Brexit thoughts from the Antipodes

My wife suggested a post on the contrast between British entry to the EU (or EEC as it was then) and the looming possibility of British exit.  She is young enough that British entry was a featured topic in New Zealand history when she did School Certificate history in the 1980s (for me, it was closer to being current affairs).  By contrast New Zealand media coverage of the British referendum is largely devoid of any particular New Zealand dimensions.  On a day when the British papers are highlighting a new poll suggesting that the Brexit cause could win, it seems like a good day for a few thoughts.

A lot has changed in the years since the early 1960s when New Zealand first faced the possibility of Britain entering the EEC, and the threat that posed to New Zealand’s major markets for dairy and lamb exports.  So important was the issue that, apparently, at New Zealand economists’ conferences in the 1960s a toast was often drunk to Charles de Gaulle, for his two vetoes of UK entry.

The make-up of our population has changed over that time, but in some ways less than one might think. In the 1961 Census, 9 per cent of the population had been born in the United Kingdom, and in the 2013 Census, 6 per cent had been.  And in most years, the United Kingdom is still the source country for the largest group of those given residence permits to live in New Zealand.  The UK still seems to be the favoured destination for New Zealanders looking for an OE, at least one beyond Australia.  Sporting ties, and rivalries, seem as strong as ever.   But if state high schools still sing “Jerusalem” and cathedral choirs still sing Stanford and Parry, the emotional ties are much less strong than they were.   In the early 1960s, it was less than 20 years since the end of World War Two, and less than that since the conflicts in Korea and Malaya where New Zealand and British troops had fought side by side.

But it is probably the economic ties that have changed most.  One of the after-effects of the war  –  and the huge overhang of debt the UK had taken on – was the Sterling Area, of which New Zealand was a part.  With a fixed exchange rate to sterling –  unchanged for almost 20 years – and our foreign exchange rate reserves held in sterling, overall sterling area access to US dollars affected each country in the area. Private international debt markets were much less developed than they had been in the past, or are now.  And New Zealand government offshore borrowing had been undertaken in the UK for more than 100 years –  it wasn’t until the very end of the 1950s that the first, expensive, New Zealand government loan was raised in the US.  Britain had been keen on New Zealand joining the IMF and World Bank –  we didn’t until 1961 –  partly because it would facilitate access to dollars for New Zealand’s capital needs.

And, most of all, the United Kingdom was a major export market –  as late as 1967, 44 per cent total exports went to the United Kingdom.  In the 1960s, almost all our dairy and lamb/mutton exports went to the United Kingdom.  As the New Zealand Ambassador to the US put it, in a prominent lecture he gave in New York in 1963, “the problem which we faced….was the threatened removal of the one remaining important free market for primary produce at a time when the highly industrialised countries of Europe are intensifying the trend to self-sufficiency in these products”.   There were, at the time, no credible alternative markets for some of the largest chunks of our exports.  And if Continental leaders were willing to consider UK entry to the EEC, they certainly didn’t see continuing New Zealand easy access to UK markets as part of the deal,  Indeed, one of the attractions of UK entry to them was detaching Britain from the Commonwealth and traditional suppliers of agricultural products (Australia as well).

Possible British entry was a huge issue for politicians and economic advisers in New Zealand in the 1960s and early 1970s, but it wasn’t a trivial issue in the British debate either.  Some of that was about past ties of blood, shared military sacrifice, shared family bonds and so on.  But some of it was economic too: New Zealand lamb and butter –  known as coming from New Zealand – had an established and significant place in the British retail market.  It would have been difficult –  perhaps impossible –  for Britain to have joined the EEC –  for British public opinion to have allowed it –  without “acceptable” arrangements for New Zealand and Australia.

At the time, material living standards in New Zealand were still higher than those in the United Kingdom –  ours were still among the best in the world.  The prospect of UK entry, with all that risked implying for markets for New Zealand produce, was a very dark cloud over those living standards.  (In that same lecture, our Ambassador to US, presumably citing received official opinion saw import substitution by building up local manufacturing, combined with rapid population growth –  natural increase and immigration –  as part of the solution).

