Another week in the Brexit campaign, and another doom-laden blast against the out-ers, this time from HM Treasury. Is the exit-disaster, now portrayed as causing unemployment to rise by between 500,000 and 800,000, being overdone?
Perhaps. But setting aside the headline figures, there are elements of the analysis that seem pretty incontrovertible. Neither can I see any counter-analysis from either the Leave campaign or a non-aligned source which puts forward serious propositions which challenge the Treasury (or the IMF, the OECD, the World Bank, etc).
Yes, the Treasury has got some things wrong in the past (for example, that being in the Exchange Rate Mechanism of the European Monetary System would be good for the British economy), but it also gets things right (for example, that austerity would not halt growth). So that on its own is not good enough reason to reject this latest document.
The key thing to understand is that it concentrates on the two-year period between the vote on June 23rd and Brexit, if that is what the British people ordain.
That’s because it will take two years for Britain and the EU, not just to untangle all the arrangements that go with EU membership, but to put new ones in place.
This seems to be agreed by both sides. What isn’t agreed, however, not even by the out-ers, is what the new deal will be. Is it a Norway-style membership of the European Economic Area, or a Swiss-style bilateral agreement covering trade and other areas such as student exchange, or a Canada-style trade agreement, or a no-deal position relying on World Trade Organisation rules?
There is no obvious alternative. And unless David Cameron and George Osborne have some secret Plan B up their sleeve (which doesn’t seem likely), a Brexit vote will usher in a period of even greater uncertainty than exists now.
The Treasury analysis points out that apart from the longer-term transition effect of moving from an economy in which a large part of activity is affected by EU membership (in mainly good, but also some bad ways) to one outside the EU, there will be short-term effects.
One is general economic uncertainty after the referendum concerning what the economy will look like in future. It says: “Businesses and households would respond to this by putting off spending decisions until the nature of new arrangements become clearer [which would] lower overall demand in the economy.”
The likelihood of individuals postponing buying cars and TVs may seem small, but the second effect could cause it. The analysis says: “Both the uncertainty effect and the transition effect would in turn weigh on financial markets, increasing volatility.”
“In the immediate aftermath of a vote to leave, financial markets would start to reassess the UK’s economic prospects. The UK would be viewed as a bigger risk to overseas investors, which would immediately lead to an increase in the premium for lending to UK businesses and households.
“The value of UK personal investments would also decline, and the fall in the value of the pound would put upward pressure on the prices paid by consumers. This would add to the transition and uncertainty effects and influence a wide range of financial conditions facing businesses and households.”
In other words, inflation and interest rates would rise, not for good reasons of the economy getting back to full speed, but for bad reasons of perceived increased risk. And if you doubt that, I’m afraid it is already happening.
The pound’s value has fallen, the price of insurance on UK government debt against default has risen, and business investment is weakening, as is business activity.
With the Brexit polls still fairly tight at only a four-point lead for Remain, that can only be because of worries about the consequences of vote to Leave.