Tyler Cowen and Steve Davies talk Theresa May, Brexit, and Europe (Live)

The UK is holding an important election on June 8th, so today we're bringing you some bonus audio on that topic. It was recorded at an event several weeks ago and features Tyler and Steve Davies of the London-based Institute of Economic Affairs. They talk about how the general election could shape the terms of Brexit, how much further the EU and even the UK might splinter, the prospects for the European left wing, and the populism underneath it all. Now, keep in mind, this was recorded shortly after Theresa May called for the snap election. And as is usual right now, a lot has happened since then. Nonetheless, we hope you enjoy the prognosticating. And we'll be back next week with Jill Lepore.

Conversations with Tyler is produced by the Mercatus Center at George Mason University. Bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. And for more conversations, including videos, transcripts, and upcoming dates, visit conversationswithtyler.com. Okay, Steve, you're the one with the British accent. Your country has called a snap election June 8th. Why did Theresa May do it, and how is it going to change the terms of Brexit? What's your take?

Well, the simple answer, of course, for any politician is she's called it because she thinks she's going to win. And improve her position in Parliament, and that's almost certainly going to be the case. Somebody very unkindly observed recently Abraham Lincoln's prospects when he picked up those theatre tickets were better than the Labour Party's right now. But more seriously, there are two other reasons for her doing this. One of them is that she wants a mandate for the kind of Brexit she wants to pursue. And the big argument now, I think, in Britain is not should we leave the EU or not. I think the British public broadly thinks, yes, we've decided to do this, let's get on with it now, including most of the people who voted remain. But the big argument now is what kind of Brexit should there be? Should there be one which involves Britain remaining in what's called the European Economic Area, which would mean access to the regulatory regime with a single market, but also accepting a whole lot of European regulations, obviously, and also free movement of labour, or should the UK go for a much more independent role, not apply for membership of the EEA? And that seems to be the one that the government wants to go for. And so she wants a mandate for that strategy, and that's what the other parties are going to argue against. The other thing is she wants to stamp her own authority on the Conservative Party. And I think what this election will do is complete a kind of transformation of the Conservative Party away from what it has been for quite a long time, actually. I think there's going to be a significant generational change in the British Conservative Party, and it's going to become much more of a traditional Conservative Party than it has been for quite a long time.

What struck me about the announcement, which to many people, including in her own cabinet, seemed to have been a surprise, is that the pound went up 2.7% right after the announcement, and that's quite a significant currency movement. Now, is this the right way to think about that? That she had her own backbenchers who were deep Eurosceptics, and now they're actually cut out of the equation. They don't have a veto anymore, so she can on one hand give a more centrist way of leaving the European Union, but on the other hand, due to your fixed-term parliaments act, when the next election has to be. That doesn't have to be right after March 2019, so she can again do the kind of Brexit she wants without the next election being a referendum on that, because that's now more put off. So no one thought she would do this, but I see the pound going up. I think of those two factors. I actually think she's much smarter than all the people who thought this wouldn't happen. And do you agree with that?

I agree completely with that, yes. She's postponed the— otherwise it would be very, very awkward. They would have been having an election a year after the Brexit negotiations were concluded, and that could have been very, very difficult. Now there's going to be a big gap. She will have time to sort out any problems that arise from the actual way in which we leave the EU. And also, a lot of people like the prospect of there being a decisive— and conclusive result in the election, which there's clearly going to be, I would say. And so yes, I think it is probably a very smart move on her part.

So how hard will the hard Brexit be? So Theresa May has said she's not going to take in migrants from the EU as a matter of law. Some may be taken in on a discretionary basis. She's making that a campaign pledge, so that would seem to rule out an arrangement like that of Switzerland or Norway and EU a CETA-like arrangement. That seems to mean hard Brexit since the European Union doesn't seem to be giving in. What rights will the London financial sector have to sell product on the continent? What will rates of tariff be? Will it be default WTO rates, or what will it look like, say, 5 years from now?

