Popular arguments for Brexit a fantasy

Popular arguments for Brexit a fantasy

by Martin Wolf  2016-04-29 05:50:01.0

IF THE UK voted to leave the European Union (EU), known as “Brexit”, it would almost certainly be outside the bloc organising the life of our neighbours and principal economic partners forever. Given this, the question is whether the option to leave should be exercised now. My answer is: absolutely not. To see why, let us examine popular arguments in favour of departure.

First, membership has brought few benefits. This is false. The Centre for European Reform estimates that it has raised trade with EU members 55%, increasing productivity and output. Trade creation within the EU has far exceeded diversion of trade from elsewhere. Europe has also brought a strong competition policy, and control of state aid. These are important gains.

Second, membership has imposed huge costs. In fact, the net fiscal cost is a mere 0.5% of gross domestic product. Moreover, this could be regained in full only if the UK abandoned altogether its preferential access to the EU market. The UK is one of the least regulated high-income economies. Its recent labour market performance demonstrates its continuing (and remarkable) flexibility.

A study from the Centre for European Policy Studies adds that only “6.8% of UK primary legislation and 14.1% of UK secondary legislation” was passed to implement EU law.

Third, an increasingly integrated eurozone will dictate to the UK. Yet a full political union of the eurozone looks quite unlikely. Its members also differ on many points, which opens up opportunities for UK influence.

Fourth, the UK should leave because a eurozone break-up would damage the UK economy.

If the eurozone broke up in a disorderly fashion, the damage to its closest partners might be substantial. Yet the EU will remain the UK’s biggest trading partner indefinitely. Thus, the UK would be damaged by a eurozone break-up, whether in the EU or not. Arguing that leaving would shield the UK against such a disaster would be like arguing Canada should leave the North American Free Trade Agreement to avoid a US financial crisis. It makes no sense.

Fifth, the UK should leave because the EU is slow-growing. It is plausible that the UK’s trade with the rest of the world will expand relative to trade with its slow-growing neighbours. But reducing access to EU markets deliberately would make sense only if membership prevented the UK from trading with the rest of the world. Germany’s export performance demonstrates that it does not.

Sixth, membership of the EU prevents the UK from opening up world markets. Yet the EU was a moving force in three successful global trade talks: the Kennedy, Tokyo and Uruguay rounds. It has increasingly turned towards preferential trade arrangements. The clout of the EU gives it far greater capacity to open up the markets of, say, China, India, or the US than the UK could do on its own.

Seventh, it would be easy to agree on alternatives to EU membership. Yet those recommending leaving have no agreed position. There are three alternatives: full departure with trade regulated by the World Trade Organisation, which would cost the UK its preferential market access to the EU; Swiss-style membership of a trade arrangement in goods, with bilateral deals in other areas, which is complex and would require the UK to retain free movement of people; and Norwegian-style membership of the European Economic Area, giving full access (except for having to abide by rules of origin in trade in goods), but would deprive the UK of a say on regulations. The more sovereignty the UK wishes to regain, the less preferential access it retains. This trade-off cannot be fudged.

Eighth, it will be easy for the UK to obtain whatever it wants from the EU. Sometimes this argument is buttressed by the statement that the rest of the EU runs a trade surplus with the UK, which it will be desperate to keep. This is naive. Divorces are rarely harmonious. Moreover, countries with big surpluses with the UK (notably Germany) would continue to sell their goods to the UK, even if Brexit led to a small rise in the import tariff.

The share of UK trade done with the rest of the EU is also far greater than the share of EU trade done with the UK. Thus the idea that a departing UK could dictate terms is a fantasy.

Those promoting departure ignore what the UK’s European partners think about the EU.

The political elites, particularly of Germany and France, regard the preservation of an integrated Europe as their highest national interest. They will want to make clear that departure carries a heavy price, which is likely to include attempts to drive euro-related financial markets from London.

Ninth, it will be easy to reach an agreement on controlling immigration. But if the UK wanted to retain preferential access to EU markets, it would be required to retain labour mobility. If, instead, it abandoned attempts to retain preferential access, it might then impose work permits on EU citizens. This would make the UK jobs market more inflexible, particularly for skilled people. As important, the EU would reciprocate. That would affect Britons working and living in the EU.

Tenth, the uncertainty associated with leaving the EU would be modest. In fact, the uncertainties would be pervasive: we do not know what the UK government negotiating an exit would want; we do not know what the rest of the EU would offer; we do not know how long negotiations would last; and we do not know what the outcome would be.

Those in favour of leaving offer fantasies of damage done by staying and of opportunity opened by departure. None of these arguments has much merit. The rational thing to do is for the UK to continue to enjoy its unique arrangement, which has brought it the advantages of membership with so few of the disadvantages. As our foreign friends tell us, to do anything else would be mad.

