Sunday, May 15, 2016

Brexit: Frame of Argument

I am interested in this topic, so why not - I'll make some comments.

Each side is making their arguments within their own frames and those frames do not intersect.

1. The Leave group is arguing for the preservation of soverignty of the UK which they do not want to be superceded by the EU. They are not arguing that they will have nothing to do with the EU. They can still engage as closely as they can with the EU as they can with other sovereign nations. It does not mean that they do not welcome immigration, but they want immigration to be controlled by the UK authorities not the EU. They welcome EU investments and they can create incentives for them in the UK's own terms, not as the EU dictates. They want to have their own fiscal and monetary policies which are tailored to the needs of the UK economy, not the EU policies which may be good for the EU as a whole but may not be good for every nations in the EU.

2. The In group is arguing that the UK has been doing well because of the size of the common market in the EU, not just for agriculture but for everything - although in fact the UK agriculture is not quite dead as it cannot compete with the imports from the EU. The argument is that if the UK were to leave the EU, it is likely that the UK will enter into a recession, presumably because the EU will then not welcome UK imports - not because the UK will not want to export or be able to compete with the EU. There is an implied threat from the EU. There may be a reduction in the amount of investments because there will be greater scrutiny of investment proposals. The argument seems also to be that by leaving the EU, the UK will not be welcoming immigrants from the EU and therefore the economy will slow down because it will not have enough workers and that wages will go up and investments will be dampened. It is conceivable that there will be fewer immigrants with UK leaving than UK staying in the EU, but it may mean fewer unskilled workers for menial jobs in restaurants and other services in major UK cities. It may also mean lesser pressures on public services and public housing, etc. The reducation may lead to an improvement of the quality of life of the people in the UK, although they may now have to learn to do their own plumbing, minor repair works, etc.

The reality is that maybe the UK is already on the verge of entering recession just like every other advanced economies in the West as China slows down. Of course, it does not help if the Leave option creates greater market uncertainty as hence a reduction in business investments. The Tata Steel there is in trouble for example and will retrench workers if revived by another party. Things may not be rosy in the coming months. They are not likely to be caused by leaving the EU, although leaving may make a bad situation worse.

Indeed, the Govenor of the Bank of England has overstepped his role by adding the voices of the opposition to leaving. The job of the central bank is to stabilise the financial system whatever the economy. Mark Carney argued that he is only doing his job - the way he sees his job to be, which is to provide comments to the market on what the central bank sees to be the short-term conditions of the economy - which usually provides clues to the market how the central bank will react and hence the market will take pre-amptive actions to counter-act the expected actions of the central bank. But in this case, the governor merely provides an opinion of a possibility and has not offered any clue as to how the central bank will react. The implied scenario from the government is that money will flow out, as investments withdraw, not as less investments will flow in, and hence interest rates will rise and this will be costly for mortgages, I think the IMF is also off kilter.

O course, there are risks involved in taking either step - in or out. The proper debate is to focus on the risks and benefits and try to debate on their quantum. Not everyone is stupid and could not grasp the challenges. There are issues of national pride which citizens rightly are willing to pay a price for, some even with their own lives as recent wars had proven. On top of that, the British can think they can do better than the Europeans, which is not something to be dismissed. I think it is a silly argument just to rest the whole argument on the point of the economies of scale.

In the end, the EU is a political not an economic argument. The idea arose from the question of what is Europe - which led to the quest to create a European identity to which the US can identify with - as an ally during war - rather than having to deal with so many soverign states, they just have to deal with Brussels.


walla said...

1. The scots are pro-in so brexit may rekindle braveheart. The most crucial question is whether it will inflate further the price of their Walkers 32 percent pure butter shortbread. Only time will tell.

2. Brexit will stir capital flight, hardly healthy for London as a financial hub which contributes about eight percent to value adds.

3. Another issue is the current account deficit. Something like five percent of GDP. Raising the interest rate to close it will however increase mortgage costs. In any case, the other euro banking community won't be sitting still on their rates.

4. Inflation will call, pound will fall and the CPI will float in tandem with import costs which may lead to deflation followed by stagflation. One must note one third of the basket are mostly european imports. Based on precedents eight years ago, inflation had peaked about two years after depreciation of the pound which however did not boost exports nor close the trade gap. This time the uncertainty factor will dampen trade and investment.

5. Will import substitution take place? Many new refugees in europe will mean lower labor and thus product costs there which will make the case for import substitution more painful.

6. On the back of the common tariffs, Brussels may set hard conditions at the negotiation table on the new trading arrangements as a lesson to discourage the others. This will strain other non-EU UK trade agreements which could end in a WTO fallback. In any case, the earliest exit will be june 23rd 2018.

6. About sixty three percent of the 3 million naturalized are europeans. Net inflow is about three hundred thousand annually, half same. Brexit will add to the disincentives; construction, retail and food services will be affected. Wage pressures, business costs, company profits, enterprise growth and tax incomes will degrade the situation, compress the pressure, widen the uncertainty.

7. On the other hand, a sharper and finer granulation of the risks-versus-rewards equation may swing towards Brexit as the only way to reengineer and revolutionise the UK.

It is no longer controversial to say her standards in everythin' started falling when she embraced Europe.

She was born to be independent, alone, brit, sherlocky. Seen in such historical lens, her innovative and trading skills can be rekindled as compensation for all those years of eurocentric claptrap. Her new generations have the mojo's and the elan to do so.

Why go down the euro-wahabi street? Why not sail again the seven seas?

8. (But drop the pomish poppycock arrogance).

walla said...