Monday, 30 October 2017

The Price of Freedom

Is there any hope that the message of the EU Referendum is getting through to our political and media Remain Establishment ? Leave voters were not thick, racist or misled - they voted to restore democratic self-government to the UK.

Moreover, since the Referendum, it has become abundantly clear that the EU is set on a course of full political union with control and governance fully centralised in Brussels. As ever, the cry heard from the EU is "more Europe". Laying bare such objectives has resulted in the phenomenon of Re-Leavers - reluctant Remain voters who now acknowledge that there is no "status quo" option and the UK simply cannot go where the EU is headed.

But then the pro-EU Establishment have never been honest about the political aims of the EU and have always tried to argue on economic grounds. Prior to joining the EEC in 1973, we were promised UK industry would sweep the world with a home market of 200m customers, yet by the time of the 1975 Referendum, we were economically diminished and could not possibly stand on our own two feet. Despite the salutary experience of the ERM in the early 1990's, by the turn of the century the pro-EU establishment were campaigning for the Euro, warning 3m jobs would be lost and UK financial services and car industry would be decimated.

So it is unsurprising that the Remain campaign was dominated by "Project Fear" and concerns over the impact of leaving the Single Market. One dire prognostication after another was rolled out, culminating in the Treasury's claim that the mere act of voting to leave the EU would trigger an immediate and painful recession - yet another totally discredited forecast.

The Referendum result suggests that the UK public have become immune to these tactics. When Philip Hammond opined on the EU Referendum that "no one voted to be poorer", he entirely missed the point. Leavers voted to be free, and if that comes with an economic cost, so be it.

But what is the economic cost of Brexit - the price of freedom from the EU ? While familiar commentators repeat their gloom-laden forecasts, there are alternative views. One recent paper by World Bank & UNCTAD economists suggested that in the event of a No Deal scenario, UK exports to the EU would drop by no more than 2% - a negligible impact. Even the IMF have revised their Armageddon level forecasts, suggesting slower growth but no recession in the next few years. To put context into the figures, "No Deal" forecasts on lost GDP tend to range range from 3-5% GDP, which is roughly £60-£100bn - coincidentally the size of EU divorce bill to be paid to secure a new UK-EU trade agreement. According to economic forecasts, deal or no deal, the price of freedom seems to be about the same.

Of course, economies and markets will always adjust to shocks such as Brexit. If trade with the EU becomes more expensive, trade and commercial activity will divert to the domestic economy and markets with the Rest of the World. In fact, the share of UK exports to the EU has already declined  from a high of 55% at the turn of the century to 43% today, less if the Rotterdam effect is taken into account.

Furthermore, a pivot away from an EU-centric economy is a necessity going forwards. The EU's share of the global economy is in decline (having halved from a high of 30%, even less once UK leaves). 90% of global growth will be outside the EU in future decades. The EU continues to suffer from the baleful effects of the euro and an anti-innovation regulatory regime. Leaving the EU is essential for our long-term economic prospects as well as for our freedom.

Economists for Free Trade go further and conclude that leaving what they view as the mercantilist EU / Single Market, designed to favour exports of  German manufacturing and French agriculture, will bring a 6.8% GDP gain amounting to £135bn.

Pro-EU commentators pour cold water on the global free trade opportunity provided by Brexit. Recently, pro-EU Sam Lowe claimed that NAFTA had only added 0.5% GDP, which he describes as "within rounding error". Yet the same commentators say it is an act of economic madness to leave the EU trade bloc. This of course ignores the obvious point that the EU is not simply a trade bloc, but also begs the question, how much value is the Single Market ?

In 2012, to commemorate 20 years of the Single Market, the EU commission published its own estimate that an average of 2% GDP had been added across the member states. To get to this figure, the commission ignored the downturn of 2008-12 and measured from the trough of 1992 to the peak of 2008. This period also coincides with the former Eastern Bloc economies experiencing high growth due to "catch-up" following decades of Communist rule. Furthermore, the UK was already developed and liberalised in 1992 and so would expect to gain less benefit than the average 2% across EU member states. So it is unlikely that the Single Market added 2% to UK GDP.

