Government and Institutions

I used to be a eurosceptic. Here’s why I changed my mind


Tax and Fiscal Policy
Tax and Fiscal Policy
Not so long ago, I was a proud member of the free-market Eurosceptic crowd. For years, I quite literally made my living criticising the EU’s populist overregulationmoral hazardthe damage created by the common European currencyEU structural funds or the Common Agricultural Policy. Even today, I am convinced that the EU is a flawed organisation and that it deserves much of the criticism that it receives from pro-market circles.

However, over the past two years, I have also come to the conclusion that for all its problems, the EU is irreplaceable in a number of its roles, which advocates of free-enterprise ought to value. Of course, the choice on 23 June is not up to an expatriated Eastern European pundit but British voters. However, for what it’s worth, I believe that it is a grave mistake for advocates of free-markets, in the UK or on the continent, to cheer for Brexit or for the EU’s eventual collapse.

In part, my change of heart on the EU – which I also outline in my new book, Towards an Imperfect Union – reflects the experience of my part of the world, where the prospect of European integration created pressure to reform Eastern European economies and strengthen the rule of law. More broadly, the EU provided a mechanism for politicians across Europe to commit to economic openness, even at times when it was politically unpopular. Much as free-market advocates might dislike the political superstructure that emerged around an initially economic project, it represents a substantial progress over the cobweb of bilateral trade agreements which guided trade relations in the past and which tended to break down on a regular basis.

The EU’s contribution goes far beyond the question of tariffs that until 1968 separated markets in the countries of the European Economic Area from one another. It includes questions of state aid to national champions or curbing of regulatory protectionism pandering to vested interests at home. In this context, the common charge against the EU – its democratic deficit – is often ill-conceived. Just as among central banks, fiscal policy boards, or energy regulators, the lack of democratic accountability by many elements of the EU’s political architecture is not a bug, but a feature.

The foundational thinkers of the free-market movement understood that economic openness required political underpinnings that go beyond the nation state. Hayek, for example, writes that “it has been rightly contended that it was one of the main deficiencies of nineteenth-century liberalism that its advocates did not sufficiently realise that the achievement of the recognised harmony of interests between the inhabitants of the different states was only possible within the framework of international security” – by which he meant a common federal government, “under which certain strictly defined powers are transferred to an international authority.”

In Hayek’s opinion, there is no conflict between the idea of a European federation and the principles of classical liberalism and free enterprise. Quite the contrary, the two are mutually reinforcing, with open markets being a prerequisite for a successful federation and “the abrogation of national sovereignties” being “the logical consummation of the liberal programme.”

Hayek was not alone in his views – very similar arguments can be found in the work of Wilhelm Röpke, a co-founder of the Mont Pèlerin Society. Of course, today’s Europe is far from the classical liberal ideal of a federation in which Brussels would be constrained by a proper system of separation of powers and judicial review. Instead, we have an evolving, oftentimes dysfunctional entity, with a system of decision-making that relies instead on a fuzzy notion of subsidiarity and layers of highly complex treaties.

However, historically, the EU is a massive improvement over what has been the baseline of European history for centuries: protectionism and war. Eurosceptics who want the EU to go away thus have to do more than to invoke its failures; they need to show how the demise of the EU – or, on a smaller scale, Brexit – would make things better, not worse. To my knowledge, nobody has yet risen to that challenge.

Don’t get me wrong, I do not think the EU can, or should just continue in its present form. To use Albert Hirschman’s terminology, there are two options to push for change: voice and exit. Because the use of voice is often frustrating, many proponents of free enterprise have now placed their bets on exit or its threat.

But how exactly is exit going to push the EU in a good direction? Right now, the campaign to leave relies on a variation of the “underpants gnomes” theory, as in the famous episode of South Park, where the following three-step business model was presented: 1. Collect underpants, 2. [blank], 3. Profit.

Similarly, nobody has explained the mechanism through which Brexit would lead to the outcomes that Leavers want, either in the UK or in Europe as a whole. Consider, for one, the issue of sovereignty. Assuming that the UK wants to retain its access to the single market, it can follow the route of Norway, an EEA member, which applies around three quarters of all EU legislation and is part of Schengen. It could follow the model of Switzerland, where a dominant (and growing) proportion of new laws and regulations result from simply transposing EU laws into its own legal system.

As free-marketeers, we would like to live in a world where governance follows the principle of mutual recognition, allowing for market integration and unrestricted competition between legal and regulatory regimes. But we do not live in that world – and we will not live in that world if the UK leaves the EU, nor will we if the EU disintegrates.