The situation is nothing like symmetrical today.  The United Kingdom is still our sixth largest trading partner, but lagging a long way behind Australia, China, the United States and the euro-area.  If London remains one of the most important financial centres in the world, open capital accounts mean that the UK is not a particularly important source of financial capital at the margin –  and, of course, our government doesn’t borrow abroad, and our exchange rate floats.    There might be opportunities for New Zealand individuals and firms if the UK actually leaves the EU  –  our lamb exports to Europe (including the UK) are still restricted, and there are some hopes that revised immigration policies might treat New Zealanders the same as, say, other Europeans.  But these are probably second or third order issues for the New Zealand economy as a whole.   Some of those strongly campaigning for Brexit would favour a much more market-oriented approach to trade and regulatory policy, and anything that lifted medium-term productivity prospects would be good for the world (including us).   Whether there would be much improvement in the quality of policy is perhaps debatable –  other Anglo countries, not caught up in the web of Brussels, have not exactly been at the forefront of market-oriented liberalization in the last decade or so.

If Brexit isn’t a great economic opportunity for New Zealand, what about the risks on the other side?  The great and good of the economic establishment –  in Britain and internationally –  have been weighing into the debate to urge British voters to vote “Remain”.   Even President Obama has been recruited to the Prime Minister’s cause –  as if the views of a foreign leader should influence British voters views about the future of their own country.  Hundreds of economists have been writing to the papers urging the voters to vote to stay in the EU.  It is a curious spectacle.  One might have supposed that agencies such as the IMF and the OECD would have little credibility with anyone these days, and nor is it clear that they have (or even should have) British voters’ best interests at heart when they offer their advice.

The economic debate seems to turn on two, separate, issues.  The first is about the transition, and the second about the medium-term.  Actually, the two quickly converge.

We’ve already seen markets rattled each time polls suggest a heightened probability of Brexit.  It will, almost certainly, get much worse in the next few weeks if the latest polls are picking up something real.  And if Britain votes to leave, the days after that result is declared could be very very messy indeed.  Apart from anything else, the path ahead –  even for Britain –  is quite unclear, starting with who will be leading the British government to negotiate the exit terms.

The world economy and financial system are hardly in fine robust health.  And the policy buffers if things go wrong are few and very limited –  in monetary policy alone, almost everyone is already starting with interest rates around zero.  Britain itself just isn’t that important –  nukes, a Security Council seats, and London as a financial centre notwithstanding. Then again, it is only a year or so since the Scottish referendum was unnerving markets, and Greek crises have repeatedly wrought havoc for the last few years.  Why?  Because what starts in one place probably won’t stop there.   No one was really comfortable that the wounds to the euro could be cauterized if Greece left. What of the EU itself?

It isn’t as if euro-skepticism is a uniquely British phenomenon.  I thought this Pew Research chart from a few days ago was fairly telling

eu favourability

Public opinion in France is less favourable to the EU than that in the UK, and the UK numbers are little different than those in Spain, Germany and the Netherlands.

Which is why a lot of the economists’ contributions to the UK debate seem rather moot.  They come up with estimates –  really not much better than back of the envelope ones, despite all the apparent sophistication  –  suggesting a potential loss of income to the average Briton if the UK leaves.  But that all assumes that the rest of the EU holds together largely as it is.  And that doesn’t seem very likely at all.  In fact, as with the cause of Scottish independence, a defeat in a single referendum seems unlikely to make the exit issue go away even in the UK.  As with the euro itself: break-up fears wax and wane, but it will be a very very long-term (most likely never) until that risk disappears altogether.

So really the economic establishment –  in the UK and globally –  is urging British voters to vote “Remain” to hold the whole EU project together.  They can’t actually say that –  that would suggest a fragility they just can’t publicly acknowledge –  so they have to pretend that it is all about the British voters’ own best interests.  This week it reached ludicrous extremes with David Cameron suggested that people who voted “Exit” weren’t being patriotic and didn’t believe in their country.