That is very tricky because in terms— there's 3 different issues there. One of them is that the government is deciding to go for, I think, a hard Brexit. I agree with that. Mainly, I think, for the very bad reason that they want to impose controls on immigration from the EU, and they can't do that if they're part of the European Economic Area, because the European countries quite reasonably, I think, say, look, there's a whole package deal here, and free movement of labor is part of the package deal. You can't pick and choose what you get. So they've decided, I think, very incorrectly that they, for political reasons, they don't want to do that and therefore they're not going to be part of the EEA. Now, the question then is, well, are they going to be able to get a trade deal with the EU of the kind of Swiss type before the deadline fall of 2019, when the 2-year ticking clock finally hits midnight? My own view is probably not, actually, because any deal has to be agreed by the 27 remaining members. And getting all 27 of them to agree to it is very, very difficult. Now, this is a case of British strategy coming back to bite them, if you will, because it was British strategy to expand the EU so enormously in the aftermath of the collapse of the Soviet Union. And as Sir Humphrey explained very lucidly to Jim Hacker in a very famous episode of Yes Prime Minister, the reason for this was to actually makes it so that nothing could get done. And that was indeed the reason. As he told— as he told Jim Hacker, the goal of British foreign policy for 1,000 years had been to bring about a disunited Europe, which is completely true. And so the problem is therefore I think we're not going to have a deal at the end of the 2 years. So I think we are probably going to need either to revert to WTO rules or I think more more likely we will have an interim agreement put in place. That's where the hard argument will be about what that interim agreement is. Now, as to the City of London, there's a lot of talk at the moment that the City of London is going to lose its so-called passporting rights, which means that it can conduct business in euros. Last year, before the referendum, the City of London did just under €1 trillion worth of Euro-denominated business. It's a lot of business. So if they were to lose that, that would be an enormous blow to them. The European Central Bank would dearly like to yank that privilege because it didn't want them to have it in the first place.

But they have nowhere to put it.

But they have nowhere to put it. The problem for the Europeans, however, is that you can't build up a major financial center like the City of London in somewhere like Frankfurt or Paris overnight.— it's a much more drawn-out process. So I think in the medium term, at any rate, the City of London probably will be given passporting privileges, but in the more medium term, a lot of business will shift to the continent, to Frankfurt primarily, but also Paris. But you're talking about a 15-year kind of time horizon for that, rather than an abrupt cliff-edge transition, I think.

And now, if you don't consider me too rude, I'd like to ask a if your country is falling apart. So in Scotland, Nicola Sturgeon is asking for, some would say demanding, a second referendum. You could argue that ever since devolution, the attention of the Scots is focused on their own politics in a way that makes them feel much more separate from England, and that won't change. And of course, they feel that their votes were disregarded in the decision for Brexit. Brexit is now quite hard. SNP, the Independence Party, has done very well in the most recent elections. It's at least— we're not sure how well they'll do this time around, but is Great Britain going to splinter because Scotland will leave? And you might say, oh, that would be insane. What currency would they use? How would they bail out their banking system? The price of oil is down. But given that the United Kingdom voted to leave the European Union, which many people advised against. Seems we can't dismiss the possibility that having said A, one then says B. So is Scotland going to leave, yes or no?

I think— I actually think— no, no, actually, I would like to say yes, but I think no.

You want them to go?

Oh, I definitely do.

Tell us why.

My attitude, and the attitude actually the majority of English, is that that it would be pretty good to get rid of the bloody Scots. If there was a referendum on Scottish independence purely in England, there would be a clear majority in favour. With or without the oil in the North Sea? Well, that's a diminishing asset anyway, actually. The production rate from the North Sea is declining dramatically. I think Nicola Sturgeon has a perfect right to call another referendum, because she did say that if there was a major change in circumstances, they would call another one. And quite clearly there's been a major change in circumstances. And as you rightly say, Scotland's view on Brexit is radically different from that of England and Wales. Now, the whether or not she will get a vote in favor of leaving the UK is more open to question, because the problem there is that leaving the UK, if the UK is still in the EU, is not quite as frightening as the prospect of leaving the UK if the UK is outside the EU. Because A, that requires the, the EU, if the goal of it is to stay in the EU, to give Scotland membership. And Spain in particular is probably going to veto Scotland becoming a member of the EU because they do not want to give encouragement to separatist movements, for obvious reasons. But also The other problem is that that would mean a hard border between England and Scotland, and that's a lot more scary than the prospect of being two separate countries but with still no hard border at all. And the Scots as a nation are actually very small c conservative. So I think that actually, if push comes to shove, they will very narrowly vote to remain in the Union. Personally, I wish they would vote to leave. And quite apart from— all joking aside, I think there's a very good reason for that, which is— well, two good reasons. One is that my general view is that small to medium-sized countries, countries up to about 7 million people, empirically do better, have better governance, better economic policy than large countries, because public choice problems are less severe in small countries. And the other thing is that Scotland has have very, very severe social problems, basically Greater Glasgow, and they're not going to address those problems in a mature way as long as they can blame them all on the English. At the moment, all the problems of Glasgow are pushed onto the English taxpayer, whereas if it was the Edinburgh taxpayer who was having to pick up the tab, that would really concentrate some minds very sharply. And if any of you know anything about the rivalry between Glasgow and Edinburgh, Well, you know, you'd realize that that would— something would be done to sort out Glasgow pretty quickly if that was the case. And so I think Scotland actually would have to sort its own problems out in a way that it's not going to do if it can blame everything on the hated English. So I would actually wish that they would vote to leave, but I fear that they will narrowly decide to stay with us. Now, on the other hand, Ireland, which I know—

For the Shetland Islands first, there's a growing separatist movement in the Shetland Islands. Oh yes, well, there's now 400 people in support. Are you hoping for them to leave Scotland?

