Brexit just broke the cartel

“The world of hope, the world of ever-closer union among countries which for centuries would kill each other by the million—came to a shattering end on Thursday,” – Felix Salmon

Felix, what a lot of rubbish.The UK’s vote to leave the EU just struck a blow for competition and free trade for all the World.

Economic History was never my strong subject but I seem to recall that the European common market was initiated after World War II to demolish a labrynth of trade restrictions erected over centuries. Racism, nationalism, protectionism and immature tit-for-tat retributions created a dysfunctional economic region. The EU was a GOOD IDEA only because of the centuries of BAD IDEAS that had preceded it. A good idea for Europe that is…but what about the rest of us?

Let’s be clear, the EU is a cartel. The problem with Unions is that they actively favour their members while penalising those who remain outside (eg agricultural subsidies, import restrictions). Moreover, in order to protect the guild, they place restrictions on their members dealings with non-members as well as levying contributions without direct benefits. As with any cartel, Unions are inherently unstable since there are competitive forces offering incentives to members to break ranks and deal outside the guild.

In the case of the EU, the biggest challenge was continuing with very high Government expenditure programs while shoring up its tax base from the attraction of lower tax jurisdictions. The UK was called upon to contribute proportionally more to fund the EU budget than it received in allocations. From the UK’s perspective, they have a better chance dealing equally with ALL THE WORLD rather than channeling a disproportionate quantity of their resources into the EU.

Let’s be clear, voting to break with the Union does not mean that the UK is abandoning principles of free trade. It’s quite the opposite. The action is embracing free trade with everyone on globally fair terms, not just with a regional group the terms of which are less efficient.

So how does this fit with the financial market reaction? Those companies who benefit from the subsidies and protection of the Union will suffer permanently when it breaks. But the microeconomics of the UK’s decision to leave cannot justify a 10% decline in Sterling nor a 10% decline in the stock market. Sensitive investors sold last Friday in reaction to the news, to temporarily reduce risk – a knee jerk response which will prove expensive to those who liquidated their positions. If, as I argue, the UK’s decision encourages competition and efficiency then the market’s will recover very quickly and, in fact, advance beyond that.

PS: My previous blog correctly predicted the sudden voter change of opinion at the ballot box. Going into the vote, opinion polls predicted the Remain decision to triumph by 4%. In actuality, Leave carried the day by that margin. How is it possible to capture this propensity to decide at the ‘point-of-vote’? Information blackouts and media restrictions would seem to run counter to efforts to impact voter behaviour. The message for politicians is to figure out ways to make the voter feel good when they are physically at the polling place, and they will vote for you.