New World Disorder? Brexit, Trump and an outlook for the global economy in 2017 Nicholas Barr London School of Economics http://econ.lse.ac.uk/staff/nb LSE-Fundación Ramón Areces conference Madrid, 12 December 2016

Nicholas Barr, December 2016 New World Disorder? Brexit, Trump and an outlook for the global economy in 2017 My view before the UK referendum is set out in a Letter to friends, LSE blog My view the morning after the referendum ‘I hope I am wrong, but fear that – for the reasons set out in my earlier article – the referendum result will come to be viewed as a historic mistake. My sadness is not for my generation but for the 75 per cent of younger people who voted to remain’ Nicholas Barr, December 2016

Nicholas Barr, December 2016 1 Economic effects Reduced growth in the UK and in the wider EU, largely because of reduced trade Loss to EU of the net transfer from the UK Divorce costs: costs of disruption will be substantial and long-lasting Nicholas Barr, December 2016

Nicholas Barr, December 2016 2 Political stability For individual countries: nationalist movements For the EU as a whole: risk to the EU project ‘Leaving also risks destabilising the EU economically and politically. Marine Le Pen is already calling for a Frexit referendum, with a risk that populist parties in other countries, including Germany, the Netherlands and Denmark, could follow’ (Financial Times, 26 February 2016) Nicholas Barr, December 2016

3 International relations Both the EU and the UK will have less clout Cohesion within the EU might suffer Why does this matter? Possible weakening of US support Russia’s long-standing interest in a less cohesive Europe Nicholas Barr, December 2016

International relations, cont’d If the UK and EU are weaker, the US is weaker. These pressures enact what has been Soviet or Russian foreign policy for sixty years – divide Western Europe and destabilise and weaken the EU. See the powerful article by Garry Kasparov, Guardian 13 May 2016 ‘A “no” vote … will greatly extend the crises that the EU is already trying to manage. Geopolitically, a Brexit will weaken Europe’s ability to stand up to Putin’s aggression and the challenges of jihadism. The EU would lose a member that has one of its biggest military and diplomatic capacities, its main advocate of interventionism, and the strongest link with Washington. Brexit will threaten the global role of both the UK and the EU’ (Waking up to a nightmare: A UK exit from the EU would be a ‘lose-lose’ for both sides, LSE blog) Nicholas Barr, December 2016

Nicholas Barr, December 2016 4 Labour mobility Why does mobility matter? Greater diversity of content and approach has the profound implication of increasing the benefits of cross-fertilisation, including student mobility and labour mobility The circulation of skilled labour promotes competitiveness by improving the match between (a) the skills and interests of workers and (b) the requirements of jobs Student mobility contributes to labour mobility, not least because study outside a person’s home country increases cultural and language skills, making later job mobility easier Nicholas Barr, December 2016

Youth mobility is particularly important The provision of work permits for those with explicit long-term job offers and proven skills is not enough, since it ignores the reality of early stage careers which are highly fluid and rely on short-term contracts, internships etc. For example, one of the best ways for companies to decide who to hire is to allow large numbers of young graduates to work for them on a temporary basis as interns or agency staff Without youth mobility between the UK and the continent, companies and universities will be restricted to a smaller pool of talent See Let young people move: Why any post-Brexit migration deal must safeguard youth mobility, LSE blog Nicholas Barr, December 2016

Nicholas Barr, December 2016 5 Higher education Drivers of higher investment in skills Demographic Skill-biased technical change Students’ right to live, study and work in 30 countries Researchers’ right to live, study and work in 30 countries UK absence would be damaging both to the UK and the wider EU, given the UK’s weight in research See EU membership is not the only way to foster labour mobility. But it is the best, LSE blog Nicholas Barr, December 2016

The future is bleak for those with medium skills Source: OECD https://onedrive.live.com/redir?resid=BF5C7EEBD50CDCE5!28159&authkey=!ADdAR62CFodUjzY&ithint=file%2cpptx % 25 20 High level problem-solving skills 15 10 5 Low problem-solving skills -5 -10 Medium-low problem- solving skills -15 -20