I would actually, yes, I would actually, yes, I would. Uh, the Shetlands would have a wonderful future as a kind of Nordic little island. They, they— that's where the oil is actually. Forties and the other two major fields are both in Shetland waters. And Shetland actually historically not a part of Scotland, part of Norway, came to Scotland just a few hundred 100 years ago.

So my people, the Irish, now there's no border whatsoever between Northern Ireland and Republic of Ireland. When you drive from one to the other, the sign changes from kilometers to miles. You get a different cell phone signal. But so many people from Ireland proper now have summer homes in the north, or they're connected in some way. There are actually homes built that straddle the border. You go from one room of the house to another and you go from one country to another. There's been peace since the Belfast Agreement. Is it now not truly inconceivable to reinstitute a hard border between the two Irelands, and what will be done because of this fact? Will we not end up with the border being between Belfast and Heathrow Airport rather than along Donegal County between the two Irelands? Tell us.

I think what will happen is that the Irish government and the British government will agree that the Irish government will do the British government's dirty work and have all the border controls and checks in places like Waterford, Cork, and Dublin, rather than— which is what happened before 1971— rather than what you suggest. Because nobody, I think, in their right mind wants to have a hard border between Northern Ireland and the Republic. It's a complete joke anyway. I mean, if you— the kind of things you talk about are not new. Even when the Troubles were going on, and all the blockhouses and when the fences were around, it was still very hard to tell where the border was in places like Fermanagh and South Armagh. So nobody really wants that. I actually think though there is a— while I think Scotland will stay in the UK, I think there is quite a realistic chance that Northern Ireland will vote to join the Republic, or join the Republic under some kind of condominium, codominium scheme. I think that's actually quite possible because for one thing the demographics are changing. The next census is probably going to show a Catholic majority in Northern Ireland, which doesn't necessarily mean a majority for union or the republic, but it's a major shift. And also, increasingly, the younger generation of the Protestant population in Northern Ireland are not as attached to the historic Ulster identity as the older generation are. And I actually think that it's quite likely that there will be a significant move, if not fully towards the United Ireland, in the direction of the United Ireland as a result of Brexit. I think that's one of the— which also I think would be a good thing in many ways, and I think that's another one of the consequences that will follow from it.

And why is it there's a movement— it has different names, some people call it populism, I'm not sure that's the right word because it's not always that popular, but in England we've had it, in parts of the United States you don't really have it much you don't have it much at all in Spain. It's growing in France, especially with young people. We'll see how strong it is. It was strong in the Netherlands, but it failed, though, because the more centrist parties moved sharply to the right. Two interrelated questions: why have left-wing parties in so many countries become so weak? So Labour in England is just a joke, right? It's not even a joke. It's one reason why Theresa May can call another election. Social democratic parties across the continent are looking extremely weak pretty consistently, but in some but not all other countries, there are these rising populist or alt-right movements. I mean, what's your take on the broader developments that are driving this new and actually pretty startling configuration of loyalties? How do you see that?

Well, the thing is, this is the predominant trend. The thing you describe is a predominant trend throughout most of Europe, and I think many other parts of the world.

But some parts are immune too. We want to explain the cross-sectional variation.

The immune bits are places like Spain, Portugal, Ireland, Japan.

Is it a Catholic thing?

The major thing— I don't think it is, because Italy's got populism, France has got it, it's pretty strong in parts of Germany as well. I think there are two things going on. One, well, first let me say a lot of people say this is due to a economic factors, it's due to a feeling of disaffection by the losers from globalization. I don't think that is actually true. You may disagree with me on this, I'll come back to you on that in a moment. I think this is about the politics of identity. I think what is happening in many countries is that a lot of people feel that their identity is threatened by globalization, by the social, cultural, technological changes, mass migration, a whole range of other things that have taken place in last 20 to 30 years. These are people who basically want the world to stay roughly the same. They feel threatened by radical dramatic change. They feel that their identity is under assault. And what they are coming to support is a kind of very unpleasant politics which combines, as in the case of Marine Le Pen, for example, very left-of-center economics. She's well to the left of most most socialist parties in economics, with anti-globalism, cultural traditionalism and authoritarianism, and anti-immigration policies. And this is politics which is on the rise in most parts of Europe. Now, the other question you asked is what's happened with the Social Democrats. Well, the big story in the Dutch election actually, which did not get covered, was the complete collapse of the Dutch Labour Party, one of the great historic of Dutch politics, it collapsed from 24% of the vote to just under 6% of the vote.

