering… What is more, France has begun to look more reliable, for not only has Paris continued to take on global leadership – from Mali to Middle East peace – but a prominent Frenchman recently reminded Washingtonians that France was America’s ‘original ally.’” In essence, Britain would be abandoning its historic role as Europe’s offshore balancer, instead allowing hegemonic powers France and Germany to dominate the continent politically and economically. Of course, the opposite could occur as well. Brexit could trigger a wave of other anti-E.U. referenda, collapsing the common market and shattering European integration, integration that has allowed sustained peace and economic growth over the past decades. With the E.U. already weakened from the Greek Debt Crisis and the unrelenting stream of refugees, it’s very likely that Brexit could be the straw that breaks the camel’s back. Either scenario is bad for Britain. Either the E.U. – led by pro-integration France and Germany – becomes a more unified and consolidated institution that casts a shadow over Britain’s power, or it collapses and destroys the economic integration that has advanced European development so precipitously.

Even if the Brexit had a minimal impact on the E.U. and Brussels continued to muddle along at its current pace, there is still the question of Scotland. Scotland is staunchly opposed to the idea of Brexit, and it is likely that there would be a second Scotish independence referendum, except this time Scotland would choose to leave the U.K. and become an independent country. As Richard Haass warns, “Fragmentation would be unlikely to stop there. What happened in Scotland could well have ripple effects across what remained of the disunited United Kingdom. In particular, Great Britain’s departure from the EU and Scotland’s departure from the UK would likely increase tensions in Northern Ireland between pro-UK Unionists and both Republicans and Nationalists seeking to join Ireland.” Thus, it’s not just a question of whether Britain will remain in the E.U., it’s a question of whether the constituent kingdoms of the U.K. remain united. In all likelihood, at least some of them will not. Loosing Scotland and potentially Northern Ireland would only further diminish Britain’s power and influence on the global stage. This would adversely impact Britain, of course, but it would also negatively affect close British allies like the United States who rely on British power and influence to support the liberal international order.

Brexit and the E.U.’s Democratic Deficit

One interesting aspect of the Brexit debate is that the two sides frequently resemble two ships passing in the night. While the Remain camp focuses on the economic and geopolitical impacts of a Brexit, the Leave supporters focus on the need to reestablish British sovereignty. Therefore, it’s important to consider the democratic deficit of the E.U. as well. To ignore it would be to leave out a major component of the pro-Brexit argument.

So, will a Brexit restore British sovereignty? No. As mentioned multiple times before, Britain will be forced to comply with the vast majority of E.U. regulations in order to maintain meaningful linkages with the common market. Indeed, no matter how Britain’s citizens choose to vote on June 23, Britain will always have to relinquish some sovereignty if it wants to maintain commercial relationships with the international economy. Britain is simply not a big enough economy to maintain complete control over its economic policies and regulations. The days of the Commonwealth are long gone, and the E.U., U.S., and China will continue to dominate trade deals for the foreseeable future. If it wants to remain a major player in the global economy, Britain will be forced to comply with the rules and regulations pushed by these economic giants. Everything from Chinese manufacturing growth to U.S. interest rate policies have a meaningful impact on the British economy. The notion that by pulling out of the E.U. Britain will be able to make its own rules and develop its own standards is naïve in the extreme. Yes, the E.U. is a flawed and somewhat dysfunctional institution, but unilaterally withdrawing from it will not change that. Instead, Britain should remain in the E.U. and continue to express its opinions and help shape E.U. policy in a positive and beneficial way. As Richard Haass so eloquently writes, “The fact that the EU bureaucracy often acts in ways that are not necessarily transparent, accountable, or efficient is true. But these realities do not offset the advantages that accrue to the UK from association. Nor do they preclude the UK and other EU members from bringing about reform that would reduce the so-called democratic deficit.”

As I wrote at the beginning of this piece, the decision over whether to withdraw from the E.U. is a complex and serious one. I am strongly in favor of Britain remaining within the E.U., but I also respect the opinions and views of those who plan on voting Leave. One thing I would urge every one of our British readers to do is read up about all of the salient facts before making such a consequential decision. A recent Ipsos poll indicates that many Britons have a flawed understanding of the E.U.-U.K. relationship, and this might partially explain why Leave – a group that I think is severely misguided – is holding a slight lead in the polls right now.

drezner brexit
As you can see, reality is different than what most Britons seem to believe (credit: Financial Times)

Whatever your opinion, though, I urge everyone in Britain to vote on the 23rd. Your voice is important and this monumental decision regarding the future of the U.K. needs your input.