Analistas 18/06/2016

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Not to keep you in suspense: If I had a vote, I’d vote to remain. But I wouldn’t be as enthusiastic as I’d like - and if “remain” wins, as I hope it does, I’d still feel a sense of dread about what the future holds.

Why? Some notes on the issue:
1. Conventional trade analysis suggests that unless Britain can make a deal that essentially preserves full access to the European Union - which seems unlikely given what a “leave” vote would do to relations - Brexit would make Britain poorer, on a sustained basis, than it would otherwise have been. I’ve done my own back-of-the-envelope calculation and come up with a sustained gross domestic product loss of 2%, which is in the same range as other calculations. This number isn’t at all a hard fact - it could be smaller or bigger - but the direction is completely clear.

2. On top of these conventional losses, there’s the special issue of the City of London, which looms very large in the British economy thanks to huge exports of financial services to the rest of Europe. The City’s role, like that of other financial centers, rests on hard-to-model agglomeration economies. Would the frictions and extra costs of Brexit hurt the City sufficiently to undermine its role, at a big cost to Britain? Nobody knows, but if so, that could add a lot to the overall economic costs.

3. Pay no attention to claims that Britain, freed from European Union rules, could achieve spectacular growth via deregulation. The process would be no better than the American version of deregulation.

4. On the other hand, I would greatly discount warnings about a dramatic financial crisis. Maybe the pound would fall - but for a country that borrows in its own currency and has an excessive current account deficit, that’s a good thing.

5. It’s also true that the economic impact of Brexit would fall quite differently on different groups within Britain. The City and those people whose incomes are tied to its fortunes would probably lose badly, but some regions of the country might benefit from a weaker pound.

6. Despite those distributional issues, straight economics is pretty clearly on the side of remaining in the European Union. Why, then, am I at all ambivalent? Because the union is so dysfunctional and seems so utterly resistant to improvement.

7. The euro is the most obvious case: It was a mistake in the first place, and this mistake was greatly compounded by the handling of the post-2009 crisis. After a sudden stop in capital flows, the big technical problem of adjustment was turned into a morality play requiring destructive austerity. And there is no hint outside the European Central Bank that any of the major players have learned anything from the debacle.

8. But it’s not just the euro. The European Union seems unable to come to grips with migration issues - not just with regard to the refugee crisis, but also with the interaction among extensive welfare states, large internal income disparities and open borders. I’m sure anti-European forces are exaggerating the burden created for Britain by migrants from the east, but it’s a flash point to which the union doesn’t seem able to respond.

9. So something has to give. I’d like to imagine that a close Brexit vote in favor of remaining would be a wake-up call - but there have been many such calls in recent years, and nothing seems to happen.

10. And yet the European project has been a source of tremendous good in the world, and it remains very important. The European Union has historically been a key force, not just for increased trade, but for democratization. Even when it falls short, as it has when dealing with the rise of authoritarianism in Hungary and now Poland, the union and its institutions are an important restraint. If Brexit greatly damages the European project, it would open the door to a lot of ugliness.

11. So I would vote to remain, but with some feelings of despair, because what I’d be voting to remain with is a system that desperately needs reform but shows little sign of reforming.

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