“Brexit’’ and long term economic dislocations

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In June 2016, the people of the United Kingdom voted to “Brexit,” or leave the European Union. It was a divisive issue with a very close margin (about 52 percent to 48 percent).

Unwinding the UK from the EU is an exceedingly complicated process, and recent news out of London confirms that there is still a long way to go. Economists (including me) and numerous world leaders advised against the breakup, as the adverse consequences for growth and standards of living could be severe. Now, it is getting real!

At issue is the UK-EU relationship going forward. Some favor a “hard Brexit” where most ties are cut, while others envision a “soft Brexit,” with some separation, but a closer future relationship.

It recently appeared as if soft Brexit (as proposed by Prime Minister Theresa May) would occur, maintaining free trade with the EU. Within days, however, several key officials had resigned in protest and her tenure was in jeopardy.

Uncertainty is taking a toll on economic growth, as companies around the world delay investments. According to the Organisation for Economic Co-operation and Development, UK economic growth is projected be just 1.4 percent this year and 1.3 percent in 2019, which is significantly slower expansion than in the Euro area.

(The UK was outperforming the Euro area before the Brexit vote.)

The 2016 popular vote to Brexit was based on issues such as EU rules on businesses (which can be convoluted), key decision-making authority vested in the EU, and high EU membership fees (which exceed what the UK receives back each year).

Some voters were particularly concerned with immigration and the lack of British control over its borders.

Weighed against this set of motivations are the reasons to remain closely tied to the EU. Free trade among member nations and the preservation of stable and long-standing institutional arrangements are among the most crucial from an economic perspective.

Given the UK’s aging workforce, workable immigration policies are also needed to allow for an inflow of young workers.

For the United States, Brexit negotiations and outcomes are important (particularly how efficiently and effectively the UK is unwound from various trade agreements), since the UK and several other European nations are significant U.S. trading partners.

Because Mexico and Canada are far and away the dominant trading partners for Texas, Brexit issues affect the state somewhat less than some areas with more European-dominated trading patterns.

Key leaders have resigned even as time runs out for the negotiation process, and the world’s attention is back to Brexit. It remains to be seen how things will conclude, but long-term economic dislocations are likely irrespective of the outcome.

Breaking up is hard to do!

Dr. M. Ray Perryman of Lindale is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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