Digesting the full implications of the UK’s “Brexit” referendum will take Britain, Europe and the world a long time. The most profound consequences will, of course, depend on the EU’s response to the UK’s withdrawal. Most people initially assumed that the EU would not “cut off its nose to spite its face” — after all, an amicable divorce seems to be in everyone’s interest.
However, the divorce — as many do — could become messy.
The benefits of trade and economic integration between the UK and EU are mutual, and if the EU took seriously its belief that closer economic integration is better, its leaders would seek to ensure the closest ties possible under the circumstances.
However, European Commission President Jean-Claude Juncker, the architect of Luxembourg’s massive corporate tax avoidance schemes, is taking a hard line: “Out means out,” he said.
That kneejerk reaction is perhaps understandable, given that Juncker might be remembered as the person who presided over the EU’s initial stage of dissolution.
He says that, to deter other countries from leaving, the EU must be uncompromising, offering the UK little more than what it is guaranteed under WTO agreements.
In other words, Europe is not to be held together by its benefits, which far exceed the costs.
Economic prosperity, the sense of solidarity and the pride of being a European are not enough, according to Juncker.
No, Europe is to be held together by threats, intimidation and fear.
That position ignores a lesson seen in both the Brexit vote and the US Republican Party primary: Large portions of the population have not been doing well. The neoliberal agenda of the past four decades might have been good for the top 1 percent, but not for the rest. I had long predicted that this stagnation would eventually have political consequences. That day is now upon us.
TRADE AGREEMENTS
On both sides of the Atlantic, citizens are seizing upon trade agreements as a source of their woes. While this is an over-simplification, it is understandable. Today’s trade agreements are negotiated in secret, with corporate interests well represented, but ordinary citizens or workers completely shut out. Not surprisingly, the results have been one-sided: Workers’ bargaining positions have been weakened further, compounding the effects of legislation undermining unions and employees’ rights.
While trade agreements played a role in creating this inequality, much else contributed to tilting the political balance toward capital. Intellectual property rules, for example, have increased pharmaceutical companies’ power to raise prices. However, any increase in corporations’ market power is de facto a lowering of real wages — an increase in the inequality that has become a hallmark of most advanced countries today.
Across many sectors, industrial concentration is increasing — and so is market power. The effects of stagnant and declining real wages have combined with those of austerity, threatening cutbacks in public services upon which so many middle and low-income workers depend.
The resulting economic uncertainty for workers, when combined with migration, has created a toxic brew. Many refugees are victims of war and oppression to which the West contributed. Providing help is a moral responsibility of all, but especially of the ex-colonial powers.
Yet, while many might deny it, an increase in the supply of low-skill labor leads — so long as there are normal downward-sloping demand curves — to lower equilibrium wages. And when wages cannot or will not be lowered, unemployment increases. This is of most concern in countries where economic mismanagement has already led to a high level of overall unemployment. Europe, especially the eurozone, has been badly mismanaged in recent decades, to the point that its average unemployment is in double digits.
Free migration within Europe means that countries that have done a better job at reducing unemployment will predictably end up with more than their fair share of refugees. Workers in these countries bear the cost in depressed wages and higher unemployment, while employers benefit from cheaper labor. The burden of refugees, no surprise, falls on those least able to bear it.
Of course, there is much talk about the net benefits of inward migration. For a country providing a low level of guaranteed benefits — social protection, education, healthcare and so forth — to all citizens, that might be the case. However, for countries that provide a decent social safety net, the opposite is true.
The result of all this downward pressure on wages and cutbacks in public services has been the evisceration of the middle class, with similar consequences on both sides of the Atlantic. Middle- and working-class households have not received the benefits of economic growth. They understand that banks had caused the 2008 crisis; but then they saw billions going to save the banks, and trivial amounts to save their homes and jobs. With median real (inflation-adjusted) income for a full-time male worker in the US lower than it was four decades ago, an angry electorate should come as no surprise.
DISAPPOINTMENT
Politicians who promised change, moreover, did not deliver what was expected. Ordinary citizens knew that the system was unfair, but they came to see it as even more rigged than they had imagined, losing what little trust they had left in establishment politicians’ capacity or will to correct it. That, too, is understandable: The new politicians shared the outlook of those who had promised that globalization would benefit all.
However, voting in anger does not solve problems, and it might bring about a political and economic situation that is even worse. The same is true of responding to a vote in anger.
Letting bygones be bygones is a basic principle in economics. On both sides of the English Channel, politics should now be directed at understanding how, in a democracy, the political establishment could have done so little to address the concerns of so many citizens. Every EU government must now regard improving ordinary citizens’ wellbeing as its primary goal. More neoliberal ideology will not help. We should stop confusing ends with means: For example, free trade, if well-managed, might bring greater shared prosperity; but if it is not well-managed, it will lower the living standards of many — possibly a majority — of citizens.
There are alternatives to the current neoliberal arrangements that can create shared prosperity, just as there are alternatives — such as US President Barack Obama’s proposed Transatlantic Trade and Investment Partnership deal with the EU — that would cause much more harm. The challenge today is to learn from the past, to embrace the former and avert the latter.
Joseph Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is university professor at Columbia University.
Copyright: Project Syndicate
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