A Bri­tish test of rea­son

Financial Mirror (Cyprus) - - FRONT PAGE -

If vot­ers in the United King­dom de­cide in the coun­try’s ref­er­en­dum on June 23 to leave the Euro­pean Union, it will not be for eco­nomic rea­sons. They may choose Brexit be­cause they want full sovereignty, be­cause they hate Brus­sels, or be­cause they want migrants to re­turn home, but not be­cause they ex­pect great eco­nomic ben­e­fits.

The pro-Brexit camp ini­tially ap­peared to be hold­ing two strong eco­nomic cards. The first was UK cit­i­zens’ over­whelm­ing re­jec­tion of their coun­try’s net fis­cal trans­fer to the rest of the EU, which cur­rently amounts to 0.4% of GDP. Since Prime Min­is­ter Mar­garet Thatcher first de­manded to have “her money back” in 1979, the bud­getary costs of EU mem­ber­ship have com­pletely over­shad­owed its eco­nomic ben­e­fits in the pub­lic’s view.

The sec­ond card was the sorry state of con­ti­nen­tal Europe’s econ­omy. In terms of GDP growth, em­ploy­ment, or in­no­va­tion, other EU coun­tries, on av­er­age, lag be­hind the UK (and, to an even greater ex­tent, the United States). Whereas EU mem­ber­ship was once re­garded as a gate­way to pros­per­ity, it is in­creas­ingly viewed as a drag on progress.

But lately, as John Van Ree­nen of the Lon­don School of Eco­nom­ics re­cently put it, the eco­nomic case for Brexit has been largely miss­ing in ac­tion. Its ad­vo­cates are at pains to ex­plain what kind of trade and part­ner­ship agree­ments, if any, Britain could en­ter into with the EU, much less how those agree­ments would be su­pe­rior to the cur­rent ar­range­ment. As a re­sult, it is tough to ar­gue that the UK would re­ceive a net eco­nomic boost – or even that it will not suf­fer con­sid­er­ably – by leav­ing the EU.

Of the eight eco­nomic eval­u­a­tions re­cently sur­veyed by the In­sti­tute for Fis­cal Stud­ies, a re­spected in­de­pen­dent re­search in­sti­tu­tion, only one claims that leav­ing the EU would lead to sig­nif­i­cant eco­nomic gains. And that study – pro­duced, un­sur­pris­ingly, by Econ­o­mists for Brexit – has been sharply crit­i­cised by the rest of the eco­nomic pro­fes­sion for lack­ing an ap­pro­pri­ate an­a­lyt­i­cal ba­sis.

Most stud­ies find that Britain would suf­fer sig­nif­i­cantly from leav­ing the EU. UK ex­porters would end up par­tic­i­pat­ing less in the large EU mar­ket, and they would be shut out of EU-ne­go­ti­ated agree­ments en­sur­ing ac­cess to ma­jor in­ter­na­tional mar­kets. While the UK could ne­go­ti­ate new agree­ments with these part­ners, that would take time, and, act­ing alone, its ne­go­ti­at­ing power would pre­sum­ably be weaker.

This means that the UK would trade less with EU and non-EU part­ners alike. It would pay higher prices for in­puts and con­sumer goods, and Bri­tish firms’ re­duced in­te­gra­tion into global value chains would un­der­mine pro­duc­tiv­ity. The cost in terms of fore­gone GDP would be 5-20 times higher than the sav­ing im­plied by not con­tribut­ing to the EU bud­get. That is not an ap­peal­ing deal, to say the least.

All mod­ern anal­y­sis of eco­nomic in­ter­na­tion­al­i­sa­tion shows that for­eign trade is a pow­er­ful se­lec­tion mech­a­nism. It pro­vides ma­jor growth op­por­tu­ni­ties for the most pro­duc­tive and in­no­va­tive firms, while en­abling them to learn from their over­seas com­peti­tors. It is no ac­ci­dent that the world’s best firms – which have the high­est pro­duc­tiv­ity, prof­its, and wages, and in­vest in strength­en­ing hu­man cap­i­tal – are trade cham­pi­ons. Brexit’s ad­verse im­pact on UK firms’ scope for de­vel­op­ment would fur­ther in­crease the eco­nomic cost.

These ar­gu­ments have been force­fully ad­vanced ahead of the ref­er­en­dum. Yet they have not sim­pli­fied the de­bate on the costs and ben­e­fits of Brexit. This may be partly be­cause that de­bate has not played out along party lines. Prime Min­is­ter David Cameron’s Con­ser­va­tives are deeply di­vided on the topic, while Jeremy Cor­byn’s Labour Party is luke­warm about the EU. Be­cause the choice is not be­tween left and right, in­de­pen­dent views have gained greater weight.

The June 23 ref­er­en­dum is im­por­tant in its own right, ow­ing to its far-reach­ing im­pli­ca­tions for the UK’s re­la­tion­ship with Europe. But it will also de­liver broader lessons.

If Bri­tish vot­ers de­cide to leave the EU, it will in­di­cate that ra­tio­nal eco­nomic ar­gu­ments carry less weight than emo­tional ap­peals. Such an out­come will bol­ster pop­ulist forces else­where – from Italy to France to the US – in their ad­vo­cacy of iso­la­tion­ist poli­cies that most ex­perts re­gard as eco­nomic non­sense. To op­pose such forces and poli­cies, main­stream po­lit­i­cal par­ties will have to ad­dress their fail­ure, even with the facts on their side, to of­fer a nar­ra­tive compelling enough to con­vince vot­ers to choose eco­nomic open­ness.

A vote by a ma­jor­ity of Bri­tish cit­i­zens to re­main in the EU would have the op­po­site im­pact, high­light­ing that, what­ever neg­a­tive feel­ings peo­ple may have about a pol­icy or en­tity, rea­son and logic can­not be tossed aside. Equally im­por­tant, such an out­come could en­cour­age greater scru­tiny of the eco­nomic con­se­quences of pop­ulist pro­grams in the US and the rest of Europe.

What is at stake in the June 23 ref­er­en­dum is there­fore not only the re­la­tion­ship be­tween Britain and the EU – or even the fu­ture of the “Euro­pean project.” How vot­ers de­cide will be an im­por­tant test of whether demo­cratic choices in ad­vanced coun­tries are gov­erned by eco­nomic ra­tio­nal­ity or pop­u­lar pas­sions.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.