The refugee crisis has also added to this concern. This week I was speaking with a number of Greek companies and I asked the chief economist of a large Greek bank what economic impact the refugees are having on the economy. Specifically, I made the observation that there must be significant transport and logistics systems in place to stimulate and support the flow of people into Europe and that Greece seems to be a focal point in the effort. I asked if the underground operators of such a system were keeping the cash in the Greek economy or if it was flowing out to Russian or other operators. The response was that the money was staying in the country. What the economist said next was more relevant. He indicated Greece is receiving about EUR 700M to support building shelters and other infrastructure for the refugees. Not only are Greek operators most likely profiting from and creating a flow of refugees but the EU payments represents about 0.5% of GDP to the distressed Greek economy. So Greece is highly incented to benefit in this politically charged issue, in contrast to the negative headlines and cost burdens ascribed to refugees who move on to other countries. So it appears the refugee crisis not only focused greater attention on the payee/payor inequalities but the negative refugee headlines during the Brexit vote may well have boosted support to leave.
Although less politically visible, many companies across sectors/industries have expressed concerns about the over-reaching regulations from Brussels. While this is not a populous issue, it highlights the fact that many companies now believe the regulatory burden of their home country compounded by Brussels is impairing their ability to be competitive in the global economy.
There are many arguments why an economic union has overall benefits; these are well documented in economic theory. However, as the BREXIT vote demonstrates, the political mood has changed in Europe. While the benefits of a union are understood by economists, the perception that they accrue to some but are paid by others means the social contracts have to be rethought. We think the exit vote will ultimately be healthy for the European Union. The original treaties negotiated that led to the union have developed unintended consequences that may no longer work for all members. It is logical for states outside the union to desire to join and earn the right of membership. There must also be the risk that violating terms of the union means an exit for non-compliance. If no rule exists, other European Union “payors” may decide leave. Europe must re-think the political contracts, as all politics must adapt to economic reality. We are optimistic Europe will go through a period of adjustment as it renegotiates with a separate United Kingdom and in this process it will have the opportunity to improve upon the overall project.
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