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Why we shouldn’t heed Brexit myths

Why we shouldn’t heed Brexit myths

Learning from lemmings – and the Queen

by Brian Reading in London

Thu 2 Jun 2016

Cry havoc and let slip the dogs of war’. Act 3, Scene 1, William Shakespeare’s Julius Caesar. If we are to believe it, ‘Brexit’ does just that. In the European Union referendum campaign, neither the Remain nor the Leave camp has a monopoly on hyperbole. Whether in defence or economics, both are exaggerating.

First, let’s deal with security. Since 1945 there have been at least 20 small and bigger wars in Europe, plus civil wars and numerous uprisings and unrest. Wars have been confined and localised.

The EU’s genesis dates back to the European Coal and Steel Community in 1951, followed by the Rome treaty which established the European Economic Community in 1958. The 1993 Maastricht treaty created the EU. British membership dates from 1973. It is hard to believe that non-membership until then increased the risk of a major European war and membership thereafter has reduced it. Likewise, to suppose that UK secession would be followed by civil war between EU member states seems far-fetched.

What are we to make of Russia? Under Vladimir Putin, it has become a rogue state. Following the Crimea invasion, his aggressive intentions are clear. Nationalism unites when things go wrong at home. But Brexit would not make the least difference to European resistance to such threats; within Nato, British participation in that resistance is certain.

A divided opposition might generate appeasement, making a major conflict more likely, as with Hitler. But again, Brexit makes no difference to such divisions. If the EU falls apart following Brexit, the imperative to co-operate in many different fields will be enhanced, not diminished.

Next, let us look at the economic arguments. The Observer newspaper polled some 3,500 ‘top’ UK economists on the effect of Brexit. About 600, 17%, replied. Nine out of 10 said British departure would damage growth. But the majority is not always right. That’s a myth – another exaggeration.

Following the 2007-08 financial crisis, Queen Elizabeth asked, ‘Why did nobody see it coming?’ Those who did not see it coming – central bankers (except the Bank for International Settlements), finance ministers, most official and private forecasters – immediately agreed: the event was indeed unforeseen!

In fact, some economists (and I count myself among them) did see it coming. Quite a few of us were alarmed by sub-prime mortgages and collateralised debt obligations which turned toxic debt into triple-A packages. But the overwhelming majority of the ‘great and the good’ were seduced by the belief that the ‘great tranquility’ or the ‘goldilocks economy’ would last forever. Some even argued that securitisation would eliminate systemic risk. Sweet dreams.

Similarly, a letter to the Times from 364 economists in 1981 claimed that Chancellor of the Exchequer Geoffrey Howe’s austerity budget during an inflationary recession was a disaster. The media supported them. Michael Foot, the Opposition leader, declared Howe’s budget would drive up unemployment to more than 3m.

In fact, Howe’s budget was a victory for monetarists over the conventional Keynesians who had ruled the roost since the 1930s depression. These nightmares turn out to be just that, no more than bad dreams. The economy recovered.

Economists are not always wrong. In May 1930, 1,028 US economists signed a petition against the Smoot-Hawley Act raising tariffs on 20,000 imports to record levels. Republican President Herbert Hoover refused to veto the Act. US imports fell by half, exacerbating global depression.

This is not an argument always to distrust conventional wisdom. But often the term is oxymoronic. One must be sceptical, and use one’s own judgment and experience in making up one’s mind. Lemmings jump over cliffs. They must be right when all others are doing so. Mostly they are wrong.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of OMFIF's Advisory Board. This is No.78 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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