And why are these parties so weak? And Labour in England?

For a very simple reason. Because basically they are trying to appeal to two radically different and increasingly hostile blocks of voters. On the one hand, traditional, typically older, white, working-class voters who are economically left-wing but culturally very traditionalist and very conservative. And on the other hand, a more metropolitan, younger, very green, very environmentally conscious, very PC, you might say, culturally leftist group who basically have the same kind of left-of-centre economics as the first group, but in every other respect are simply on a totally different agenda. And it's almost impossible to appeal to both of those two groups at once. And social democratic parties in most parts of Europe are losing their traditional working-class base to the new populist politics. That's what's happening. Now, if I may, I'd like to put a question to you now. Sure, sure. What I would say is, I mean, first of all, how do you see recent events in the United States fitting into this kind of broad scenario? Do you think that the kind of account I've given of populism in Europe is a good way of understanding or explaining what happened in the election last November or other trends in American politics in the last few years?

I think it's much more cultural and less economic than people think. If you look even at a state such as West Virginia— I just wrote a column about West Virginia— we all talk about how poor it is, but per capita income in West Virginia, it's about three-quarters of the US national average. If you take into account the fact that it's cheaper to live there, it's actually not that far from the national average. There are obvious problems with opioids, low labor force participation, but that actually means the other people in West Virginia actually have to be awfully productive. The per capita income in West Virginia in real terms is about equal to that of France or Japan. Now those are poorer countries than the United States, but if your theory is all about the extreme poverty of West Virginia, and the state is falling apart, when in fact it's been growing a bit. It's gained 50,000 residents over the last 15 years. Not a lot, but it's not being massively depopulated. And your theory is they're all opting for Trump or populism or alt-right because they're so poor. It doesn't make sense. I think there's increased sorting of this country by education and what is sometimes called a coastal elites phenomenon, though you find it in Ann Arbor. And Austin, Texas, and some places that aren't the coasts. And I think part of it is because of the internet. There is a split of sympathy. So say parents, rather, they might have once said, "I don't want my daughter to marry an X," some ethnic or racial group. And now it's, "I don't want my daughter to marry a Republican," is a much stronger sentiment. And parts of the country are realizing they should rebel against that. I don't feel they're doing so in an especially effective way, but that's what I think is happening here. There is slow wage growth, and that creates grievances where expectations are not met, and that feeds into the cultural problems. But I think also in Europe, it's very often a more cultural thing. So Spain has relatively recent fascism. So they're somewhat inoculated because there's been a lot of immigration to Spain. Ireland didn't have fascism, but it had the issue, obviously, a lot of violence. So the idea that some kind of alt-right view comes along that flirts with the idea of being violent on Twitter, it's not going to be a big seller in Ireland. And I think it's really history being recreated in different places in different ways.

Yeah, I tend to agree very much with that, actually. And what I then ask you further is, well, you say that— and I agree with you, as I say— that the economics is not what's really driving this. It's more a cultural phenomenon. But on the other hand, how do you think politics is reacting to something you've been writing about for a while now, which is what you see as the stagnation of innovation, the problems of lack of income growth for large parts of society. What effects do you think this is having on the broader kind of political media that we're living in?

I would just say we have so much debt and have some high implicit liabilities, and furthermore, we're committed to paying off interest groups that we're actually now at a margin. We can't do that for everyone now. So you have Republicans controlling every branch of government. They can't agree on tax reform. They can't agree on how to alter Obamacare, at least at least not yet. And those are signs it's not really gridlock in the 2011 sense, but we don't have the resources to make deals by paying off the complainers. And so on all sides, a lot of parties are ceasing to cooperate, and it's more kind of incoherence than a gridlock. But with that, we must end, and thank you all for listening. Thank you, Steve. Thank you. Thanks for listening to Conversations With Tyler. You can subscribe to the podcast in iTunes, Stitcher, or your favorite podcast app. And if you like this podcast, please consider rating it on iTunes and leaving a review. This helps other people find the show.