But very few British voters really want any part of an “ever-closer union”.  Actually, few voters in most of the rest of Europe do either.  And yet everyone recognizes that  the euro in particular can’t credibly hold together without further progress in that direction.  Probably most voters are quite keen on free trade in goods –  and to a lesser extent in services – among European countries, but they don’t want their laws made by unelected officials in Brussels, or even by majorities of ministers from other countries.  And they don’t want their laws interpreted, and application decided, by foreign judges.  It is quite a bit about what being a nation state is.  Many aren’t too keen on a lot of immigration either –  no matter how often the elites assert that benefits flow from it.  That seems like the sort of choice citizens of each country should get to make.  And to be able to toss out the people who make laws and regulations they disagree with.

I’m not a Brit –  all my ancestors were, but they left in 1850 and shortly thereafter –  but of all the countries in the world other than New Zealand, Britain is  probably the one I care most about.  Were I a British voter, I’d vote for Exit.  Not because Britons would necessarily be better off economically –  they could be, with the right policies, but one doesn’t decide the future of one’s country based solely on narrow economic considerations.   Had it been otherwise, perhaps New Zealand in the 1960s could have done a Newfoundland, and given up our independence to become part of the UK (in case anyone is wondering, I’ve not found any who suggested doing that).

Voting to leave the EU would be, to some extent, a step into the unknown.  But big important choices often are – whether to go to war, to marry or to break-up a marriage, to split a country, or an empire.  People in Ireland were probably worse off (economically) for decades from leaving the United Kingdom, but who is to say their choice was wrong or illegitimate. One must be prepared to count the cost of those choices.   But if British voters want their country to be as independent –  but still, inevitably interdependent –  as New Zealand, or Australia, or Canada, or the United States, then Exit seems like the way to vote.  It might be a rocky ride, even for the rest of us –  perhaps it might even be the unwelcome way in which Graeme Wheeler gets the TWI down –  but it is a perfectly reasonable choice.  And one voters in other countries are likely also to make before long.   The EU as we see it today looks a lot like a project that has badly over-reached.

 

5 thoughts on “Brexit thoughts from the Antipodes

  1. I largely agree with you, Michael, but with enough doubts to take the other side from you, sorry.

    My paternal side arrived here from Preston in 1865, so like you I retain an keen interest in British affairs. But my Mum was of Irish stock, and her parents had a strong Irish accent as they were born in Ireland. She was not fond of the Queen.

    We tend to forget that the EEC (current affairs for me, too, at the time) was essentially an anti-free trade agreement at birth (like the TPP).

    It was good for us that Britain went in that direction, eventually, but we prove the case for the WTO, not for a discriminatory trading bloc like the EEC or now, the EU and the TPP.

    But if I was a worker in Britain, with a primary school age child, as I have, I would vote Remain because for all their faults, European governments, generally, place a greater value on human rights, including labour rights, than the right wing FPP governments periodically elected in Britain.

    With Britain’s monetary independence, British workers really do have have the best of both worlds. And the upper classes don’t do too badly out of the peace dividend, as well.

    Cheers.

    .

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  2. They are probably mad to leave but as an outsider I hope they will, merely to see what might happen. This applies to Trump as well. And I think the support for both is for the same quite healthy anti bureaucrat/politician reason.

    I would say Cameron’s (and Obama’s) support might clinch the “Out” vote in the same way as Key’s support for the flag backfired. Neither lot did the maths – taking conservative support for “Out” and “Keep the flag” – and adding it to their non-supporters – adds up to a loss. If both had stayed neutral perhaps Britain would have been more likely to stay in the EU and we would have a new flag.

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  3. I am all for it. Britain should exit and reinstate the British Commonwealth as a trading bloc. That was what NZ as a colony was set up for. To deliver product to Britain with exclusive distribution rights.

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