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For a country supposedly crawling out of the ruins of the Brexit vote, the U.K. has been having a strikingly good year so far. The number of people working stands at a record high, and income inequality is approaching a 30-year low, according to the Office for National Statistics. New orders for manufacturers are at their highest level in a generation, and employers in general are struggling to find enough staff to cope with demand. Even the (relatively new) national happiness index stands at a peak.
When Britain voted to leave the European Union in June 2016, a very different future was forecast. Mark Rutte, the Dutch prime minister, declared that Britain had just “collapsed: politically, monetarily, constitutionally and economically.” But the plague of locusts has yet to show up—which is odd, given how many experts predicted that a victory for Brexit would bring catastrophe. Now, almost two years after the vote, the picture is clearer, and there is plenty of evidence to challenge the conventional wisdom, for those with eyes to see it.
To be sure, the quality of our political drama remains dismal. If you have only been looking at Westminster, you will have only seen disaster. The leaders of the Brexit campaign hadn’t given enough thought to what they’d do if they won, so they ended up destroying each other when the time came. Theresa May, who had opposed Brexit, became prime minister and then lost her majority in a snap election last summer; she carries on, but with little authority.
Brexit capsized the entire political establishment. It was a revolution, but no new regime has emerged. And that may be no bad thing: After the pyrotechnics of the past few years, a spell of boring politics is welcome. If this is a crisis, it is one with its compensations.
In the run-up to the 2016 referendum, the International Monetary Fund predicted that a vote for Brexit would result in “sharp drops in equity and house prices” and a downturn in foreign investment. But all three measures went on to hit record levels. Barclays predicted that there would be a 0.4% contraction in gross domestic product in 2017, Credit Suisse a 1% fall, Nomura a 1.3% fall. In the end, GDP rose by 1.4%. The Organization for Economic Cooperation and Development warned that consumers would be shaken and cut back on their spending. They didn’t.
‘How could so many great minds get it so wrong?’
Perhaps the direst Brexit warnings came from the U.K. Treasury. The milder of its two forecasts said that the economy would “fall into recession with four quarters of negative growth,” while “unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work.” As it turned, economic growth accelerated after the Brexit vote. Employment rose by 560,000, and the unemployment rate now stands at a 43-year low.
How could so many great minds get it so wrong? It is a case study of unconscious bias in forecasts.
Too many economists assumed that the public would react to a Brexit vote in the same way that they themselves would: Run for the hills and wait for the sky to fall. So they made guesses—about consumer spending, investment, productivity—and entered them into computer models that came up with nonsense figures. Their only correct prediction was the 10% drop in the value of the pound, which has brought its blessings (high manufacturing exports) as well as its curses (consumer price inflation peaking at 3%).
The great exodus of financial sector workers hasn’t quite happened either. Before the referendum, banks were cheerfully saying that they’d lose no time in packing up and booking flights— Goldman Sachs and JP Morgan even donated £500,000 (about $705,000) to the Remain campaign. Deutsche Bank spoke of moving 4,000 staff out of London. But Deutsche has since calmed down and is now talking about moving a few hundred; last summer it signed a lease on a new London headquarters.
London’s resilience is easy to explain. It is perhaps the greatest financial center in the world. No other European city comes close, not just for finance but (let’s face it) for vibrancy, atmosphere, people and opportunity. What’s the point of earning more money in Frankfurt if you have to spend it in Frankfurt? London’s advantages—the time zone, the language, its fintech pre-eminence, the financial ecosystem—are still very much in place. Its biggest rivals are Hong Kong, New York and Singapore, all of which manage just fine outside the EU.
When companies sit down to do Brexit scenario planning, they find that it’s not so hard. A free-trade arrangement with the EU in the style of the North American Free Trade Agreement is the most likely outcome, in exchange for British cash (the current figure is £37 billion, paid over several decades). If the British negotiate a bad deal (the next most likely option), businesses would end up bound by the same EU rules they face now—so not much would change.
If the talks go wrong, or if the deal is vetoed by the parliament of Wallonia (a fate that almost blocked the EU-Canada free-trade agreement), World Trade Organization rules would kick in, so tariffs would be capped at 4.2% on average. That would cause a headache for importers, but it’s manageable. So the worst-case Brexit scenario is hardly catastrophic.
For financial chiefs, Brexit might mean doing more business out of a bureau in Dublin or Paris, but its impact probably won’t go much further. TheCityUK, a trade body, had been talking about as many as 100,000 financial jobs moving from London after a Brexit vote; it has since estimated that the toll will be more like 3,000.
The idea of foreign workers abandoning Britain has captured imaginations around the world, especially among those looking for proof of the disaster they wrongly predicted. A report in the New York Times a few months ago described an “exodus of foreign workers,” leaving British employers “in the lurch.” Another article described the departure of workers for the National Health Service, explaining that the country to which they had immigrated “no longer exists.”
But Britain very much does still exist, as does the NHS, whose ranks now include more EU nationals than ever before (trainee doctors in particular). The same goes for universities: Cambridge, for example, saw 382 EU nationals leave last year, but it saw 509 others arrive. A forthcoming survey of U.K. universities by the Spectator shows that two-thirds saw a net increase in the number of EU nationals last year. The same trend holds for the economy overall. Since the Brexit referendum, according to the Office for National Statistics, 17 EU nationals have arrived in Britain for every 10 who have left.
