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There were certain days that changed the world. Brexit was one of those days. British people will have the final say, in an in/out referendum. Watch out. Here we go. One story dominates the news today, and it is Brexit. Brexit, Brexit, Brexit, Brexit. What has been one of the most divisive votes. It was staggering. History unfolding before our very eyes. The population at large doesn't trust the establishment. The pasty of independence.
Brexit changed the way that politics is done, not only in the UK but beyond that too. People want to take their country back. Passions that are not unique to Britain. It was a real once in a lifetime moment. But also sort of manifestly an act of economic self-harm. Thing is, not everyone and their dog arrived at the polling station with an economics textbook in hand or paw. It's not even the main thing that mattered to a lot of people who voted to leave.
A cosmopolitan elite had been trying to redefine Britain as a multicultural, multiracial, multi-ethnic society and the Brexiteers said 'no'. We are a particular people, a product of a particular history with a particular set of roots. We need our country back. And so on the 23rd of June 2016, more than 33 million people cast ballots on a relationship that had shaped Britain's laws, trade and politics for almost half a century. 'Yes' is now showing 67%. The British people have spoken and the answer is 'we're out'.
By margin of 52 to 48, they said Britain should exit the European Union This is our Independence Day. It might have felt shocking, but it wasn't quite as surprising as I think a lot of people look back and say that it was. But it was a political earthquake whose aftershocks were felt around the globe. It shifted the world from a world which seemed to be getting ever closer in which globalization was the dominant theme into a world that was becoming ever more fragmented. Brexit has ushered in a decade which has left Britain Europe, the West, in a worse shape than it started it. The issue is, would it have done much better without it? And it is possible to work that out. To understand what happened,
we can compare it with a model of what didn't. This is that story, why Brexit emerged, what it cost and what might come next. I remember the day when we voted on Brexit. I took my dogs for a walk to the local voting booth. The dogs I think were pro-Brexit. Dogs tend to be pro- Brexit. I was anti-Brexit. Do you want me to say that I voted leave? Because I did. The main thing I remember from the actual day was being woken up by my husband very early and him saying, you've got to go to work
because the result isn't quite what we expected. Phenomenal events taking place here. No one expected this result. Everyone is stunned. I'd written an essay called The 20% World, which pointed out that if the odds on Trump being elected on Brexit, on Corbyn being elected and Le Pen being elected in France, they were all around 20%. What was staggering was that two of them were going to happen in one year. Brexit was not just a British upset, it was an early warning light on the dashboard of globalization. When the results came in, there was shock.
People were not expecting this, the markets weren't expecting this. The smart money thought that it was Remain. I was sat at my desk, watching the pound plummet as the results rolled in. The pound has taken a thumping. Every single industry group is trading in the red. I realized that we were at the beginning of a very profound historical change. I do not think it would be right for me to try to be the captain that steers our country to its next destination. There were some in the European Union who looked at a result like that and thought, surely this is gonna have to be rerun.
It's such a narrow margin of victory. I quote, 'damn a bad day for Europe'. The UK is no more part of the club. I regret that very much. People said that the money was smart, the money wasn't smart. Virtually every economic expert told the British people that this would be a very painful thing to do, and yet people still voted for that. The campaigns and the run up to the vote were unexpectedly aggressive. I really remember when the MP Jo Cox was murdered in her constituency.
It felt symptomatic of the febrile state of UK politics. May we and the generations of members that follow us in this house honor Jo's memory. The fury seemed out of all proportion to what our relationship with the EU actually was. And it was not a fiscal union, it was not a military union. At the heart of the Brexit debate was a disconnect between the winners and the losers of the global economy. The winners didn't understand how much the losers had lost and they didn't get any sense of what you lose when you lose a stable manufacturing job.
We all come to work to be better off for your family, don't you? Now, I'm not sure if I've got that stability anymore. A few days before the vote, there was a big broadcast audience event on the BBC. I was part of the presenting team, surrounded by people who I didn't know which way they were going to vote, and there was a moment when Boris Johnson said, I believe that this Thursday can be our country's Independence Day. And I saw and felt half of the room erupt around me, and it was really then that I realised how strong the sentiment to leave the EU was. But there was a snag.
We voted to leave, but we didn't know what voting to leave meant. It was a sort of blind Brexit. People voted saying they didn't like the status quo of the Europe. They wanted to go out, but they never got a vote on what the alternative was. The leave groups were disparate, not connected, and in many cases looking for different things. One vision of the future was a sort of little England vision. We'd retreat to a sort of hobbit world. We had a group of people who thought this would be a chance to pump more money into the NHS, put up walls to immigrants and so on.
