Conventional wisdom says the upcoming EU Referendum pits those concerned about economics against those concerned about immigration. Yet many leading Leave intellectuals have long argued that the UK, outside of the EU, would not only be more free and democratic, but more prosperous.
What is their case? It rests on two components. The first is a critique of the supposed benefits of remaining in the EU (on jobs, prices and trade). Secondly, they ask a broader question: “What governmental institutions stand the best chance of enhancing prosperity for the British people in the coming decades?”
Economics all too often ignores the role of institutions – what is difficult to measure tends to be ignored. In this regard, the Treasury’s recent analysis of the supposed economic impact of Brexit was partial – merely looking at effects on trade and FDI of Brexit on a static basis. For starters, the study assumed away any benefits to leaving: we’d supposedly fail to utilise any of our new found freedoms to sign free trade deals with non-EU countries or even to deregulate. But it also, crucially, ignored the potential evolution of the EU.
First, let’s debunk some myths. We are told the EU is ‘good for jobs’. Given three of the four European countries with the highest employment rates – Iceland, Switzerland and Norway – are not in the EU, and Greece and Spain have unemployment rates over 20 per cent, this takes some chutzpah. The EU is clearly neither necessary nor sufficient for a healthy labour market. What really matters is domestic policy. A vote to Remain will give the green light for further harmonisation on social, employment, tax and regulatory policy – risking abandonment of more liberal policies that have facilitated robust job creation here.
Perhaps the most laughable claim is that the EU delivers ‘lower prices’. The EU is a customs union – creating a protective wall around the single market raises prices for agricultural and manufactured goods substantially. Estimates by Patrick Minford suggests electrical machinery is 24 per cent above world prices, cars 22 per cent and furniture 54 per cent. Paddy Ashdown let the cat of the bag by moaning that Brexit would deliver ‘cheap food’. Heaven forfend! There is yet more evidence in economically disastrous renewables and biofuels mandates, which drive up energy and food costs further.
A third myth is that the EU has been good at delivering free trade deals. Managing the competing interests of 28 member states means, in fact, we shamefully still do not have free trade with obvious allies and mature economies, such as Japan, Canada, Australia and the US. These have been delayed by objections from countries elsewhere in the EU, not us. And despite all we hear about the importance of being in a big block, smaller independent countries have signed important FTAs that we do not have, such as Iceland (with China) and Switzerland (with Canada, China and Japan).
We are also told that there are no economists or economic studies favouring Brexit. Yet many important studies, such as from the Mayor of London’s economics team, Capital Economics, Open Europe, the Centre for Economic and Business Research and the IEA, have suggested that there would be no long-term material losses from Brexit, and in some cases gains. Well-known figures, such as former Bank of England Governor Lord (Mervyn) King, have said that our leaving the EU is not primarily an economic question, with the impact of leaving greatly exaggerated.
Here’s the crux. Brexit will help us economically if it leads to more economically liberal outcomes. We all know what this means: free trade (as far as possible); restrained government, providing genuine public goods and dealing with spillovers efficiently; the rule of law respected; regulatory systems robust through their flexibility; competition delivering best practice across governments; and accountable power, unbeholden to vested interests.
The EU does not deliver these aims. It’s a one-way centralisation ratchet. It rejects a vision that embraces diversity and competition between member states, in favour of a top-down agenda towards conformity. It pushes harmonised product and process regulations across the whole ‘internal market’ to supposedly stop a ‘race to the bottom’. The ratchets occurs because the institutions of the EU have no incentive to give up power.
The result for Britain is that our more liberal instincts are being harmonised away with countries who want a ‘social Europe’. Damaging regulations, in areas such as financial services, are imposed upon us against our interests when domestic regulation would be more appropriate. The mooted harmonisation on other things in the Five Presidents Report, such as on bankruptcy and corporate law, taxes and other aspects of labour market regulation, threaten to make this problem worse.
Most problems that governments seek to deal with, in things such as spillovers and public goods, are either very local or global in nature. The EU is neither. As a result, we’re represented as 1/28th of a voice on global bodies, such as the World Trade Organisation, where we could exert real influence, but have also lost power over whole areas of policy, which could be better tailored to domestic circumstances and needs.
These institutional flaws are compounded by the centralisation of power in Brussels empowering sectional interests. In future, if we remain in, the UK might become subservient to a Eurozone bloc within the institutions of the EU. This might be less problematic if the EU seemed capable of reform, but does anyone believe that after the farce of the renegotiation?
Brexit, whilst no panacea, would structurally change the game. It would prevent forthcoming pressures to harmonise many of our laws and regulations further in a damaging way to our interests; prevent us becoming second-class members of an EU with Eurozone dominance; return our seats on global top regulatory tables; and return control over trade policy. It might even change the direction of the EU.
Our exit will be a process, not an event. It will require good policy choices over time. The calculation that we Brexiteers are making is that a responsive government will correct mistakes better than a distant bureaucratic elite.