Brexit – what are the options?

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Anatole Kaletsky (Gavekal, Reuters, International Herald Tribune)
Chair: Adam Bennett (St Antony’s College, Oxford)

Since the referendum, the options facing Britain have been debated extensively (except by the government which remains tight-lipped), and the discussion is only likely to intensify further as the prospect of invoking Article 50 looms. Anatole Kaletsky, who last appeared before PEFM in January 2016 to discuss the evolution of capitalism in light of the global financial crisis in 2008, returned to PEFM eleven months later to divulge his thinking on the implications of the shock Brexit referendum of 2016, a political and economic event that has finally eclipsed the events of 2008 as the inexorable topic of everyone’s conversation (at least in the UK). Kaletsky’s overarching thesis was that there was still a real possibility that Brexit might not actually take place.

Kaletsky began by deciphering the underlying reasons for the Brexit vote. In light of the US presidential election, it is arguable that the referendum had less to do with particular European issues but is rather symptomatic of a global phenomenon sweeping across the West, driven by demographics, educational attainment and regional disparities. However, Kaletsky sees limited evidence in globalization driving the voting patterns, noting that supporters of Brexit usually had slightly higher incomes than average and were to a large extent outside the labour force (chiefly older retired voters and non-working women). Indeed, those potentially most affected in terms of the impact of immigration on jobs – those just entering the labour market, see freedom of movement not as a threat, but as a benefit of the EU. Instead, in Kaletsky’s reading, the Brexit vote was an example of a gradually spreading conflict between the generations, with governments showing clear favouritism to older voters. This perspective highlights that those who voted against globalization and immigration have largely guaranteed incomes (including through UK’s ‘triple lock’) and are therefore unlikely to suffer the economic consequences of lower growth that “Project Fear” warned about. 

Going deeper, Kaletsky sees a more fundamental political economy driver related to the crisis of capitalism in 2007-08. As in previous epochs of capitalist success, the years before the crisis served to justify various political and social transformations which were seen as a necessary price for economic progress. For example, the widening of inequality over the last 20 years has been justified as a ‘necessary evil’ and was only tolerable as long as everyone was seen to be better off. However, with the crisis the ‘cake’ stopped growing, bringing to the fore issues of inequality and distribution, and with them, a struggle to devise a different political and economic settlement.

Kaletsky then moved from analysis to prediction, focusing first on the economic fallout. He argued that compared to others, the UK is particularly dependent on tradable services, which depend on non-tariff barriers not covered in FTAs or in WTO’s terms. Therefore, the UK would be unlikely to preserve its economic performance as the importance of its competitive advantages diminishes. To compensate for this via increased manufacturing exports, as some have suggested, will require a massive devaluation in the exchange rate vis-à-vis the euro in order to increase British competitiveness, which in turn would lead to very significant losses in real incomes. 

Drawing on this, Kaletsky outlined two broad possibilities. The first is that growing recognition of the economic costs over the next two years will lead to a change in public opinion, and hence politics. Current expectations of ‘soft’ Brexit in some quarters are, however, unrealistic as they amount to accepting the main costs of membership while losing the benefits of participation. The second possibility is that the EU could fall apart, which in retrospect would make Brexit a diplomatic masterstroke. In this scenario, Britain would be best positioned to emerge from the ensuing chaos. Brexit itself had made this scenario harder to dismiss as it has served to legitimatize positions which had previously been seen as extreme in the past. However, Kaletsky does not think that such a breakup scenario is very likely.

Kaletsky therefore believes that it is possible that UK might end up ultimately choosing to ‘remain’ after all, in preference to a ‘hard’ Brexit – for several reasons. First, the Brexit vision (and the supposed benefits) currently being proposed by its adherents (whether hard or soft) will be almost impossible to deliver either politically, economically, administratively, or even legally given mutually excluding needs. Second, Theresa May is in a politically weak position as whichever way she leans, she will alienate a significant fraction of her own party. This would provide an opening to other politically ambitious Conservative politicians, particularly given the lack of real threat from Labour which could otherwise unify the Conservatives. Third, these developments depend on changes in public opinion, but given that most leavers expect stronger economy and more public spending there is a significant potential for disappointed expectations. 

The remaining conditions which Kaletsky puts forward are, if anything, even more important. In Britain, there needs to be a deeper reflection of what democracy means and a change in the belief that one can never question the results of the referendum if and when facts change. Meanwhile, the EU needs to be more politically flexible to prevent its own failure, particularly by repatriating some powers to member states, including on migration, while recognizing the need for a two-track EU centered on the euro. As he himself acknowledges, these are a lot of conditions – but it is still possible that they might all be satisfied and that Brexit never in the end takes place.