Roger Bootle :
Last week saw yet another warning about the dire economic costs of Brexit, this time from the IMF. This followed similar warnings from the Bank of England, HM Treasury, the OECD, the National Institute, and Uncle Tom Cobley and all. There was even a letter signed by 200 economists, highlighting the same dangers. This recalled the 1981 letter signed by 364 economists warning of the threat of recession – published just as the economy was starting to recover.
Such an overwhelming consensus of economists might seem impressive. After all, how could so many different voices come to the same conclusion, yet still be wrong? Easily.
They aren’t umpteen different voices. These people are the victims of group-think. Moreover, there is a long history of the global economic establishment getting the most important issues of the day profoundly wrong. It did not foresee the fall of communism, the collapse of inflation or the global financial crisis.
“Just as in 1931, the economy was in serious recession but there was little that the government could do”
And, on UK issues, our own economic establishment has done no better. In 1931, the UK government was obliged to make painful cuts in spending and run a tight monetary policy to stay on the Gold Standard.
When Britain was forced off gold, this was supposed to be a disaster, but in fact it ushered in a period of rapid economic growth, thanks to a weaker exchange rate and lower interest rates. The former Labour cabinet minister, Sidney Webb, said: “No one told us we could do that”.
In fact, someone, namely John Maynard Keynes, had told them. But the overwhelming majority of the establishment stood against him. In 1992, the pound was a member of the European Exchange Rate Mechanism (ERM).
Just as in 1931, the economy was in serious recession but there was little that the government could do.
Mark Carney, the Bank of England’s governor, has warned about the dangers to the British economy of a Brexit Mark Carney, the Bank of England’s governor, has warned about the dangers to the British economy of a Brexit
The Treasury, backed up by most of the economic establishment, and opposed by only a small group of economists (of whom I was one), said that if we left the ERM, inflation would surge, interest rates would rise, and the economy would be damaged. In the event, we were forced out of the system on 16 September 1992, which was soon dubbed “Black Wednesday”. The result was that inflation fell, interest rates were cut and the economy recovered.
Black Wednesday was soon renamed “Golden Wednesday”. In the late 1990s, it was being debated whether the UK should join the euro.
We were told by the great and the good that if we did not join, much of the City would decamp to Paris and Frankfurt, the Japanese carmakers would up sticks and our economy would be severely damaged.
“Why did the proponents of eurozone membership get this so blatantly wrong? After all, they were predominantly decent, honest and intelligent”
Meanwhile, in those countries which did join, the economy would surge forward, helped by the end of exchange rate uncertainty and the beginning of complete transparency about prices.
Why did the proponents of eurozone membership get this so blatantly wrong? After all, they were predominantly decent, honest and intelligent.
Nor were they necessarily wrong about the benefits of certainty and transparency. Their problem was that they lacked balance and perspective. The much bigger issues concerned competitiveness, indebtedness and the need for an independent monetary policy.
In the current debate, the EU’s single market is the focus of much attention. Allegedly, if we are not members, we will not have “access” to it. This word “access” is extremely misleading. And so is its derivative, “full access”. Every country has access to the single market.
To sell into it, non-members normally have to pay EU tariffs, submit their goods for inspection at border controls, together with the associated paperwork, and comply with rules concerning the origin of goods and their components.
There is no doubt that not having to bear these various costs and inconveniences is an advantage. So, if this advantage came without any costs, you would of course want to have it.
The single market has failed to prop up ailing eurozone economies such as Greece
The single market has failed to prop up ailing eurozone economies such as Greece
But that is precisely the point – it comes with umpteen costs: having to impose EU rules across the whole of your economy; having to pay the EU’s annual membership fee; being unable to negotiate trade deals with other countries around the world; having to impose the EU’s external tariffs on imports into your country; and being obliged to take any number of EU citizens to live and work in your country.
So the issue is about weighing up costs and benefits – and how these might change over time.
But it is more of a judgment call than a totting-up of numbers. In trying to make it, I suggest that you ponder three key questions.
First, if the benefits of the single market are so enormous, then why is it that over recent years countries all around the world have increased their exports into the single market at a faster rate than most single market members?
Second, if the single market is of such overwhelming importance, why are so many of its members in a terrible state? Why is the Greek economy not carried forward on a wave of prosperity unleashed by the absence of form-filling and checking at borders?
Third, if trade deals are so important, why does the UK do such a huge amount of trade with countries that it doesn’t currently have a trade deal with – including America?
Even though I believe that we should leave, I concede that there are some good arguments for remaining in the EU. But the fact that various economic bodies with a less than distinguished record of foreseeing the future warn us against leaving is not one of them.
(Roger Bootle is executive chairman of Capital Economics).
