Brexit: a nation divided by economics
The popular narrative about the Referendum is that the nation was divided by age and socio-economic categories. However, one other difference appears to cut across both: what people believed about the cost of leaving. If Lord Ashcroft Polls’ post-vote sample of 12,000 is representative, 77% of remain voters thought the economic impact of Brexit would be ‘disastrous’ whereas 69% of leave voters thought it ‘didn’t matter much either way’. There is no need to look further to understand what dominated voters’ decisions. And they can’t both be right.
The Ashcroft poll is detailed yet there is not enough cross-sectional analysis to tell how much the age and affluence factors explain the divergence in opinions about the economic cost of leaving. However, when checking with people who might be expected to agree roughly on the scale of the effects, I found similar polarisation amongst fellow investment managers, amongst economists and even past members of the Monetary Policy Committee. That suggests that it is not about understanding or experience of financial matters and that it is not explained by differences in age and affluence. Not being explained by anything else that divides us, it must be what most divides us.
How can this have happened? Most impacts will be via trade. International trade is not remotely as poorly understood or difficult to model as climate change, which also polarises opinions. True, trade economics have become less important and glamorous than either monetary economics or the business cycle, largely because of freer trade, but they are hardly defunct. To much of the electorate, it was depressing and annoying that there was not more informed analysis that could have narrowed if not removed this divide.
The problem does not go away with the result. It is now fundamental to the Government’s negotiating strategy that it has a clear and realistic view of the cost of having no trade concessions, or accepting WTO terms, and the value of expected savings from not having to accept all EU regulations, so that it knows how hard and how quickly (if at all) to strike bargains.
This is not a project where quick outcomes are likely to be the best outcomes. Much of the hard graft of shaping a strategy in detail should be informed by UK businesses and business organisations – the same people who are now calling for a swift end to uncertainty. It will take time. And it’s not just UK-based businesses who will want to talk about a trade deal. EU businesses with investments in the UK, and perhaps with cross-border manufacturing and supply chains, as well as businesses in the EU who export to us, need to be given time to lobby their own side, to add leverage to any discussion of a trade deal that might replace WTO terms.
Whilst it should be allowed to take time, it is vital we see early evidence that, having failed to persuade Europe to reform its regulations, the Government will not waste the opportunity to reform our own. For example, in Fowler Drew’s own field of retail investment services, where firms face an increase in costs and staffing inefficiencies from the loss of ‘passporting’, it is inconceivable that there are not gains to be had from reforming some of the accompanying regulation from Brussels, or that this cannot be done without weakening the protection of customers of our industry or improving the value proposition when customers pay every penny of regulatory costs and contribute our regulatory capital.
Since we all prefer certainty, it would be reassuring if it was clear very quickly that it was the disaster side that got the economics most wrong. It may be a little too soon for that but financial markets, an even larger electorate, are not so far supporting them. UK share prices on average regained early losses very quickly, perhaps supported by the weakness of sterling. But sterling is itself barely lower against the dollar than the bottom end of a trading range that has held since we first flirted with European exchange-rate integration in 1990, and well within its range against the Euro. Sterling weakness was always going to be part of the way in which the most adverse of trade effects were likely to be avoided, so the reaction of just share prices or just the currency cannot tell us as much about the markets’ vote as they do combined.
Meanwhile, the reaction of EU financial markets is a reminder that the sustainability of the status quo in the EU was itself far from certain, whether we stayed or went. There were always two sides to the trade represented by the Referendum vote: the future of the UK and the future of the EU and Eurozone. Indeed, it is possible that the economic assessment that most divided the nation was in part explained by whether people saw this as primarily the UK’s problem or rather as the EU’s.