Brexit and Beyond

Brexit, currency area, England, European Union, Pound Sterling
"Doggerland," by Juschki, CC BY SA 4.0

Brexit, currency area, England, European Union, Pound Sterling

In this post, I will stray a bit from monetary issues but not too far.  The British people voted last Thursday (June 23rd ) to exit the European Union.  How should that decision be viewed by classical liberals?  Do Americans have a stake in the outcome?  Should the readers of Alt-M care?

The political classes on both sides of the Atlantic are appalled at the voters’ decision.  The peasants have risen up in revolt and their decision cannot be allowed to stand.  There are already calls for a political mulligan in the form of a second referendum.  Others have called for the British Parliament to nullify the vote.  Both suggestions reveal the low regard for democratic decision making among Britain’s and Europe’s political elites.  No one can predict the outcome at this point.

Let us pause for a moment and consider what the vote’s outcome says about the prescience of the ruling class in Britain, on the Continent and, yes, over here.  (President Obama interjected himself into the vote and appeared dumbstruck last Friday when British voters rejected his advice.)  Political leaders pretend to be wiser and better able to look into the future and discern what is best for the people.  But almost to a person, they were unprepared for the referendum’s outcome.  That speaks both to their distance from the people they claim to represent and their ability to forecast events even 24 hours in advance.  So much for the wisdom of the elites.

(I am perplexed by just how surprised political and business leaders were.  I was in Europe the weekend before and was briefed by a veteran British MP, who was firmly in the Remain camp.  He called the election too close to call.  He said that victory by the Leave side was entirely possible.)

What was at stake in the election?  The leaders of the European Union portray it as promoting free trade and economic liberalism.  It is far from that.  The bureaucracy in Brussels has created an overbearing regulatory super-state, against which the British voters rose up.  To classical liberals, since the demise of the Soviet Union, the European Union is the last bastion of central planning.

As is always true, there were multiple motivations to those wanting to breakaway.  One group certainly felt that Britain could be more economically free out than in.

Immigration was an important issue there, as it has become here.  Voters opposed an immigration policy imposed from afar.  Additionally, Britain as an island had heretofore been largely immune from the mass migration from the Middle East, North Africa and elsewhere.  It appeared that would no longer be true.  Again, there is an echo in the United States in the debate over accepting Syrian refugees.  Being emotion-laden, immigration can be the leading edge of popular discontent.

One thing not at stake in the election was the hoary issue of the currency.  That issue had already been decided soon after the euro’s introduction as a currency on January 1, 1999.  There was a move for Britain to adopt the euro, but it was strongly rebuffed.  I am not usually an advocate of floating currencies.  Faced with a monetary straightjacket of the euro, however, Britain wisely chose the flexibility of keeping the pound sterling.  I helped make that case in Britain, and history has shown it to be a good decision.  The pound was a monetary safety valve for Britain.  But the political differences remained and eventually boiled over in this vote.

The core monetary issue is that no monetary policy could be the correct one for countries as economically diverse as those comprising the European Union (now numbering 28).  The area did not meet the criteria of being an optimal currency area.  Given those facts, Britain was better off conducting its own monetary policy.[1]  There are now a total of nine countries within the EU that do not use the euro.[2]

Prime Minister Cameron was the architect of the referendum and, hence, his own demise.  He advocated remaining in the EU but wanted to end the debate over the issue within the Conservative Party.  He did not even consult his own Cabinet over the decision.  For Cameron, it was a massive political blunder.  He compounded that blunder by announcing his resignation, effective in October, at a news conference the day after the referendum.  That rendered him the lamest of political ducks.

But the method by which the referendum got on the ballot put supporters of an EU exit at a profound disadvantage.  They had no strategic economic plan in the event the referendum passed. That is why there is such extreme political and economic uncertainty.  No one has exited the EU before.  Neither the yet-undecided new British Prime Minister nor the EU leaders know what comes next.  That is a situation of extreme economic uncertainty, which markets hate.  We see this in the volatility in financial markets.  Blame not British voters, however, but Cameron’s political stunt.

Fifteen years ago, two colleagues and I first proposed a global free trade association.[3]  It would be a coalition of the willing, the most free-trading countries in the world.  Some, but not all members of the EU would have qualified.  That created the very problem now facing Britain: how can it trade more freely with the rest of the world and also trade preferentially with EU countries.  The answer we eventually hit on was that Britain (and other qualifying EU members) could move from membership in the EU to membership in the broader European Economic Area (as Iceland, Liechtenstein and Norway are today).

The key point was that Britain would have had a plan and first have negotiated with the EU.  Only then would it (and possibly other countries) have exited as members of the EU.  Had it been done in that fashion, we would not be facing the global turmoil we are right now.  It would have been Brexit with a plan.

We are where we are, however, and Britain’s new leadership must make the best of it.  Assuming they honor the vote, they need to try to negotiate the best possible deal with the EU.  It would be in Europe’s economic interests to negotiate the closest possible economic relationship.  Financial markets have signaled that Continental European countries have more potentially to lose than does Britain.  Some EU leaders have suggested, in effect, that Britain be punished for leaving.  German Chancellor Merkel has called for calm and a sensible negotiating position.  One hopes her good counsel prevails.

If the EU hotheads prevail, they will be cutting off their noses to spite their faces.  As with all trade barriers, Britain’s “punishment” will inure to the harm of their own citizens as much as Britain’s.[4]  I personally believe that Britain will prosper with or without a special relationship with the EU.

The divisions within the United Kingdom of England, Wales, Scotland and Northern Ireland were not created by the Brexit vote, but have been exacerbated by it.  Scotland voted heavily to Remain, and Northern Ireland somewhat less heavily so.  There is a move afoot for Scotland to hold a second referendum on its independence so it can join the EU on its own.  I offer no opinion on whether Scotland will or should enter into disunion with the rest of the United Kingdom.  If the union no longer benefits the British peoples, I wish them peace and prosperity as they chart their own courses.  It would be difficult for an American of Irish heritage to say otherwise.

I conclude by answering my three questions.  First, classical liberals should always applaud when a people chooses its own political future.  This is especially so when they do so peacefully.  Second, the United States has a special relationship with Britain, and it is in our interest to maintain that whether Britain is inside or outside the EU.  Doing that may be complicated, and I only wish that the Obama administration had drawn up contingency plans for a Brexit vote.  Finally, Britain’s choice to retain the pound is a test case for advocates of floating currencies.  There are some problems they can address, but they are not a panacea.


[1] The Bank of England always had the option to track the monetary policy of the European Central Bank.  Some countries outside the euro effectively peg to it, which means they are importing ECB monetary policy.

[2] Besides the United Kingdom, they are Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania and Sweden.

[3] See Chapter 3, "The Free Trade Association: A Trade Agenda for the New Global Economy" by John C. Hulsman, Gerald P. O’Driscoll, Jr., and Denise H. Froning in 2001 Index of Economic Freedom, Gerald P. O’Driscoll, Jr., Kim R. Holmes and Melanie Kirkpatrick, eds.,(Washington, D.C. The Heritage Foundation and The Wall Street Journal, 2001): 43-62.

[4] One argument to punish Britain is to make it an example to others who might exit the EU. It is a curious position to take by those claiming the EU is a good deal for its members.