Brexit

Continuing with the topics mentioned in that opening post, the Brexit transition was big news a month ago.

And a month later ... it's a big fat nothingburger. Why is that so? Here's some context in multiple parts; ultimately I have no better answer than this is a vastly overrated issue.

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This would be a good time to browse the discussion in the Handbook in VI.A. It's about what a country is, what a nation is, and what a state is. This has also been covered here as part of older posts about sovereign defaults, trusting GDP measurements, and gullibility about international situations. 

Further, VI.A.4. in the Handbook discusses nationalism, and a related topic that arose in the 19th century and is still hanging around. This is the idea that if a nation isn't "big enough" that it won't be viable.

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Then there's a notion, floating around for a long time, that the arc of history points towards regions with different interests uniting into larger countries. Basically, the idea of the Star Trek mythos, which features planetary governments, and a "united federation" that sounds a lot like our federal system of government.

Here's the thing: there really aren't many successful examples of that happening with actual countries here on the real earth. Separate but similar colonies, like those that make up the U.S., Canada, Australia, and South Africa have been able to pull this off. India was able to make it work without many colonists, but with some colonial institutions to build upon. On the other hand, the Spanish-speaking New World broke up into a couple of dozen countries.

So the dream in Europe has been that if they can pull competing nations together into one big entity, that the size advantage will outweigh interest in nationalism.

But any proponent of this is going to have to explain Switzerland to me. If size is important, the threshold where its costs are overcome doesn't require a country to be very large at all. And the UK is about 10 times the size of Switzerland.

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And there's the rub: people in the UK aren't feeling that the size of the European Union is doing much for them. 

All the rest is window dressing. If people in the UK felt that being part of the EU was beneficial on net, most of the other issues would go away. They don't. And this part of the story is underappreciated. 

And ... Switzerland makes me think they are probably right.

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So why do we have an EU at all? A more united Europe has been  in the works for over 200 years. Recall that the French Revolution followed, and borrowed some, from the American Revolution 15 years earlier. Out of the French Revolution came Napoleonic France: a short-lived continental superpower. 

You have to get deeper into European history than most people do to get to the part about how part of the Napoleonic program was dissolving some existing countries and reorganizing them into bigger ones along ethnic, cultural, social, religious, legal, and political lines.† Agglomerating some German states, and some Italian states didn't last. But it planted a seed for further (mostly failed) revolutions in 1830, and 1848, and discussions of how Germans as a nation should be united in a country later called Germany (Italy went through something similar).

Of course, Germany and France then fought 3 wars in 75 years. After that came the talk that maybe if Germany and France were united in the same country, a fourth war could be avoided. Work on this started in 1951 with a common market (no trade barriers) for coal and steel called the ECSC. This actually included 4 more countries, including the 3rd big one on the continent, Italy. This evolved into the EEC, with integration across more part of life, in 1957. Other countries joined, including the UK in 1961 (where the colloquial name for the EEC was the "common market"). More integration led ultimately to the EU forming in 1993. It now has 27 members, well, 26 now that the UK has left.‡

Organizationally, the EU is federal, like the U.S. But, it's central government in Brussels is more powerful on some aspects, and but less powerful on most. This has led to domination of its politics by the (most populous) Germans, with fairly strong backing from the French.  In addition, it's kind of an object lesson that the little known 10th amendment to the U.S. Constitution is more important than had been previously guessed (it states a principal for drawing the line between what powers go to the top level of government, and what go to the second level). This sort of dividing line is missing in the EU.

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An imperfect analogy can be drawn to the U.S. The 4 big countries in the EU (Germany, the UK, France, and Italy) are analogous to the U.S. states of California, Texas, New York, and Florida. In the U.S., the # 2 state is growing faster, and asserting itself as perhaps the best state.

The UK is in a similar position, in that, its economy has done pretty well for the last 35 years, and there has been a feeling that they are being held back by the rest of the EU. This comes out in complaints about many issues, but the core is that it has not been clear to the UK that they are better off in the EU for quite some time. 

Ultimately, this led to a political movement, and a referendum where a majority voted to leave the EU, the portmanteau of "Britain" and "exit", and 4 years of negotiations. It is important to note that elected officials in the UK were following the will expressed in the vote, even though they may not have personally been in favor of Brexit. 

