This article appeared originally in Gulf News: link to original article
What are the economic arguments for Brexit? There is no straightforward answer here.
What is clear though is that determining fiscal and monetary policies, which the UK enjoyed, are not among those.
Unlike its European counterparts that adopted the euro, the UK determined its own exchange rate using tools available to its central bank. The UK was also free to determine its own tax rates, as did all EU member-states. Being in the EU while still retaining those two freedoms gave the UK the better of both worlds, which makes any Brexit argument regarding the two, more or less, invalid.
With that being said, the sterling pound reached a 30-year low against the dollar because of Brexit. And even if that did not happen, the UK would have needed to devalue its currency if it is to start promoting its exports, whether via a future trade deal with the EU or to the rest of the world.
If the UK did not enjoy such freedom in its monetary policy, Brexit’s economic consequences would have been made much harder to predict and much harder to manage if the UK had at a point adopted the euro and needed now to revert back to sterling pound.
In all cases, planned or unplanned currency devaluation is not all good for British citizens. As the currency loses value and World Trade Organisation tariffs are imposed if a trade deal between the UK and EU could not be reached, the pinch would be felt mainly by British citizens as they pay higher prices for EU-imported products — since those are the products that will be affected first.
With the above explained, the only economic argument left for Brexit is one that has to do with an ancient topic in economics: free flow of capital and people. For the sake of this article, free flow of people will only be discussed. So what makes people move physically from one country to another?
Labor market equilibrium is attained when supply of labour meets demand for it, taking mainly into account skill level and wages. When domestic supply of labor does not meet the demand for it, whether in terms of skills or wages, people move in pursuit of better opportunities either from the domestic country to a foreign one or vice versa.
Brexit’s argument was that the free flow of people between EU countries has undercut employment opportunities for British citizens. Normally, as economies develop, job requirements become more sophisticated as a natural result of division and specialisation of labor, which makes labour market equilibrium harder to achieve.
Brexit’s free flow of people argument centres around citizens from other EU member-states being employed instead of British citizens. Such an argument is flawed and here is why.
Let’s assume for instance that demand for wages in the UK exceed supply. Citizens move from their mother countries to the UK to fill in those jobs and push the market towards equilibrium. If demand for wages was to meet supply, that will not take place.
However, the rising cost of living among other factors restricts domestic demand from meeting domestic supply of wages by lowering the former, which encourages migration from other countries to the domestic country. In UK’s case, such migration occurs anyway, except that it being in the EU made the flow of people from EU member-states to the UK easier than that from non-EU member states.
In conclusion, the UK prior to the Brexit vote controlled its own monetary and fiscal policies even if it had to meet fiscal targets set by the EU for all member-states. The UK was actually heading for a budget surplus in the very near future. As for our main argument, the free flow of people is necessary to achieve labour market equilibrium when the domestic market cannot attain it on its own. The last thought that I want to leave you with: what would have happened if the UK had adopted the euro instead of the sterling pound?