Opinion – The Macroeconomics of Brexit: Motivated Reasoning? – Paul Krugman – The New York Times

Nobel Prize winning economist, Paul Krugman, in his NYT op-ed blog accuses the economics profession of over sexing fears of post Brexit referendum  short-term consequences. He argues that sloppy thinking is always a vice.

Source: The Macroeconomics of Brexit: Motivated Reasoning? – The New York Times

To be absolutely clear, Krugman confirmed that the long run economic consequences of Brexit are massively damaging. Because of the loss of trade, he expects an output loss of 2-3% in perpetuity. This is a truly staggering loss of UK wealth (see earlier blog).

However, Krugman argues strongly that the short/medium term consequences have been seriously overstated by the economics profession and are not based upon sound economic theory. This is significant because politicians, like former UK Chancellor, George Osborne, hyped up the consequences of Brexit.

Regular readers of this blog will know that I campaigned passionately for Remain. But I’m a realist. I’m beginning to adjust to a post-Brexit world.

But it’s not just about the trade and immigration deal that the UK strikes with the EU and other countries.

It’s very much about other radical policy changes in post-Brexit Britain. The UK must pay for the permanent loss of output amounting to 2-3% in perpetuity. How this is achieved deserves some serious analysis and debate. Here are a few straw-man suggestions:

  • Radical change to public services at both the national and local level
  • Higher national productivity
  • Far greater innovation
  • Increased exports
  • Massive increase in skills
  • Reduced energy consumption
  • Reduced waste
  • Reduced population, e.g. export people/ lower immigration
  • Reintroduction of national service




Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis | Cato @ Liberty

Map of Cyprus with EU flag

Map of Cyprus with EU flag (Photo credit: Wikipedia)

This is an outstanding must-read article from the Cato Institute. It argues that unlike many other European nations, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

Source: Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis | Cato @ Liberty

The article puts Cyprus on a pedestal as best practice and this will be good for Cyprus to attract inbound investment and borrow money in international markets.

However, the article ignores the political and social context.

Firstly, Germany gave Cyprus a very raw deal because she was small. German policy makers deliberately tried to destroy Cyprus business with large Russian companies.

Secondly, unlike bigger countries like France or Italy, Cyprus could not manipulate the rules of the fiscal compact.

Thirdly, the Cyprus example highlights that the EU economic engine is a sham. There is no cohesive energy strategy that capitalized upon Cyprus’ offshore gas reserves. Meanwhile, Angela Merkel, in a box domestically because of her refugee policies, was able to get the EU to stomp up EUR3 billion for Turkey.

The bottom line is that it is not possible to consider economics in isolation, social and political policies must be dovetailed.

In the case of Cyprus, the real prize will come from reunifying the island.