As well as leaving the Single Market, we will be leaving the EU's Customs Union, resulting in a new customs border with associated customs clearance and Rules of Origin (RoO). Open Europe has estimated this will add 4% to the transactional cost of trade resulting in a 1% impact to GDP.  Customs borders between EU states were removed at the introduction of the Single Market in 1992 (note that this does not apply to EFTA EEA states, who still have a customs border with the EU).  So in fact the optimistic estimate of 2% GDP gain from the Single Market since 1992 will include the removal of internal customs borders within the EU. Given that the 2% figure is likely over-estimated for the UK and Open Europe's estimate of 1% GDP for a customs border, the value of staying in the Single Market via EFTA EEA (which has customs borders) is of minimal value - perhaps 0.5%, the figure which Sam Lowe considers to be "in the rounding error".

The Single Market may not have added much value, but it has certainly curtailed our freedom and sovereignty. Norwegian euro-sceptics complain that the EU increasingly encroaches on their sovereignty via the EEA agreement and want a looser free trade agreement. It seems to me that the Single Market is another example of pro-EU establishment economic propaganda providing cover for political aims. To quote Jacques Delors on the founding of the Single Market: "Europe cannot attain political union ... unless it is in control of its economic destiny. That is why we need an organised economic area."  

But another question arises. If the Single Market has added so little value, how is it that leaving it will be such an economic  catastrophe ? Single Market advocates say that tariffs are not the issue and a simple free trade agreement is little better than No Deal. It's all about "non-tariff barriers". The argument seems to be that having become enmeshed in the EU's regulatory regime (for negligible economic gain), dis-entangling is so difficult it will create a shock and lasting damage to our economy.

Single Market advocate Pete North has recently published a blog post laying out his thinking on this point as a basis for a parliamentary briefing he has been asked to submit, covering Flexcit memes that I am very familiar with. The Norths deserve credit for leading the debate on non-tariff barriers, which is what initially attracted to me to Flexcit. Unfortunately, they refuse to countenance or engage with any alternative views or perspectives and instead double-down on their apocalyptic view of life outside the Single Market. As I explored further and learnt more, I found myself questioning the impartiality and accuracy of the North's claims. So I want to take the opportunity to respond to the blog post and write up my own perspective.

While Pete North has written up his thoughts in one (albeit relatively lengthy) post, he can give the impression of detail while glossing over complex points. So I will probably need a lot of blog posts to respond. I hope to examine the paradoxical claim that the Single Market has added little value but is somehow too expensive to leave. In essence, I want to explore the price of freedom from the EU and its regulatory union / Single Market.


  1. Good stuff, look forward to the follow ups

  2. A decent round up Paul. Very important in creating the narrative about high costs of leaving have been a few things -

    1) Gravity models of trade which claim that EU membership doubles UK trade with the EU. While appearing scientific, these models are in fact prone to enormous margins of error, with different estimation approaches providing radically different results. For example, Walsh et al. (2006) present estimates for the impact of the EU on services trade - one specification shows a significant impact, another (statistically better one) shows no effect. The Treasury study from 2016 was also flawed in several respects, most seriously using an average impact across EU countries rather than the impact for the UK alone. Gudgin and Coutts (2017) have shown that if you instead look at the UK only, the effects are much smaller.

    2) Claims that higher trade levels lead to higher productivity. This claim is based on a single paper which uses a sample mostly of emerging economies. If you look at just advanced economies, there is no relationship. This supposed productivity effect is a very important part of the empirical result of HMT but is incredibly flaky.

    3) Another piece of sleight of hand used by the LSE was to add in to UK 'losses' the supposed future gains of further UK integration.

    4) Exaggerated claims about the scale and impact of NTBs. You have done a good job of demolishing these claims yourself. Typical of the dubious approaches here have been claims that NTBs post-Brexit might be similar to the (questionable) estimates of NTBs between the EU and US. Given the regulatory alignment of the UK and EU this is obviously inaccurate. Some more serious recent estimates have instead suggested the scale of NTBs might be around 3% of export values (see e.g. Lawless and Morganroth This is a long way from the apocalyptic claims of some observers.

    All in all what we have here is a tissue of exaggerated estimates created by cherry-picking of data or deliberately skewed methodologies. What's quite interesting if you follow the whole literature on UK EU membership back to the early 1990s is that these 'big numbers'only started to materialise a couple of years ago.

  3. Thanks for your comments.

    Having looked at some of the papers produced by LSE types, I am amazed at the confirmation bias, skewed assumptions and quoting of each other's works as "facts" I found. Absolutely no independent academic rigour whatsoever.