As an Economist it frustrates me when anyone suggests an
exit from the EU would benefit the UK. In a truly integrated world where 30
countries can take part in the manufacture of one t-shirt, it is absurd to
believe general increases in protectionism can improve welfare. Nigel Farage’s
(UKIP’s) xenophobic, blame-thy-neighbour rhetoric is currently gaining a lot of
attention. I thought it was time I laid out my beliefs regarding the EU. I
first look at the insurmountable costs of an EU exit and then discuss some of the
so-called benefits of leaving the EU.
THE COSTS OF AN
EXIT
1) Trade
Let’s start with the basics – trade. Regardless of what
Farage claims, leaving a Free Trade Union will inevitably lead to lower trade
with Europe and the rest of the world pushing us closer (even if by a small
amount) to our autarkic equilibrium. You are on your own if you believe less
trade with the rest of the world will improve living standards. There is as
overwhelming agreement in the profession regarding the gains from trade. Trade leads to increased choice and variety, lower prices, increased
competitiveness and the ability to exploit a comparative advantage. You may
quite correctly argue that the gains from trade are severely unequal and
globalisation leads to an increasing gap between the rich and poor. But the
issue here is not with trade itself but with the subsequent redistributions.
Free trade increases the size of the pie and it is up to government policies to
redistribute this accordingly.
As for the firm perspective, small firms or the less
productive (higher cost) firms do suffer from globalisation, being replaced be
global MNCs with low costs and high market share. So perhaps leaving the EU may
improve the bargaining power and market share of small businesses albeit at the
cost of lower competitiveness and higher priced goods. However, in reality this is not what would happen. Large MNCs are globally integrated international firms and would brush
off a UK exit, perhaps locating their headquarters elsewhere. The ones that
will suffer are the small businesses and manufacturers that will see rising
inputs costs and a diminishing export market. The idea that an EU exit will return the UK
to a manufacturing powerhouse is nonsensical and living in the past. If
anything, manufacturing will suffer the most whilst financial firms, which are
the epitome of globalisation, will be just fine. As competitiveness falls,
firms locate elsewhere, prices rise and incomes fall, the current account
deficit will almost certainly enlarge as UK exports become less attractive whilst the needs for imports remains.
Capital and
Property
What about investments? Put simply, FDI and hot money
inflows will almost certainly fall. A choice between two equally productive
manufacturing firms in the UK and Germany has only one winner. The firm that
has access to the EU market with harmonised rules reducing uncertainty and the
ability to export more cheaply will win. Being outside the EU will almost certainly
lead to an increased risk premium on UK fixed income and equity as growth
expectations become more uncertain and access to European free trade and all
the bilateral/multilateral agreements that go with it disappear.
As for property, the recent surge in house prices in the UK is partly driven by foreign capital, especially in London. Whilst this capital is partly responsible for creating a bubble in London, its reversal over time will cause large capital losses in the property market and we all have seen what decreasing house prices can lead to. It seems unlikely, but London property is an asset class like any other and its popularity may decrease over time as the UK shuns the rest of the world. Property prices will rise much more in line with UK incomes which in turn will be lower. Foreign capital will find its home elsewhere as other property bubbles emerge across the globe.
As capital inflows fall, the real exchange rate will
depreciate making imports even more expensive. Less access to financing,
borrowing and lower liquidity will hurt small businesses. Despite setbacks
during most recessions, the world is only going in one direction – towards
globalisation. Turning your back on it now is a mistake.
Immigration
I have written a blog on immigration previously so I will
keep it short and sweet. The gist is simple. Immigration brings ideas,
innovations, lowers costs, fills jobs that UK residents do not, reduces the
debt burden of the economy and improves public services such as the NHS. The
cited economics costs of immigration are often factually incorrect or simply
xenophobic. Of course there are some costs such as welfare tourism but these
must be viewed against the indisputable and overwhelming benefits of
immigration.
