This is no time to sell the United Kingdom short. Its economic and political institutions remain among the strongest in the world and should afford it considerable opportunity to negotiate new arrangements with the European Union.
In the early 1970s, the U.K. economy was struggling – hamstrung by nettlesome labor relations and too much government intervention. It joined the European Economic Community (EEC) to jump-start growth.
Much was accomplished through closer ties with the continent. However, more important were reforms championed by Prime Minister Margaret Thatcher and other British leaders that rolled back the frontiers of the state, cleared a path for private innovation and, ultimately, turned the economy around.
As conceived in 1950s, the EEC removed tariffs and other barriers to the movement of goods, workers and investment across borders. It has since morphed into a quasi-federal system, the European Union, with an unelected bureaucracy in Brussels that imposes policies and regulations on virtually all aspects of British life – ranging from immigration to the environment. And most members, less the U.K. and some smaller economies, have adopted a single currency.
After the 2008 financial crisis, Britain was free from Brussels’ tortuous decision-making processes and Germany’s domination of the European Central Bank to more quickly and effectively recapitalize and reform its banks. Today, U.K. banks have solid balance sheets, whereas banks in Italy and other major continental economies do not.
Although the U.K. does not participate in the Schengen Area, which establishes passport-free travel and removes border checks among member states, the EU still effectively imposes on it the immigration policies of the most open or least capable EU states.
Greece and Hungary have been unable to effectively limit the flow of Middle East refugees, and Germany – which profits immensely from the euro at the expense of its southern neighbors – is in the unusual position of having labor shortages. Once inside Germany and granted papers, immigrants can pretty much go where they please – including the U.K.
The U.K. government would like to limit immigration to about 100,000 per year, but to accommodate the flow of migrants from the continent, it requires non-Europeans to earn at least US$52,000 a year. Essentially, London must deny admission to an American nursery school teacher but accept a Bulgarian ex-convict with few prospects for being genuinely self-sufficient.
Once Britain invokes Article 50 of the Lisbon Treaty, it has two years to negotiate a new economic association agreement that each of the remaining EU governments must approve.
It would serve Britain’s interests to continue free trade and limited movement of workers so, for example, employees of its banks can move about the continent freely to sell services. In return, the other EU states will likely seek an agreement similar to their free-trade arrangement with Norway.
Norway must apply most EU regulatory directives without voting representation, contribute to the EU budget for the privilege and accept the full free movement of people.
That would frustrate the purpose of Brexit – to restore British sovereignty and control over regulation, finances and immigration – but the U.K. has leverage its small Nordic neighbor does not enjoy.
The U.K. is a major importer of German manufactures and Irish agriculture products, as well as an important market for Spain, France, Holland and several other EU members.
If Britain is forced to walk away empty-handed, those nations lose free access to the second-largest market, after Germany, in Europe. Britain won’t face terribly high tariffs on the continent – the average across all products is about 1.5 percent. The strengths of its banks will compensate for the inconvenience of its employees moving about Europe without an EU passport.
Prior to the vote, President Obama warned the U.K. would only get consideration for a free-trade agreement with the United States after a deal was struck with the EU. The fact is a trans-Atlantic pact may never be completed because it would require approval by each individual EU member.
A deal with the U.K. would be as easy to conclude as the free-trade pact accomplished with Canada under President Reagan, and a new president should better recognize the security advantages of keeping the U.K. trading and prosperous.
Once European indignation concerning the Brexit vote calms, an amicable commercial agreement with the EU – and perhaps with the United States – should be possible. The U.K. private sector – with less meddling from Brussels – will be an incubator for innovation and growth that rivals any in the world.
Peter Morici is a professor at the University of Maryland’s Robert H. Smith School of Business. He served as chief economist of the U.S. International Trade Commission from 1993-1995. He tweets @pmorici1. © 2016, Washington Times