Another view of Brexit was that we would be a global power. 10 years later, we can begin to assess what actually happened and compare it to what didn't. Don't worry, that'll make sense in a minute. The economy immediately after the Brexit vote was much more resilient than people expected. We were told that the housing market would collapse, that there would be apocalyptic consequences for the economy, But actually consumers who are the biggest parts of the UK economy, continue to spend.
You can argue about the economic effects relentlessly. Well, that is a relief since we're about to. But it's complicated. And the reason for that is that you've had a lot of economic shocks hit the UK since then. The pandemic, the energy crisis. Various government policies that have also been very bad for the economy in particular are energy policy. It's impossible to say that having the most expensive energy in the developed world hasn't made a significant difference. So disentangling the Brexit effects from all those other effects is really, really difficult, But perhaps not impossible. And here's how.
What we've done is bring together a sample of 23 OECD countries and pick out the economies most similar historically to the UK, and use those countries as a guide for how the UK might have been expected to perform- Had it remained in the EU that is. And that's what you're seeing here, the red line being the UK's actual GDP, the white one, what our model initially suggests it could have been. And what we see is a 10% hit to the economy. Which for the UK's three trillion pound economy means 300 billion pounds. So clearly that's pretty massive. But if you look beneath the hood, it shows that most of it is driven by the performance of the US and Irish economies.
Now the latter's GDP is heavily impacted by the activity of multinational companies, so there's a case for removing it. So if we exclude Ireland, we reduce the hit to 6%. And then there's the question about the US economy. It accounts for about four percentage points of the total gap, but a lot of that is nothing to do with Brexit. The US didn't experience an energy shock in 2022. It also benefited from significant fiscal stimulus and AI investment. And so if we adjust for all that too? We get down to a number between two and four percent of GDP, which we think is a reasonable estimate for the hit to the economy.
This figure is far away from the initial 10% calculation, which we've shown to be too great, but even so, two to four percent is still a hit. No matter which way you cut it, it's quite hard to come up with a positive number for the impact of Brexit. It would be very foolish to say that leaving the EU had been an absolute negative, just as it would be very foolish to say that being a member of the EU had been an absolute positive. On all the things to do with AI, Britain has probably benefited a little bit by being outside the European Union, which most of the tech giants in America are slightly scared of. And of different days of the week,
Britain's been quite good at getting on with Donald Trump. Financial services in particular have done pretty well in the years since we left the EU. Much better than goods exports, for example. We're a massive destination for VC funding. A large number of the investment funds that are based in the EU are run out of London. We're a massive center for derivative trading in the Euro. But there's no denying it, Brexit did put us on a different trajectory.
There was some real economic impacts and potentially some much larger political ones The most surprising thing that happened is the degree of political chaos it has unleashed. This Parliament is a disgrace. The political infighting was extraordinary, cross-party and relentless. For goodness sake Prime Minister, won't you just go? This government has no mandate for the vicious form of Brexit it is pursuing. You know, the economic impact, it almost seems like a sideshow relative to that.
We've heard from, I think it's five prime ministers since Brexit. Cameron didn't try and deliver Brexit. He simply resigned. Theresa May tried to deliver it and resigned. Boris Johnson tried to deliver it and resigned. Liz Truss resigned. And Rishi Sunak was eventually defeated in the elections. What's interesting about Brexit is it redivided British politics along completely new lines and it's ended up the two main parties, particularly really the Conservatives being very wounded by it.
The fragmentation is clear when you look at how people said they'd vote in 2016 and compare it to how they said they'd vote this year. The pie has become notably more colorful. Good news for chart designers, less so for members of Parliament. I feel like a pawn in a big game of chess. Uncover more at bloomberg.com/videos. I think there is a link between the divisions within and what we see now, an age of greater multi-party politics in the UK.
Brexit still governs a lot of the kind of dividing lines in Britain. It has contributed to the stagnation that leads to popular discontent. Those who had previously been trusted to make decisions sitting in Westminster, they're learning to live with much reduced credibility and much reduced room for manoeuvre. Is time running out for you Prime Minister? We lost our ability to focus on the really fundamental things that matter, how to improve our productivity, which is dismally low and how to improve the quality of our government.
Our policies around our tax regime and our energy regime, how we employ people and how we pay to employ people, our social care. I think one big lesson of the last few years and indeed the whole Brexit experience is that economics is not the only thing that matters. Brexit was a big moment for expansive political promises about the golden horizons that lay beyond the result. We will do a new deal, a better deal, And for many people that has not been delivered.
The Brexit vote was driven to a very, very considerable extent by the fact that immigration was rising in this country and the fact that the political elite was constantly promising to control immigration. Enough is enough. And failing to deliver on that promise. In the decade before the referendum, migration climbed towards record levels reaching a peak just ahead of the vote. What many people thought when they were voting for Brexit was that there would be a reduction in numbers. One of the great expectations was that a fall off in immigration would improve employment prospects and wage prospects in some of the left-behind areas.