Brain Drain
All of the effects above will lead to a brain drain where
the best minds leave the UK. Those that add to the economy the most will have
the incentive to relocate elsewhere where growth is higher and firms are more
integrated. Movement of physical and financial capital will be followed by its complementarity in labour. Even if labour stays put, the UK will miss out
on the benefits of skilled immigration that makes the UK so competitive,
especially in financial services. Comparative advantages will fade away alongside skilled labour.
REASONS TO EXIT
National
Sovereignty
It is true that globalisation and a political union leads to
less national sovereignty. But for me this is not a cost. A lot of laws and
decisions require international cooperation such as tax avoidance, climate
change and international security. Geopolitical issues such as Ukraine and
Syria rely on multilateral cooperation (even if the response is poor).
Furthermore, do not get mistaken; the UK still has a lot of national
sovereignty. It is the global issues that are and should be dealt with
centrally. The idea of Germans setting UK law is a terrible way of viewing
international cooperation and simply not true. I hope that views will
change over the next few decades. Hopefully one day, people will consider
themselves as much European as British. Harmonisation of laws, such as in
financial services, can increase capital flows, decrease uncertainty, improve
tax revenues and improve global growth. Some laws should be left to the
national governments of course but the idea of solely unilateral laws in an
integrated world no longer works.
Furthermore, whether you like it or not, the world is
becoming more integrated and decisions are made increasingly at a
cross-national level. Outside the EU, the UK will become increasingly less
influential in the global arena. An outsider.
Culture
The view is that globalisation and the EU leads to
increasing cultural fragmentation, changing British values and a “white middle
class” that loses out the most to quote Farage. To some extent this is
undoubtedly true. In the EU, the UK has and will become an ever-increasing mixing
pot. Yet a mixing pot to be proud of. A mixing pot of different talents, skills
and interests. A mixing pot of skilled and unskilled workers with a range of
ideas, innovations and experience. My big issue with UKIP is the constant
mention of this “white middle class.” If you consider being white and middle
class as being British you are not living in the 21st century.
Let’s remember that cultures have been developed over years
of immigration all over the world. The idea of trying to preserve a specific
culture of the past is the sort of conservatism that will stand in the way of
not just economic development but also racial integration and decreasing
ignorance of others. We should be happy to embrace different cultures.
Preventing immigration is not the solution. The solution is breaking down the
fragmentation between cultures.
What may have been very British a hundred years ago may not
be very British today and the same goes for the next hundred years. Cultural
changes happen slowly over time alongside increasing living standards. Do not
fear them but embrace them.
Contagion
Of course being part of the EU means European recessions
flow quickly to the UK increasing costs and damaging incomes in downturns.
However I would respond with two points. Firstly, financial markets are highly integrated globally and therefore any financial recession is, in its very
nature, contagious. The UK is one of the financial capitals of the world and
hence will suffer from global recessions regardless of being in an economic
union or not.
As for the sovereign debt crisis, whether we are in the EU
or not, UK banks and investors will always hold EU debt. Bailing out European
sovereigns will always be in the interest of the UK and its deposit holders.
The recession and subsequent debt crisis led to a large blame-thy-neighbour
rhetoric in many countries. It is always easy to blame outsiders and this often
happens in recessions. Most of the time however these views conflict with
reality.
Secondly, whilst recessions are exacerbated by globalisation so
is both short term and long-term growth.
NO REFRENDUM
If the arguments are so convincing then why not let the
people vote in a referendum? That would be the democratic thing to do after
all. Let the voters decide. My reason for not wanting a referendum is that the
public are not properly informed and the results may be disastrous. A lot of
the benefits of global integration are slow and not visible until they are gone.
Unless you are an economist, in finance or business, or just take a genuine
interest in the subject your views may be distorted by the political rhetoric. The UKIP view is convincing if it is the first you
have heard the subject. However, more often that not it is fantasy and driven
far more by xenophobia than good Economics. Providing voters with a referendum
is an easy way to win votes and lay blame, but it is dangerous. Furthermore,
just because one party offers a referendum does not mean all the others should.
A referendum can theoretically be used for any issue. The reason we don’t have
a referendum on banning taxation is because the result may just be yes.
