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UK's one-off gain

UK's one-off gain

Why Brexit makes economic sense

by Andrew Lilico in London

Fri 17 Jun 2016

The economic argument for ‘Brexit’ is not that the UK would make significant economic gains by leaving the European Union. Rather, it is that leaving would be close enough to economically neutral in its effects that strong geopolitical, constitutional, and self-determination advantages can be achieved without prohibitive economic cost.

The UK in economic terms has gained much from EU membership. By far the most important source of benefits has arisen in the form of influence via the treaties and the workings of the European Commission. Britain has converted its continental partners to an economic philosophy based around free trade, market liberalisation, privatisation, limits on state aid, competition, and the interests of small and medium-sized enterprises.

These are tangible and valuable advantages. They have created a regulatory and broad economic policy environment in Europe that is welcoming to British businesses. This is aligned with the way the UK regulates its own firms, and creates an openness that allows exports to the advantage of Britain’s own importing consumers. At the same time, the UK has played its part in encouraging EU openness to globalisation.

These economic benefits from EU membership have been primarily one-off gains, stemming from UK success in converting its partners to its way of thinking and policy-making. This process is now complete. Inside the EU, the UK is a block on progress, preventing the euro area from making full use of its institutions to address governance issues.

It is implausible that the UK’s European partners would turn away from it if Britain left the EU – at a time when a survey by the Pew Research Centre, discussed in an accompanying OMFIF Commentary, finds dissatisfaction with the EU rising across the continent. The Union’s philosophy is embedded in its treaties. It will be very hard to change the rules of trade it has encouraged us to adopt.

Following Brexit, the EU would work better and grow faster – to the UK’s benefit. In a dynamic world, the UK could take better advantage of its ability to reverse policy errors, allowing for more policy experimentation and innovation. In respect of trade, Britain can gain as much from new trade deals with non-EU countries as the modest losses it is likely to make in EU trade.

These longer-term gains will not come for free. In the short term, Brexit is likely to bring two or three years of somewhat slower growth. But by 2030 I would expect the UK to be more or less back to balance. It might even gain.

The UK has done a good job in converting its friends to converge in the British direction. Progress has been sufficient for Brexit’s economic costs to be low. Over the longer term, this will more than compensate for losing the political and geopolitical benefits of EU membership.

Leaving the EU does not require economic justification. Staying does. Voters need only to believe the economic costs of leaving will not be too high.

Andrew Lilico is Executive Director and Principal of Europe Economics. This is No.95 in the series – the 100th article will appear on 23 June.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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