Officially, the separation took place last January 31st. But, there was a transition period, and that ended formally on last December 31st. That was why it was in the news so much a month ago.

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A not so small point in all of this, which is underappreciated in the U.S., is that the UK does not share a legal system (or even a predisposition towards how the legal system should look and act). Systems on the continent are similar because they are all tied back to the Napoleonic reorganization of the continent. On the other hand, the system in the UK is like that in the U.S. (with the partial exception of Louisiana). This historical accident has not made incorporating the UK into the EU easy.

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Personally and professionally, I'm a believer in making immigration as open as practical. Having said that, it bugs a lot of people, and it's my job to not be dismissive of that. And a lot of people in the UK feel that they have an immigration problem.

Now, there's a folk theorem in economics that asserts that all benefits and costs eventually accrue to the holders of fixed resources. And in immigration, the fixed resources that are important are the ones that attract immigrants.

And a lot of people think that the UK has a problem with immigration because being a member of the EU has made the UK's border (for immigration purposes) the borders of the EU. So if an immigrant could get inside the EU, they would be drawn to the desirable institutions in the UK. If the net benefits of those immigrants are not positive, then the UK has a problem.

From this perspective, the choices that the English (mostly) face is either to get rid of their desirable institutions, or pull their borders back to those of the UK. They chose the latter.

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So where does all this backstory put us macroeconomically?

The UK got no special economic benefit from being in the EU, and vice versa. It's hard for me to say how Brexit could then be anything other than a neutral move. Certainly that should probably be our null hypothesis. In turn, this makes me think that a lot of people worried about the split excessively. 

There are some who do make claims of great benefits to EU membership through trade. Yet, fundamentally, people/countries/regions trade with two groups: those who are nearby, and those who are socioeconomically similar. The UK has thus always traded the most with continental Europe. And while Brexit might make that a little tougher, it won't change those two underlying facts. So again, I think our null hypothesis on this one should be neutral.

As to immigration, I don't think in the long-run that the UK will benefit from restricting immigration through Brexit. Having said this, reasonable people could disagree about this one. So rather than neutral, my view is that this issue may best be described by "be careful what you wish for".

Lastly, there has also been some talk of the future axes of the world economy. By your late middle age,  I suspect the world will have settled into the equilibrium for the next few centuries, with four loci of economic activity: India, China, the U.S., and the EU. The facts on the ground are that continental Europe looked pretty good as it recovered from World War II. But it has faded the last few decades, and has started to fall behind the U.S. rather significantly. In this world, Japan and Russia are the big free agents ... and the UK may have just jumped teams with their last and best opportunity.

† Americans don't tend to know that much about this. But most have heard in history class about the use of Hessian troops in the Revolutionary War. A few of them even ask what the heck was a Hessian anyway? Turns out, Hesse (in a couple of different version) was one of those smaller countries that was effectively eliminated by Napoleon's reorganizations. 

‡ This is as good a time as any to note that the tables in Chapter VI are a bit sketchy about the size of the EU's economy. This is because it was not always clear whether they included or excluded the UK. This was made worse by the fact that with COVID-19, many countries delayed announcing their GDP data, so it was never clear whether the sources I had were pre-Brexit or post-Brexit.

ADDENDUM: A possible post about this has been on my mind, but it slipped my mind as I wrote this one up and posted it. Anyway, anyone who doubts that Brexit would allow the UK to do things differently, and perhaps better, needs to explain vaccine policy in Europe. As of about 2 weeks ago, the UK had vaccinated more people than all of the EU combined. The UK also developed one of the earliest vaccines, which they've been using for several weeks; it was just approved by the EU the other day. And individual countries in Europe, in particular France, are having trouble figuring out a workable vaccine policy at all. The situation in the EU is so bad that Hungary (admittedly not a poster child for cooperative behavior) has given up on the EU and contracted with China for a supply of the vaccine developed there. This all is in spite of the UK having epidemic rates high enough to cause systemic troubles in other countries on the continent. At some point one had to relax: if they say they can do better on their own, and then they do, concede that they were right.