Regardless of Outcome, Brexit Vote Highlights Global Anxiety over Free Trade and Economic Integration

The economic case against a British exit from the European Union is clear, according to Columbia Business School Dean Glenn Hubbard, but with politics and identity thrown in the mix, the outcome to Thursday’s nail-biter vote is harder to predict.

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On Thursday morning, voters in the United Kingdom will head to the polls for a referendum on whether the country should remain part of the European Union. With just two days to go, the contest remains a dead heat with 44 percent in favor of remaining, 43 percent in favor of exiting, and 11 percent still uncertain, according to the Economist.

The referendum, a 2013 campaign promise by Prime Minister David Cameron, marks the second time the UK has faced a vote on its basic political structure in just two years, following 2014’s Scottish Independence Referendum.

WATCH: As part of the Global Business Forum, a jointly sponsored event by Freshfields Bruckhaus Deringer and Columbia Business and Law Schools’ Richard Paul Richman Center for Business, Law and Public Policy, Glenn Hubbard, Dean and Russell L. Carson Professor of Finance and Economics, and René Stulz of The Ohio State University discuss the implications of a potential Brexit.

Support for a Brexit is strongest among voters for the United Kingdom Independence Party (UKIP, commonly pronounced “you-kip”), lead by the flamboyant and controversial Member of the European Parliament Nigel Farage. Conservative Party voters also presently favor an exit by a margin of four points, despite the opposition of party leader Cameron.

On the other side, left-leaning Labour Party voters overwhelmingly support remaining in the EU, although their leader, Jeremy Corbyn — who, with his occasionally disheveled appearance, left-wing policy proposals, and strong youth support, has drawn comparisons to Bernie Sanders — voted in 1975 to leave the precursor to the European Union, the European Communities. The debate took a particularly tragic turn for Labour — and the country at large — last week, when MP and “remain” supporter Jo Cox was murdered by a man who, during his subsequent arraignment, gave his name as “death to traitors, freedom for Britain.”

Support for the “remain” campaign has also been strong among the centrist Liberal Democrats and the nationalist parties Plaid Cymru and the Scottish National Party. Indeed, it is widely speculated that, should voters approve an exit from the EU, Scotland would exit the UK in order to remain part of the political union.

Proponents of an exit have stressed that independence would offer Britain greater control over its borders and freedom from the regulatory burdens of the EU, as well as removing the substantial cost of membership in the union, which the Vote Leave campaign has billed as “send[ing]  the EU £350 million a week.” (The real story is much more complicated.)

Immigration has risen from minor concern in the late 1990s (only 4 percent of the population listed it as one of Britain’s most important issues in December 1999) to a centerpiece of contemporary politics, with more than 75 percent of the population favoring a reduction in immigration. That’s only been heightened in the wake of economic turmoil across southern Europe and the more recent Syrian refugee crisis.

UK attitudes toward immigrations

Percent of the population listing each issue as among the top three concerns facing the country.

© The Migration Observatory at the University of Oxford

The leave campaign has also sought to argue that EU regulation dampens economic activity in the UK. And according to Open Europe, a think tank promoting “flexible integration” into the EU, the 100 most burdensome EU regulations do indeed cost the country £33.3 ($48.8) billion annually — though the question remains whether these costs are outweighed by the benefits they provide in facilitating the common market.

Opponents, including many economists, stress that leaving the EU could be extremely costly for Great Britain. “For some people, this is political. For others, it’s economics.” says Glenn Hubbard, Russell L. Carson Professor of Finance and Economics and dean of Columbia Business School, says. “And I think a lot of what you’re seeing in the debate and the polls and the betting markets is which of those horses — the political horse or the economics horse — is likely to win that race.”

 The UK’s National Institute of Economic and Social Research estimates that an exit would cost the country 1 percent of GDP by 2017, and as much as 7.8 percent by 2030. Open Europe, meanwhile, estimates that the country could improve GDP by 1.6 percent under a best-case scenario, or lose 2.2 percent under a worst-case scenario, depending on the trade deals it is subsequently able to strike. “Better trade and integration is also linked to productivity,” Hubbard points out. 

Loss of access to the common market would be particularly painful for “the City,” as the UK’s finance hub in London is known. As Geoffrey Heal, a noted Welsh economist and the Donald C. Waite III Professor of Social Enterprise at Columbia Business School, has pointed out, much of the foreign investment in the UK has depended on easy access to the wider European market. Without that access, investors are likely to pick up and move on to Brussels or Germany.

The importance of access to the common European market for maintaining British standards of living further means that even an independent Britain is unlikely to truly be free of EU regulation or free migration. If the country wishes to remain part of the European Economic Area after exiting the European Union — the so-called “Norway model” — it would almost certainly still have to accede to the free movement of goods and people. It would also still be subject to the vast majority of the EU’s costliest regulation, but without a vote to amend them or to propose new regulations.

Hubbard points out that the issue may well be larger than this single election. “If I’m right, the real issue on global minds — not just UK voters’ minds — is: what are people around the world really saying about trade and integration.” The conflicts currently playing out at the national and supra-national level are further mirrored at the regional level — nearly every country in the EU contains at least one active separatist movement, from the Andalusians in Spain to the Walloons in France and Belgium.

Regardless of which way the vote goes, the referendum highlights the continued fragility of the political union four years after it was awarded the Nobel Peace Prize for sixty years of advancing peace and reconciliation across the continent. “That it’s this close,” Hubbard explains, “says that whatever the outcome later this week, the volatility’s not going away for a while.”

About the researcher

R. Glenn Hubbard

Professor Hubbard is a specialist in public finance, managerial information and incentive problems in corporate finance, and financial markets and institutions. He has written...

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