The only route towards “retaking control of our laws” post-Brexit consists of not being a part of the single market but instead negotiating some limited trade agreement, like Canada. Setting aside the fact that such trade agreements, too, would restrain the ability of the UK to adopt or repeal some legislation, it would carry costs for those sectors of the economy not covered in the agreement. The bottom line is that, after Brexit, there would be less economic integration with the continent, not more – and much less control over the terms under which UK businesses operated in the EU.

Leavers, such as Dan Hannan, put a lot of faith into the UK’s ability to strike solid free trade agreements with the rest of the world right after leaving the EU. It is true the common external tariff means that the UK cannot just slash its tariffs on imports from the entire world, as many of us would wish. What Leavers neglect to mention is that the UK, or other countries, cannot engage in protectionism against third countries, either.

A more significant hole in their argument has to do with the nature of today’s trade deals. With the rise of the service sector and decades of trade liberalisation after the Second World War, conventional forms of protectionism such as quotas and tariffs are becoming less and less relevant. Integration of markets requires also dismantling regulatory barriers – a task that is taking the EU itself decades. The shift of relative importance to regulatory protectionism is also reflected in the complexity of the trade agreements around the world. Those are not simple matters of scrapping (mostly trivial) quotas and tariffs.

Instead, trade agreements that really liberalise markets involve complicated and politically contentious issues of mutual recognition, regulatory harmonisation, and introduction of common dispute resolution mechanisms. As such, they require significant political investment, expertise, and patience. The notion that economies around the world would jump immediately at the first possibility of striking deep and meaningful trade deals with the UK, dismantling not only tariffs and quantitative restrictions but regulatory barriers as well, is not realistic.

I am not saying that Brexit would be an economic catastrophe for the UK. But it is clear that it would involve a fair amount of uncertainty about the economic ties between the UK and the EU and with the rest of the world. And there is ample evidence that such uncertainty is bad for economic activity.

As an Eastern European, however, I find the strongest argument against Brexit to be geopolitical, not economic. Europe is being torn apart by rising nativist movements, a protracted economic malaise, the rise of a revisionist Russia, and brewing instability in the Middle East. Across the Atlantic, there is a small, yet non-negligible, chance that Donald Trump will become the next president of the United States. In short, the world appears to be a more dangerous place than at any other time in my memory. Even in the most optimistic of scenarios, Brexit would shift the focus of British politics – and of much of European politics – away from these strategic threats to parochial efforts aiming at reaching a decent trading and political settlement. That strikes me as a risk that would require a much more compelling justification than the one currently provided by the Leave campaign.

Dalibor Rohac is an economics fellow at IEA, a research fellow at the American Enterprise Institute, and author of Towards an Imperfect Union: A Conservative Case for the EU

IEA Economics Fellow

Dalibor Rohac is an Economics Fellow at the Institute of Economic Affairs. Dalibor has also worked as a policy analyst with the Cato Institute’s Center for Global Liberty and Prosperity, with his work focusing on primarily on international political economy and development. Dalibor has a very international education, as he holds a Ph.D. in political economy from King’s College London, an M.Phil. from Oxford University, an M.A. from George Mason University and an undergraduate degree from Charles University in Prague.

2 thoughts on “I used to be a eurosceptic. Here’s why I changed my mind”

  1. Posted 30/03/2016 at 16:49 | Permalink

    Of course the EU is a political project: economics is a relatively unimportant aspect of it. But it badly needs reform — and that’s why it was so disappointing (a) that the British Prime Minister (and government) chose to ask for so little in their ‘negotiations’ and (b) that the EU appeared to be both complacent and inflexible in responding in such a grudging way. I believe (and hope) it’s possible (no more) that Brexit would (will) jolt the EU into realising that it does need some truly radical changes — for example to its ridiculous energy policies which are doing so much damage across Europe. Of course the UK can survive perfectly well outside the EU; but we are not being given the choice of remaining in a ‘reformed EU’. That is precisely what is not on offer.

  2. Posted 31/03/2016 at 03:58 | Permalink

    “Europe is being torn apart by rising nativist movements, a protracted economic malaise”, any of that got anything to do with EU structures and policies?

    States that cannot accommodate their populations’ voices are not strengthened in the face of the other threats you mention, they are weakened. Eventually the populations insist on exit from the state structures being imposed on them, and the longer this is resisted the worse the dislocation when it comes.

    Imposing the “correct” policies on people who reject them can only work for so long, and by denying them a voice it first infantilizes them and then calls forth irresponsibility. Quite apart from the ethics of this, who’s to say you’re actually right about what the “correct” policies are?

    The EU is broken, it can’t be fixed, and UK can best serve everyone by leaving. The UK can then move to help establish an alternative European economic space, perhaps based in UNECE as suggested in the Flexcit plan.

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