Wednesday, 20 September 2017

Blog

On Brexit

July 6, 2016
in Blog

There has been a strong (and I’m inclined to say emotional) negative reaction to the Brexit. But really, it doesn’t have to be the end of the world for the British economy. Being a member to the European Union (EU) imposes two constraints.  First, there is an upper constraint on how much economic freedom a country may have by belonging to the EU (especially regarding trade with the rest of the world outside of the EU). Second, there might also be a lower constraint on how much economic regulation (mostly on immigration) an EU member can put in place.

The vote for Brexit has been captured by individuals that want to cross both constraints. Some people voted for Brexit with the hopes of building a freer UK, but others voted with more nationalistic aspirations, hoping to close the economy and slow immigration. What will determine if Brexit is a good or bad thing will ultimately be the path that the UK chooses moving forward.

The UK can, for instance, keep a free trade agreement with the European Economic Area (EEA), as Norway does. An alternative path is a similar one to that followed by Chile, where the UK unilaterally open its borders to the rest of the world. The point is that leaving the EU does not necessarily imply a more regulated and closed economy. Several countries outside of the EU, like Switzerland, for example, are doing just fine.

Let’s take a look at economic freedom in the UK and in the EU. The following list shows the freedom ranking from the  latest Index of Economic Freedom from the Heritage Foundation. The UK is the third most free economy in the EU.

  1. Ireland: 8
  2. Estonia: 9
  3. United Kingdom: 10
  4. Denmark: 12
  5. Lithuania: 13
  6. Netherlands: 16
  7. Germany: 17
  8. Luxembourg: 19
  9. Czech Republic: 21
  10. Finland: 24
  11. Sweden: 26
  12. Austria: 28
  13. Latvia: 36
  14. Poland: 39
  15. Cyprus: 42
  16. Spain: 43
  17. Belgium: 44
  18. Malta: 55
  19. Slovakia: 56
  20. Hungary: 58
  21. Bulgaria: 60
  22. Romania: 61
  23. Portugal: 64
  24. France: 75
  25. Italy: 86
  26. Slovenia: 90
  27. Croatia: 103
  28. Greece: 138

This would suggest that the UK did not leave the EU in order to regulate their economy– if Croatia and Greece can over-regulate, then the UK could have, too! The Brexit vote, in fact, was mostly motivated by social and political reasons. A change in the local culture and public opinion, in part due to high immigration over the past decade, is certainly a factor. The opposition to a political body that decides which regulations should be imposed on the British economy was another. Why should Brits accept regulation officials in Brussels that hardly represent them or their interests?

The UK is now facing a great opportunity: it can become a more free and open economy and enjoy the benefits of the free-market. On the other hand, it is facing the danger of a nationalism that would isolate the country and perhaps even create animosity with its allies and friends. As Brexit is now inevitable, we should work to show the world that the sky is not falling– nor does it have to.