Financial Times

A poster urging people to vote to leave the European Union in the uncoming referendum is seen in Peterborough, eastern England. Picture: AFP/JAMES PHEBY

LISTEN TO US: A poster urging people to vote to leave the European Union in the referendum is seen in Peterborough, eastern England, this month. Picture: AFP

IF THE UK voted to leave the European Union (EU), known as “Brexit”, it would almost certainly be outside the bloc organising the life of our neighbours and principal economic partners forever. Given this, the question is whether the option to leave should be exercised now. My answer is: absolutely not. To see why, let us examine popular arguments in favour of departure.

First, membership has brought few benefits. This is false. The Centre for European Reform estimates that it has raised trade with EU members 55%, increasing productivity and output. Trade creation within the EU has far exceeded diversion of trade from elsewhere. Europe has also brought a strong competition policy, and control of state aid. These are important gains.

Second, membership has imposed huge costs. In fact, the net fiscal cost is a mere 0.5% of gross domestic product. Moreover, this could be regained in full only if the UK abandoned altogether its preferential access to the EU market. The UK is one of the least regulated high-income economies. Its recent labour market performance demonstrates its continuing (and remarkable) flexibility.

A study from the Centre for European Policy Studies adds that only “6.8% of UK primary legislation and 14.1% of UK secondary legislation” was passed to implement EU law.

Third, an increasingly integrated eurozone will dictate to the UK. Yet a full political union of the eurozone looks quite unlikely. Its members also differ on many points, which opens up opportunities for UK influence.

Fourth, the UK should leave because a eurozone break-up would damage the UK economy.

If the eurozone broke up in a disorderly fashion, the damage to its closest partners might be substantial. Yet the EU will remain the UK’s biggest trading partner indefinitely. Thus, the UK would be damaged by a eurozone break-up, whether in the EU or not. Arguing that leaving would shield the UK against such a disaster would be like arguing Canada should leave the North American Free Trade Agreement to avoid a US financial crisis. It makes no sense.

Fifth, the UK should leave because the EU is slow-growing. It is plausible that the UK’s trade with the rest of the world will expand relative to trade with its slow-growing neighbours. But reducing access to EU markets deliberately would make sense only if membership prevented the UK from trading with the rest of the world. Germany’s export performance demonstrates that it does not.

Sixth, membership of the EU prevents the UK from opening up world markets. Yet the EU was a moving force in three successful global trade talks: the Kennedy, Tokyo and Uruguay rounds. It has increasingly turned towards preferential trade arrangements. The clout of the EU gives it far greater capacity to open up the markets of, say, China, India, or the US than the UK could do on its own.

Seventh, it would be easy to agree on alternatives to EU membership. Yet those recommending leaving have no agreed position. There are three alternatives: full departure with trade regulated by the World Trade Organisation, which would cost the UK its preferential market access to the EU; Swiss-style membership of a trade arrangement in goods, with bilateral deals in other areas, which is complex and would require the UK to retain free movement of people; and Norwegian-style membership of the European Economic Area, giving full access (except for having to abide by rules of origin in trade in goods), but would deprive the UK of a say on regulations. The more sovereignty the UK wishes to regain, the less preferential access it retains. This trade-off cannot be fudged.

Eighth, it will be easy for the UK to obtain whatever it wants from the EU. Sometimes this argument is buttressed by the statement that the rest of the EU runs a trade surplus with the UK, which it will be desperate to keep. This is naive. Divorces are rarely harmonious. Moreover, countries with big surpluses with the UK (notably Germany) would continue to sell their goods to the UK, even if Brexit led to a small rise in the import tariff.

The share of UK trade done with the rest of the EU is also far greater than the share of EU trade done with the UK. Thus the idea that a departing UK could dictate terms is a fantasy.

Those promoting departure ignore what the UK’s European partners think about the EU.

The political elites, particularly of Germany and France, regard the preservation of an integrated Europe as their highest national interest. They will want to make clear that departure carries a heavy price, which is likely to include attempts to drive euro-related financial markets from London.

Ninth, it will be easy to reach an agreement on controlling immigration. But if the UK wanted to retain preferential access to EU markets, it would be required to retain labour mobility. If, instead, it abandoned attempts to retain preferential access, it might then impose work permits on EU citizens. This would make the UK jobs market more inflexible, particularly for skilled people. As important, the EU would reciprocate. That would affect Britons working and living in the EU.

Tenth, the uncertainty associated with leaving the EU would be modest. In fact, the uncertainties would be pervasive: we do not know what the UK government negotiating an exit would want; we do not know what the rest of the EU would offer; we do not know how long negotiations would last; and we do not know what the outcome would be.

Those in favour of leaving offer fantasies of damage done by staying and of opportunity opened by departure. None of these arguments has much merit. The rational thing to do is for the UK to continue to enjoy its unique arrangement, which has brought it the advantages of membership with so few of the disadvantages. As our foreign friends tell us, to do anything else would be mad.

Financial Times

Leave a Reply