Still, it is true that the total number of people arriving from the EU has fallen from pre-Brexit levels—and some employers are indeed panicking. Politicians too. Nicola Sturgeon, first minister of Scotland, warned recently that half of the workers in the U.K. food-processing industry are EU nationals. The Food and Drink Federation has gone as far as to say that its members might “be unable to feed the nation”
Ms. Sturgeon exaggerated: 33% of these workers are from the EU. But, strikingly, it was just 1% in 2004. So the food-processing industry, like many others, had completely changed its business model in response to the sudden influx of workers, who arrived at a scale the U.K. government never envisaged.
‘One remarkable effect of Brexit has been a mellowing in the country’s political mood.’
The idea of their arriving at a slower rate certainly worries David Page, whose private-equity firm owns the pizza chain Franco Manca. He warned that his staff feel “bruised” by Brexit and might not hang around in Britain. Facing “bigger competition for a lesser pool of staff,” he said, the company might even “have to increase our bonus packages.” Heaven forbid! Mr. Page’s plight was reported as proof of the grim effect of Brexit on business, but the expectation of such wage boosts is precisely why a lot of people voted for Brexit. They saw it as something that would nudge the balance of power away from the bosses and back to the workers.
One remarkable effect of Brexit has been a mellowing in the country’s political mood. Concern about immigration has fallen sharply, even if immigration is still twice as high as the government’s target. Nigel Farage’s UK Independence Party, the closest Britain has to a populist movement, is dying on its feet. Not so long ago, it was Britain’s third-largest party. Now it’s a comic irrelevance, struggling to win 2% of the vote and with no chance of taking any seats in Parliament.
Compare this to the tumult in the rest of Europe. Populist parties have recently taken over half of the vote in Italy, a third of the vote in France’s presidential election, a fifth of the vote in Germany and Austria and about the same share of parliamentary seats. Brexit Britain is an oasis of stability by comparison, perhaps the most successful melting pot in the continent. It’s quite true that the U.K. Labour Party, now under new hard-left management, is a threat to the calm. But the populist specter, which is haunting so much of Europe, has been exorcised from the U.K. body politic.
To confuse populism with Brexit is to confuse a disease with its cure. As the Princeton political theorist Jan-Werner Müller has observed, populism is primarily a form of rhetoric, not a political agenda. It’s all about shaking a fist at the establishment, saying that your party alone can represent the silent majority. The reaction in the chancelleries of Europe has seemed to follow the Bertolt Brecht poem: “Would it not be easier… To dissolve the people/ And elect another?” But Britain offers an easier remedy: If you address what people are concerned about, populism goes away.
The disorientation in the House of Commons can be seen as part of this adjustment—a sign of things going right, not wrong. A new Tory MP, Kemi Badenoch, used her maiden speech to comfort her colleagues by saying that democracy is like sex: If it’s not messy, you’re not doing it right. Her quote might owe more to Woody Allen than to Bagehot, but it makes a key point: Brexit has forced back on the agenda important themes that had been discarded, and it goes beyond the protection of the nation state and control of borders. MPs now talk a lot about the wants and needs of those who voted for Brexit—typically less-affluent people who did not go to university. A demographic that had been taken for granted has now made itself felt.
But Brexit did not need to be such a political mess. Many of the more facile claims made by Brexiteers have been disproved, at some cost to Britain’s reputation abroad. U.S. Treasury Secretary Steven Mnunchin says that the U.K. is at the “front of the line” for a free-trade deal, but progress is discouragingly slow. It was assumed during the campaign that negotiations with Brussels would be quick and easy. Instead, we have seen slow diplomatic torture from a well-organized EU that regards its treatment of Britain as a proxy war with its own populist tormentors.
The House of Commons is full of politicians who fantasize about somehow thwarting the whole process. Ms. May needs Parliament’s permission to agree to a deal; many MPs are getting excited about making life so difficult for her that the whole project would be abandoned. But it’s a pipe dream. Michael O’Leary, the CEO of Ryanair, recently pointed out that his fellow Irishmen keep holding referendums until people give the right answer. But this is not the British way. Even if it were, support for Brexit has barely changed since referendum day, with the country still evenly split.
If the fate of Brexit was decided by the quality of political leadership, the project would have been abandoned long ago. But this was not about a choice of government, or calculations of GDP per capita: It was about sovereignty, democracy and the idea that British laws and government should be decided only by those elected by the British public. In its way, it was the greatest-ever vote of confidence in the project of the United Kingdom, and that confidence has not gone away.
Every so often, I receive an email that gathers up news stories containing the words “despite Brexit.” It never fails to cheer me up. For example: “ Citigroup to invest in London, hire staff, despite Brexit,” or “Despite Brexit, City real estate partners reap benefits of record year.” None of this has anything to do with Brexit, which hasn’t actually happened yet. When it does, to judge by the reaction so far, it may well boil down to far less, economically, than either its supporters or enemies think.
It could be that Brexit, in and of itself, will be neither good nor bad for Britain. It will bring extra powers, and all depends on whether those powers will be used well or badly in 10 Downing Street. It’s still early days. But from what we’ve seen so far, it looks like a bet that a lot of Britons are still glad to have taken.
