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You are here: Home / Podcast / 113: Brexit and the Economics of Immigration

113: Brexit and the Economics of Immigration

June 22, 2016 by David Stein · Updated March 3, 2022

Does immigration harm or benefit a country’s economy? Should the UK leave the European Union?

Photo by Trey Ratcliff
Photo by Trey Ratcliff

In this episode you’ll learn:

  • Why it is difficult to really get to know a country.
  • What are the ingredients of a successful market economy.
  • What is the flaw with the European Union.
  • What are the economic impacts of immigration.

Show Notes

Business Agent – the alternative finance marketplace in the U.K.

The Long-term Macroeconomic Impact of Lower Migration To the UK – Katerina Lisenkova and Miguel Sanchez-Martinez – National Institute of Economic and Social Research

EU Facts: how much does Britain pay to the EU budget? – UK Telegraph

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Summary Article

Brexit and the Economics of Immigration

In June 2004, I took a train from Lausanne, Switzerland, where I had met with some hedge fund managers, to Venice, Italy where I was going to be a tourist for a long weekend before flying home.

It was my first time in either country. I don’t speak their native languages. Nor did I have much time to prepare as my trip was booked on short notice. I could say hello in French and Italian.

The European football championship known as Euro 2004 took place while I was there. I found myself caught up in the excitement of this sports competition, particularly after I was awoken one night in Lausanne by cheers, honking cars and other celebratory acts.

The next morning I learned the revelry had been over the outcome of a Euro 2004 football match. What I found amazing is Switzerland wasn’t even one of the teams that had played. All that celebration over a match between the national teams of two other countries.

Intrigued by the continental solidarity over this sport, I watched a number of matches on television during the evenings at my hotel in Venice, after spending the day exploring the city. I watched even though none of the commentary was in English.

The other thing that struck me on this trip was how orderly Switzerland appeared with seemingly every accessible open space organized into a garden. As soon the train crossed into Italy, I noticed the terrain was more laid-back and chaotic. More abandoned fields. More weeds growing in the cracks in the cement.

In 2013, I spent two months with my family traveling throughout Europe. We started in Italy and drove to Switzerland, Germany and farther north.

This time I noticed Germany had a much larger variety and selection of food than Italy and the prices in Germany were lower. That seemed odd as both countries were members of the European Union and used the same currency.

Of course, these are just fleeting impressions and I am by no means an expert on European countries, their economies or cultures.

Yet, as outsiders, while we were enthralled by the opportunity to drive from one country to the next without being stopped by customs, we were also aware of the differences between these developed nations, even if the evidence was anecdotal.

Ingredients

Successful market economies need a number of ingredients including a stable political system, good governance, minimal corruption and bureaucracy, the rule of law where contracts are honored, a ready supply of land, educated workers and a robust financial system including access to investment capital.

Market economies also need ambitious entrepreneurs and businesses who have the flexibility and capabilities to pursue economic opportunities. Successful economies also need the legal and cultural frameworks to allow for failure.

When these ingredients are absent then a nation’s economy will underperform its potential, and if the ingredients are diluted or taken away then an economy can be brought to its knees as we are currently witnessing in Venezuela.

Yet, even when these basic ingredients exist, the economic outcomes can vary between countries due to how the ingredients are used and combined.

In short, while countries have many similarities, they also have distinct cultures, even economic cultures.

A Flawed Merger

The fundamental flaw with the European Union, particularly the use of a common currency in the form of the euro, is the structure ignores the differences in economic cultures.

Over time, these differences can be overcome if the countries merge in the same way the individual states came together to form the United States. But that is unlikely to happen.

Consequently, the European Union is only a partial merger and a flawed one at that. The reason is without a complete fiscal merger including a common banking system, a common federal government program of taxation and benefits, a common legal system etc. then European economic policy and culture will be dictated by the strongest economies and nations in Europe, specifically Germany.

That leaves less robust economies such as Greece, Portugal, Italy and eastern European nations without the flexibility to set their interest rates and take other fiscal actions more supportive of their domestic economic situations.

Meanwhile, workers and refugees migrate to the strongest economies of Europe, placing additional stress on those nation’s infrastructure and social welfare systems.

The additional workers ultimately lead to greater economic output for those nations, but the process of assimilation is chaotic.

The Economic Impact of Immigration

The National Institute of Economic and Social Research, Britain’s longest established independent research institute, noted between 1990 and 2015 the number of international migrants worldwide increased from 153 to 244 million.

During the same period the net migration in the UK increased from under 50,000 to over 300,000 per year.

The research institute reviewed multiple studies regarding the economic impact of immigration. The consensus among the various studies was migration had no impact on unemployment levels within the UK and minimal impact on the wages of native workers, the exception being a minor impact on the wages of low-skilled laborers. The studies found incoming migration mostly had a negative impact on the wages of other immigrants.

The studies also concluded immigrants paid more in government taxes than they received in benefits. Finally, most studies showed the UK economic growth would be lower if the country left the European Union, cutting off the free movement of workers.

The Choice

As I write this, the United Kingdom will vote in a couple of days whether to exit the European Union or not; the so called Brexit vote. The outcome is a toss-up as there are many undecided voters.

The choice seems to be between sticking with a flawed partnership where there are more knowns than unknowns or abandoning the partnership and dealing with the turbulence and fear that will accompany the decision.

Many couples have faced the same situation. Is it better to stay together and try to work things out and learn to live with each partner’s flaws or is the partnership irreparable and it’s better to face the uncertainty and fear of what’s next rather than continue to live in misery?

I don’t have an answer.

Only the respective partners including in this case the citizens of the UK have an insider’s perspective. Outsiders like me with only anecdotal experience with the European Union aren’t really qualified to tell anyone how to vote.

Related Episodes

179: Free Markets and the Great Famine

181: Does Illegal Immigration Help or Hurt the Economy?

237: Brexit Is A Mess – Lessons Learned

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