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Interviews | Jun 22, 2016 |

Lothian: ‘Brexit’ economic doom scenarios ‘nonsense’

James R. Lothian

James R. Lothian

Tomorrow, voters in Great Britain go to the polls to vote on one of the most globally contentious economic and political issues of 2016: Whether or not the British should leave the European Union.

At the heart of the closely watched vote are a plethora of issues, from immigration to sovereignty, with pundits and politicians alike casting scenarios of doom and gloom, no matter what the outcome.

What to make of it all?

We turned to Professor James Lothian, director of Fordham University’s Frank J. Petrilli Center for Research in International Finance and the Toppeta Family Chair in Global Financial Markets, for a quick lesson in the EU, the British vote and its potential impact on global markets.

He had a lot to say about the bloated bureaucracy of the EU and the low level of discourse surrounding what has been dubbed “Brexit.”

Read his comments below, edited only for style.

1) For the uninitiated, why is the future of the European Union such a big deal? Or is it?

As things have turned out, the EU is not that big of a deal. The initial impetus was good – get rid of barriers to trade in Europe. That was a big plus. 

One major minus was that trade with the rest of the world remained inhibited by tariffs and other non-tariff barriers. Pick any consumer durable – say a TV, a computer or an electric drill – and you will pay at least 25 percent more in an EU country than in the United States.

The second was that the EU has become a big bureaucracy that grows like [wild] year in and year out. That bureaucracy does what bureaucrats do. They inflict costs on the rest of society in the form of taxes and regulations. All of these things have costs in terms of diminished productivity and real GDP growth. People are made worse off. 

And they restrict human freedom. European bureaucrats could not give a fig about the common man and woman. Theirs is a power trip. 

Washington is getting out of control in this regard. Brussels [the Belgian city the European Union calls home] is worse. It does, however, have one saving grace: more Michelin-starred restaurants than any city other than Paris. And guess who pays the expense account bills for that?

2) The European Union is obviously a huge economic entity, but with some obviously shaky partners such as Greece. Would a pullout by Britain, one of the largest members of the union, signal an imminent collapse of the EU?

No, but it would be a wake up call. Some other countries may start thinking hard about costs vs. returns from membership in the EU, and more importantly, the single currency. 

3) What is the potential impact on the U.S. dollar and commerce in either a “stay” or “leave” vote?

A leave would be good for us, not huge but a positive. Trade between the U.K. and the United States, which is already considerable, would increase further. The EU has free trade within its bloc, but 20-percent tariffs on goods from the rest of the world. 

4) Some commentators have speculated that a British vote to leave the EU would lead to a stock-market plunge in some countries, with estimates ranging from between 7 and 20 percent, depending on location. Is that likely? If there are losses, would they be short-term or long-term?

These estimates are nonsense. The idea underlying theme is that real GDP will plummet and that those declines will feed directly into stock prices. The fact is that U.K. real GDP is more likely to increase. Correspondingly, spillovers abroad will be minimal. 

Given all the scare stories circulated by the European ruling classes and the media, there probably has already been some negative effects in stock markets. If Brexit comes to pass and it becomes apparent that the sky is not falling, as would be the case, stocks – particularly in the U.K. – may very well benefit.

What is truly appalling is the low level of discourse on the question. The “elites” in the U.K., the United States and on the continent tell crazy stories, and this pap is taken at face value in the media. Trade will not come to an end. It very likely will increase on net. Income will not fall. It very likely will rise. The only losers on this deal are the bureaucrats and the protected industries in the EU that would have to compete with industries in the rest of the world.

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