Britain would be poorer outside the European Union? Economic nonsense

Economics view

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The Independent Online

Boris Johnson, London’s flamboyant Mayor, has invited the rage of his Prime Minister David Cameron. Johnson will urge the British public to vote for leaving the European Union in the June 23 referendum. Johnson has become the most prominent and influential voice for British Exit–Brexit. Not surprisingly, Cameron has lashed out.

Cameron is in a tangle of his own making. He calculated that a referendum would neutralise opponents who were gaining by stirring anti-European sentiment. But he misjudged his own people: they have little use for Europe. And Cameron’s deal with European leaders has failed to pacify because it makes sense only to those steeped in the European lore. Now, Cameron believes he can scare the British public. “Leaving Europe,” he asserts, “will threaten our economic and national security.” 

While Cameron seeks to win the political skirmish, Johnson has history on his side. As the late historian Tony Judt might have said, the parenthesis on the European Union may be closing. That parenthesis opened on May 9, 1950, when French foreign minister Robert Schuman first announced an initiative for European cooperation. The Second World War still cast a long shadow and Schuman declared that peace in Europe would be built on a “material basis.”   Johnson applauds the early achievements. From the Treaty of Rome in 1957 through to the 1980s, European nations opened their borders to trade and thus created the material basis for peace. 

Indeed, British Prime Minister Margaret Thatcher, much hated by Europeans, did more for Europe’s commercial integration than any other leader of her generation. She championed the Single European Act of 1986, pushing forward the process set in motion by Treaty of Rome. 

But by the late 1980s, Johnson writes, realistic possibilities for more commercial integration were largely exhausted. Indeed, a recent paper from the pro-European Bruegel think-tank in Brussels documents how little has been achieved since then. This is not a surprise. While the Treaty of Rome created a level playing field with little loss of national sovereignty other than at the border, every initiative since then has required national governments to cede authority to Brussels.

The European Union claims legitimacy on the basis that national governments are incapable of meeting the needs of their citizens and supranational governance is needed to increase the welfare of all Europeans. That mindset led in the late 1980s to the push towards a single currency, the euro. Vastly inflated claims were made of the prosperity that the euro would create. These never materialised, while the costs are all too evident. The Bruegel paper tells us that even the single market initiatives have ceased to provide dividends.

The real problem with Europe today is its unworkable governance structure. In a 1986 paper, Robert Keohane –then at Harvard University – explained that international governance required trust and reciprocity. In contrast, hierarchical or hegemonic structures would prove to be fragile, Keohane warned. Hegemony can work if the hegemon is willing to pay for that right. But in Europe’s semi-hierarchical governance system, Germany exercises hegemonic veto authority without paying the bills. 

For this reason, European governance has been prone to delays and half measures during the neverending eurozone distress. And now we may well be seeing breakdown of that fragile structure under the stress of the refugee crisis.

Echoing Cameron, proponents for Europe say that Britain will incur severe economic costs by leaving the European Union. Britain’s trade with Europe will collapse, they say, and the City of London will lose its pre-eminence. Claims of dire consequences by business executives are particularly unreliable. In 1999, Adair Turner, then director general of the Confederation of Business and Industry supported Britain joining the euro. Now the number crunchers torture the data to show that British productivity could decline precipitously. This is economic nonsense.

Any transition will bring uncertainties, but the economic principles are clear. Trade with a particular country or group of countries brings no special dividends. Indeed, leading trade theorist Jagdish Bhagwati has repeatedly warned that preferential trade arrangements hurt rather than help. 

Moreover, for more than two decades, Britain has steadily increased its trade with non-European countries. This is only to be expected. Even Germany’s trade is increasing mainly beyond European borders. The US has just overtaken France as Germany’s largest trading partner. Europe is a slow-growing region and will almost certainly fall further behind the rest of the world over the next half century. Europeans will look for opportunities elsewhere. Only the productive relationships within Europe will survive—with or without European Union rules and governance.

As the parenthesis on post-War Europe closes, economics and politics point in the same direction. Cameron’s rage arises from his political miscalculation– even his ministers are walking away from him. On June 23, British citizens may well vote to remain in the European Union, but atrophy of European institutions will continue and Johnson is likely to win history’s verdict. 

Ashoka Mody is visiting professor of international economic policy at Princeton University and former deputy director of the International Monetary Fund’s European Department