Brexit and Beyond

B & B P1000321

On March 3rd 2016 I published an article on my blog -jbhearn.wordpress.com- entitled “Brexit: should we” I was one of only a handful of economists who explained why we should leave the EU. I will recap the main points and then look at how we should make this exit happen.

In 1973 I supported UK entry into the European Economic Community (EEC) and in the 1975 referendum I voted to continue this membership. The reason for this was quite simple. As an economist there is a convincing argument that on average we will all be better off if the world trades freely rather than having countries hiding behind protective barriers. The EEC was a customs union and inside that union trade would be free from restrictions and surrounding this union there would be a common external tariff which was set at the lowest rate of all the member countries. This was a considerable step towards free trade. At the time I was concerned that the Common Agricultural Policy ignored all the rules of free trade by setting minimum price guarantees but I hoped that the EEC would see economic sense and bring the agricultural industry into line.

This change of heart on my part as I was now going to vote to leave begs the question what has changed since 1973/75? What I, and many others, did not foresee at the time was that the EEC would morph into a political monolith. Even the title European Union (EU) dropped the word “economic” from its headline. The problem with this political monolith was, and is, that it wastefully duplicates much political activity and misallocates resources that could be much better used satisfying the real demands of its citizens.

At the time of the last UK referendum the question that the electorate wanted answered was can we complete an effective analysis of the total costs and benefits of staying in or leaving the EU? The answer to this question was no and the post referendum situation has exposed all of the fraudulent claims put forward as either the costs or benefits of leaving. Before the vote George Osborne, David Cameron, Jeremy Corbyn, Nigel Farage all put forward precise numerical estimates which they said quantified the costs or benefits to the economy if the UK voted to leave. We even had conflicting claims over the same forecast. For example the remainers said that a fall in the rate of exchange following a Brexit decision would push up domestic inflation and be damaging, while the leavers pointed out how it would make our exports more competitive, reduce our external account deficit and be beneficial to the economy.

Obviously the point I was making posed the question how can it be possible to make an informed decision about the effect of Brexit on the economy? At the time, my advice to people was that it is not possible for you to make an informed decision about what is best for the country, however you are more likely to be able to make a judgement about whether you and your family will be better off inside or outside the union. Therefore we should rely on James Surowiecki’s “The Wisdom of Crowds” and hope that each person making their best guess about their own self-interest would produce the right decision for the country without any one person knowing the best solution for the economy as a whole.

I had written previously on why the euro was/is a mistake; why politics is prone to misallocate resources when it can compulsorily call upon taxation to finance its action and I had explained why we need limited government and regulated capitalism to bring about growth and higher living standards. I had concluded that the best way to achieve this was for government to balance their budget and for a market based reappraisal of interest rate policy. These were solutions that would never have found traction in the EU and therefore my mind was made up: we should leave and return to being masters of our own destiny.

We voted to leave and article 50 was invoked and, as I see it, there are two possible approaches to our formal exit at the end of March 2019. I call these the “top down approach” and the “bottom up approach”. I recognize that both approaches have the same economic aim, which is to maintain the advantages of free trade for all businesses in the UK and every member country of the EU. In other words, maintaining the current economic status quo. The top down approach, which is what we seem to be following, asks an army of politicians and bureaucrats to negotiate every potential trade deal down to a free trade deal. The bottom up approach says let us accept the situation we currently find ourselves in, which is free trade, and maintain this after we leave. If there are any concerns about maintaining this position then and only then do we bring in the negotiating team. The bottom up approach is business-centric, causing minimal disruption and is cost effective to achieve. The top down approach is politics-centric and involves a lot of disruption and is very costly.

I was shocked when I recently spoke to an eminent economist who said that we will need more than 2 years to negotiate a free trade agreement with the EU and I hope she was equally shocked when I reminded her that we already had free trade and all I was asking is that this continues uninterrupted. No businesses in the current EU want the UK to be placed outside the common external tariff and for us to then erect equal and opposite tariffs against all imports from the EU.

In my observations of the Brexit negotiations I am concerned that politicians and bureaucrats seem to be hogging the centre stage and as I see it they are ultimately unimportant and largely unnecessary if they are discussing something that does not need to change.

Ask any business in any of the EU countries whether they would like different trading conditions after Brexit and the answer is “no”. This leads me to question the extent to which politicians should be involved in these negotiations. Just suppose we asked all the politicians in the UK whether they want Brexit and say they can vote freely without feeling constrained by any previous referendum. Bearing in mind that they do not know what will be the best outcome for the economy I have no doubt that there would be a majority vote in favour of remaining in the EU. Why is this likely to happen? The reason is that a political career in the UK can be relatively short and is definitely insecure. Much better for a politician to have the opportunity to pursue a second career in Brussels and if they voted to leave, they would be reducing their own career opportunities. Although this may seem a little cynical and not worth consideration in an academic journal, it does offer some indication of why negotiations may be slow, held up, abandoned, and if we exit negotiations without an agreement, then I am told that legally we cannot leave the EU and the UK voter will be told that the politicians tried their best but their hands were tied by a greater power outside their control and as much as they wanted to bend to the will of the people, all their efforts have been thwarted.

John Hearn 06/12/17

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2 thoughts on “Brexit and Beyond

  1. Yes, I can agree with a lot of your arguments but having spent my life in industry, I recognised that we Brits are not as good as we think we are. Back in the ’70’s our motor industry was a basket case but after Sir Keith advised Maggie that we should allow Nissan in, because they would bring new management skills, the motor industry, OEM’s and suppliers, were dragged into the late 20th century.
    Recently, Aston Martin had been a basket case until they appointed Andy Palmer, in 2014, who took over after spending 23 years, at NISSAN!
    In a post industrial world no-one knows where anything is heading, but we need to be part of a wider world and as you say, that access to free trade is an imperative to keep us open to skills from everywhere.
    I voted Remain because I don’t do risk, especially when politicians are involved. So far, not so good. I’m keeping my fingers crossed and hope that common sense,” if it ain’t broke, don’t fix it”, prevails.

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  2. Richard Southgate seems to have confused continuity (in the EU) with risk aversion. To have remained in was a tremendous risk as we would have been forced or coerced into all sorts of adventures which the EU institutions wanted. We have seen evidence of that since Brexit with movements towards EU controlled integrated military forces and a “United States of Europe”.

    The concept of inaction to avoid risk is not usually a valid one in business and it certainly was not valid in the case of Brexit. To control such of your own destiny as you can must always be a better, less risky plan than abandoning control to others. The hope the decisions of others might be benign is unjustified while the thought they might actually pay our interests any attention whatever is wildly optimistic.

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