Exit, Brexit, Voice And Loyalty

When thinking about the state of affairs in Europe, including post-crisis developments and Brexit, Albert Hirschman’s classic book Exit, Voice and Loyalty comes to mind. Hirschman noted two ways in which customers can respond to a firm´s deteriorating performance: switch to another product, or complain to management. Thus, they can exit or they can exercise voice.

The basic model discussed by Hirschman can also be applied to nation states and perhaps also to international organizations. In the cases of nation states Hirschman’s model brings for example into focus the problems created by freedom of movement between radically discrepant economics and politics. In the case of international organizations, when are the benefits to join greater than the costs associated with membership? If dissatisfied, when would a member state use voice and when would it consider exit?

Nation states

During EU enlargement, many European transition countries became EU member states, including the Baltics that previously had been provinces in the Soviet Union. The fall of the Berlin Wall in 1989 marked an end to communist central planning. It was a dramatic event. Many people saw it as a victory for free market policies. The Baltics moved from communist-style central planning to these very policies. From one extreme to another. This did not produce favorable results during the 2008 crisis with austerity causing a sharp decline in GDP and high unemployment. Slow post-crisis recovery has stopped convergence with richer EU member states in its tracks.

Citizens of nations, in this case the Baltic States, have essentially two possible options when they perceive a decrease in quality of live for their citizens. They can exit i.e. leave the country; or, they can voice their concern i.e. attempt to repair or improve government policy in their country through communication of the complaint or proposal for change. The easier availability of an exit option, the lower the likelihood of voice.

During Soviet times, it was dangerous to protest bad policies and the border was closed. Thus, both exit and voice were dangerous. With EU accession, protest became possible and the borders were opened. Citizens dissatisfied with government policies could either use voice or they could exit. Given higher salaries and social benefits in countries in the EU’s common labor market such as Great Britain and Germany or in Scandinavia the exit option became feasible. This triggered large-scale outward migration during 2008 crisis, especially from Latvia and Lithuania. Mostly of young people.

It has been argued that governments cannot survive in the long-term if they implement policies against their own people’s interests. But in countries such as the Baltics that had been under Soviet rule for decades there was no tradition of using voice and protest. Exit option became a favored solution.

The exit option for citizens of transitions countries is not all bad if the flows are circular. That is, if people migrate to gain new experience or education and return. But there is damage to long-term economic growth if the flow is the one-way outward migration of the youngest most competitive segment of the population.

The EU has sometimes taken advantage of this situation suggesting that its Southern European member states, including Greece, should implement similar austerity policies as did the Baltics. But Greece has a different history. It never was a Soviet republic. Nevertheless, the EU sends a clear signal. The austerity architect in Latvia, former prime minister Valdis Dombrovskis, became EC Commissioner and Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union! This same European Commission assumed a role as an agent of the creditor nations in the Euro Area, pushing austerity on its weaker member states, including the Baltics and Greece, to safeguard the richer EU creditor member states. The results have been miserable.

Brexit

The UK has been a reluctant partner in European integration, not adopting the euro and not participating in Schengen. If dissatisfied with the EU, it could have used voice and demand change, or it can exit (as it has chosen to do).

One would assume that a country like the UK, the third largest economy in the EU, had a voice in the EU system. London is Europe’s financial center. Britain is central to the transatlantic link. It has a strong military critical for Europe’s security and for NATO. Under most US presidents the White House would likely make the first call to 10 Downing Street in the event of global economic or security crisis. Why would a country with such privileged position want to leave the club when access to the EU single market is also central to its continued prosperity?

The UK played a central role in creating EFTA in 1960. It decided to leave in 1972 for what was then the European Economic Community. Today EFTA member states have access to the single EU market via the EEA Agreement. But EFTA/EEA member states have no direct influence on the laws and regulations governing the EU’s single market. For smaller European countries such as Norway and Iceland this sovereign deficit is acceptable; the benefits have been assessed to be greater than the costs. What is the likelihood anyway that Denmark, Finland and Sweden, all EU member states, will agree to something in the EU that Iceland and Norway cannot live with?

Initially, the EU was to be a ticket for prosperity for the countries joining. But this is history. Its post-2008 economic performance has been dismal. Only few large countries have a voice in decision-making. For countries wishing to leave, there are no obvious exit options except perhaps for smaller countries, such as an independent Scotland wanting to maintain access to the single EU market via the EFTA/EEA agreement. What is Britain doing with Brexit? Has it accidentally created incentives for its own disintegration?

The UK checked-in in 1973 but check-out looks messy, with EU membership appearing as the only viable game in town for the moment. It should have used voice to make EU better. Not exit.