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Yearning for Britain's global punch

by Brian Reading

Yearning for Britain's global punch

The divide between those for and against the UK leaving the EU – ‘Brexit’ – knows no conventional boundaries. UK political parties differ horizontally, left to right on the x-axis. Brexit splits parties vertically, top to bottom on the y-axis. Economists, corporate executives, trades unionists, the establishment, lower, middle, upper classes, media, young and old, public servants and private sector workers: all are divided.

Multinationals tend towards a self-interested stance against Brexit. But even here there are differences. Japanese car manufacturer Toyota says it will stay in Britain whatever the outcome.

Few voters will be persuaded to change sides during the debate. Many undecided may get bored and decide to remain undecided – not voting. ‘Don’t know’ is not only a respectable position but also intellectually the most respectable. Nobody knows the future.

Numbers will be bandied about – the benefits of EU membership to date, the future costs and benefits of staying in or leaving. Measured in billions of pounds, they will be spuriously precise and utterly unfounded. Past, present and future costs and benefits cannot be known. All depend on counterfactual constructs, ‘guesstimates’ of what would otherwise have happened or will happen.

One analyst published his estimate of the benefits of being in. When asked about the costs of Brexit, he replied he did not know as that depended on the counterfactual. This is a bogus debate. The Scottish National Party pre-referendum independence arithmetic showed massive benefits for Scotland from North Sea oil. These vanished when oil prices plunged from $100 to $30 a barrel.

Logical arguments

There are, however, some issues that depend on logic. The establishment remains mesmerised by Britain’s imperial legacy and yearns for the country to punch globally at its former weight. The ins argue that EU membership helps it do so. Not so. Although membership increases the EU’s punch, it reduces the UK’s. When the UK agrees, it is as strong in or out. When the UK differs, it is stronger out and the EU weaker.

EU members regularly disagree, and do so publically. There is often no EU position, so no voice. This is not to argue that the UK position, when it differs, is always right. But it is better to be seen as supporting or opposing, rather than submerged by indecision.

Another fallacy is to suppose foreign direct investment into an advanced economy is undeniably beneficial. Balance of payments current and capital accounts (now renamed financial accounts) are opposite and equal – the larger the capital inflow, the worse the current balance.

Freely floating exchange rates balance capital inflows with current outflows through currency appreciation. Foreign exchange intervention artificially increases capital outflows, boosting domestic demand for imports by its monetary consequences.

FDI creates identifiable and quantifiable employment gains. The consequent job losses are unidentifiable and unquantifiable. Domestic savings and technological improvements are crowded out. Advanced economies need not import management expertise.

A third fallacy is to argue that the UK is too small to go it alone. In an uncharacteristic non sequitur, Martin Wolf, an economics commentator, argued on 7 January in the Financial Times, ‘The big justification for leaving is that the UK has long been able to sustain democratic self-government and no other arrangement could be as legitimate. The big argument against this is that the UK, with less than 1% of the world’s population and less than 3% of its output, can achieve what it wants more effectively from within the European club.’

This must be based on an unstated premise. Britain is the world’s ninth largest economy (PPP GDP) and 21st by population. In the EU Britain must take rules it fails to change. Out, it makes its own rules and can choose which EU rules to take. It may or may not be in its interests to do so. But it is a democratic choice.

The issues are complex. Scottish independence, a possible consequence of Brexit, has been dealt a blow by the oil price collapse. It is a microcosm of the arguments. Equally, ever closer union has been torpedoed by the euro debacle.

Sadly, the immigration crisis has also demonstrated the inability of EU members to work together to address a humanitarian tragedy.

Personally I am biased in favour of Brexit from an unreformed EU. I am sceptical that negotiation can agree reforms. But at the same time events are capable of enforcing them.

Independence is never absolute. But interdependence consequences, accepted democratically, are surely preferable to those enforced and obligatory – especially for a large economy that differs structurally and historically from its neighbours.

Brian Reading is an independent economist.