Brexit: long-term hopes vs. short-term fears; a reprise

by John Reiners

I wrote my first post on this subject in February, just as the referendum campaign was getting started. I set out my hope that the debate would focus on long-term aspirations, but my concern that it would focus instead on short-term fears—of economic disaster vs. uncontrolled immigration. Sadly my concern was well founded. So as we are in the final few days I would like to say something on the underexplored topic of the long-term outlook for the Eurozone, the EU, and the impact on the UK.

Nearly all comment on European economic prospects has been negative. The Eurozone economy is most often presented as a basket case, likely to fall further behind the other major regional trading blocs, North America and, in particular, Asia. The Eurozone is flawed, unable to resolve its problems with Greece and without the political will to make the deep structural changes needed for the long term. Across the EU, the failure to embrace reform is leading to persistent, high levels of unemployment. According to this view, the UK is chained to a sclerotic European economy, with hundreds of thousands of economic migrants every year seeking to find work in the UK. This is a powerful case for Brexit, which hasn’t been convincingly countered by the Remain side.

However, there is an alternative, more positive view of European economic prospects. Earlier this month I listened to our Eurozone economist, Marion Amiot, set out the prospects for the region, on one of Oxford Economics’ regular macroeconomic briefings. Certainly the Eurozone has challenges, but recent economic performance has improved, and the outlook is positive, with rising employment, investment, and exports. Marion’s forecast was that the Eurozone is set to avoid the danger of secular stagnation with steady, if unspectacular, growth forecast for the years ahead. This at the time when the forecasts for the US and UK economy are deteriorating, and there are risks to growth in Asia as China struggles to adapt its economy.

There is also a counter to the argument that Europe’s best days are behind it, with the future belonging to Asia. Europe is home to many of the world’s industry leaders in some of the sectors that are likely to see the most rapid growth, like advanced manufacturing, renewables, and healthcare. It has strengths in the types of soft infrastructure that will be critical in supporting future economic success, such as a highly educated workforce, excellent universities and research facilities, and established institutions to support businesses. Certainly Europe faces difficult structural problems—but this could alternatively be presented as an opportunity. For example, last year McKinsey estimated that if Europe were able to tackle these longstanding issues, growth could accelerate to 2%–3% a year, with the creation of an additional 20 million jobs. Such growth among its major trading partners, combined with the impetus provided by the capital markets union and the digital single market, could provide the UK with the kick start needed to its own slow economic recovery.

Like most aspects of this debate, particularly when considering the longer-term impacts, the issues are not straightforward, and it’s possible to put a well-argued case both for and against. For one reason or another, though, those arguing for Remain have been shy at presenting a positive case for how Europe could present more than just a tariff-free trade area for British products and services. It’s true that as the campaign has continued, the British public has shown less interest in engaging in speculative debate on the long term economic pros and cons of being part of the EU. In my view, both sides share responsibility for failing to present the important long term issues in ways that would have generated an informed debate, preferring the instant impact of headline statistics, which have been viewed with justifiable scepticism.

John Reiners is Oxford Economics Managing Editor, EMEA. He manages research programs on a wide range of topics, including digital economy and international trade. He can be contacted at jreiners@oxfordeconomics.com.