But of course, what actually happened there was a massive increase in immigration. That increase is what you are seeing here, but what's important to note is origin. Since 2016, the proportion of those originating from the EU has decreased, but the number of arrivals from non-EU countries have gone up. They went up for practical reasons because Boris Johnson as prime minister was desperate to fill a lot of gaps in the labor market that had been left after COVID. In recent years, small boat arrivals became a defining
symbol of the Brexit era, convincing many voters that the country still hasn't taken back control. And this is why Brexit has become this self-reinforcing process because as the number of immigrants have increased, the people who voted for Brexit have felt cheated. People were made big promises by leaders who largely did not stay the course to deliver them, and I think that has had a widespread impact in unleashing a disillusionment, a frustration. A fuller picture now emerges. Brexit was a promise of control, prosperity and more money for things like the NHS. Three of Britain's great pillars after tea, the monarchy and apologizing.
I'm so sorry! And so far the data show the results of that promise to be a bit underwhelming. Meanwhile, pandemics, wars and energy crises exacerbated resentment and frustration that everything's just a lot worse and a lot smaller than it used to be. And not just in Britain, Brexit was domestic politics with foreign policy consequences. What it did was to set off a sort of populous revolution that spread around the world. There is a new sheriff in town. We want a piece of ice for world protection. Because of the world that Brexit ushered in, a much more nationalistic one and one where America's tried to go in a different direction and Europe's going in a different direction,
competing nationalisms are suddenly to the fore. The idea of the West uniting to deal with, most obviously Ukraine, now that has all gone somewhat into reverse. I've empowered you to be a tough guy and I don't think you'd be a tough guy without the United States. Europe and America together is a very, very hard thing for anyone to stand up against, but when they're running in different directions, it's not a great look. The forces that Brexit unleashed created not just a more fragmented world, but a world which is divided into big trading blocs.
The European Union, the United States, and to some extent Asian countries. And that leaves Britain out isolated on its own. There's less reason to talk to us if you are the US for example, because we are not that way into to Europe as a, you know, route to influencing Europe. There's less reason to pay attention to us in the United Nations. You look at political debate, it has always been full of emotion, anger, many different things which really involve the heart more than the brain.
I think what's interesting about politics across much of the West since the vote is that it's become much more about anger, injustice. People protesting about a world they often don't understand. And the strange logic of this anger is to demand madder music and stronger wine. So instead of saying, well, perhaps populism is a mistake, perhaps we ought to be a little bit more pragmatic. You say, well, let's try harder to deliver these impossible dreams. In Britain, politicians who speak the language of betrayal and unfinished Brexit business have found a large audience.
A single politician, Nigel Farage, who had most involvement in making that Brexit happen is the favourite to win the next election and be prime minister And that is completely shaking up British politics. They're an absolute disgrace. The prospect has opponents, therefore pushing ever harder in the other direction. Some advocate rejoining the EU, something a recent poll suggested 52% of the British public would now support. In the last four years, two prime ministers, Rishi Sunak and Keir Starmer have sought to bring the UK closer to the EU with agreements and attempts at agreement in different areas that really matter.
Defence, security, immigration, economics. Many of the easy solutions to the Brexit problem, which are Britain having a closer but still rather loose relationship with the European Union seem very attractive, but they're not actually all that practical. Any move closer to the EU also runs into two familiar problems. Britain still dislikes being told what to do Careful. And Europe isn't especially keen to start convincing it otherwise. It is time to leave Brexit behind. My guess is that Britain ends up with some kind of version of an associate membership of the EU and yes, that would involve Britain having
to take some rules in a way that it might object to, but it would give it access to that much larger market and it would help the European Union as well. One of the other tragic consequences of Brexit is the European Union has seen one of the biggest economies in Europe leaving and leaving for very specific reasons to do with free movement of people and has not learned anything from it. I think the most optimistic version of what you could say is you could say, well, this was a test case for democracy. A country votes to do something that it knows to be a sort of act of self-harm, and yet still, there is no challenge to the idea of democracy.
It's still the core of everything that Britain does. Perhaps over time we'll be able to see it as a moment that reshaped alliances and relationships and that is a necessary thing for nations and regions over time. The future has to involve leaving the arguments about Brexit behind and focusing on the things that are really holding the UK back today. I think the big lesson for economists is that, yeah, there's, there's more to life than economics. The sort of chastening lesson for policy makers was that even when you think the economy is doing well, you think people are being well served.
If you are leaving a significant chunk behind, given the chance, they will punish you and they'll punish the system and you won't necessarily get a do-over.
