‘There is an economic argument for leaving the EU, but it is a weak one’
By Professor Michael Ben-Gad, Department of Economics
How do the EU’s origins relate to the Brexit debate?
There is an economic argument for leaving the EU, but on balance I believe it is a weak one. The EU was designed by the six core states – France, West Germany, Belgium, Netherlands, Luxembourg and Italy – around a vision that was primarily French. The UK joined late and had to accept the structures that were already in place – this is why the French initially refused for many years to allow the UK to join.
So unhappiness with the EU is to some degree to be expected. To most British people, its rules and governance structures are extremely alien and hence few understand or know much about it. Still, the UK derives benefits from membership.
Benefits of access to the European market
More generally, economists tend to regard free trade as welfare enhancing, a result that features in Adam Smith’s Wealth of Nations and later in the works of David Ricardo. Generally, the benefits of trade, greater efficiency through specialization are particularly large for the smaller economy, it captures more of the gains from trade.
Hence the UK generally benefits from trading with the continent more than the continent as a whole benefits from trading with the UK. The continent provides ready markets for UK goods, and British consumers benefit from the lower prices and greater variety of goods available from Europe, more than Europeans gain from trading with the British.
There are other benefits to membership, including the right to travel, live and work in other countries. Lots of British people retire to southern Europe, particularly to Spain, and it is not clear if that would still be as easy if the UK leaves.
What are the economic arguments against EU membership?
Opponents of the EU point to its massive inefficiencies and the large amounts of money the UK pays to fund both the bureaucracy and to help the poorer parts of the EU. All of this is true and a serious problem.
They also claim that in the event of Brexit, the UK can negotiate a superior deal with the EU that would give the country all the benefits without the costs. I believe that is unlikely. In fact, I think that in the event of Brexit, the EU will have an incentive to punish the UK and make sure the change is as disruptive as possible to serve as a warning to other countries that might also contemplate going down this path or want the benefits without the costs and constraints.
Furthermore, opponents promise that the UK will be able to negotiate better trade deals with nations such as Canada, Australia and India on its own. Again, I believe this is very unlikely. The EU has much more bargaining power than the UK on its own and these countries have little need to resuscitate the old British Empire and its system of imperial preferences.
Are there broader strategic issues at stake?
Federalists are right to point to the way the EU has so far successfully achieved the main goals of its founders; for the original impetus for creating the EU was strategic – it served as a mechanism for ending the rivalries between nations that led to two world wars, and as a liberal alternative to the Council for Mutual Economic Assistance (Comecon) that the USSR had imposed on its Eastern European satellites in 1949. It is, however, possible to love something to death.
Federalists perhaps fail to realise that beyond a certain point, the effort to create an ever closer union, far from alleviating discord between nations has the potential to exacerbate them. Take the euro. Economists like me were critical of the common currency when it was introduced, but our warnings were largely ignored. Forcing different countries so very different from each, across an entire continent, to adhere to a single monetary policy creates the grounds for endless conflict. And if countries share a single currency they can no longer pursue independent fiscal policy either, hence the restrictions imposed by the Maastricht agreement. The inevitable result is that political leaders can now blame their EU partners for economic downturns, austerity and the migration crisis too. This also creates opportunities for nationalist demagogues.
For these reasons and other, most of the British public were always skeptical of ever closer union and campaigners for Brexit will contend that recent events have proven them right. Yet recent events have also made the prospect of ever closer union highly unlikely. Like the UK, the Czech Republic, Denmark, Hungary, Poland and Sweden have opted to remain outside the eurozone and their people largely share the belief that European integration has gone as far as it should.
Furthermore, if at some point in the distant future, were there to be a renewed effort to turn the EU into something like a unified political entity, the UK will still enjoy the option of simply leaving then and there. Forcing the UK to remain inside a European superstate against its will would require a military invasion. The European Commission has 23,000 civil servants in its employ, but I doubt they will be scrambling off landing craft to assault the beaches of Kent anytime soon.