Government and Institutions

“Despite Brexit” or “because of Brexit”?


How far has EU membership benefited the UK economy since 1973? A pro-EU colleague emailed me last week: “we’re the fifth largest economy in the world, but in the 1970s, before we joined the EU, we were the sick man of Europe – strike-bound, socialist, ungovernable, poor and getting poorer.”

The not-so-subtle implication of the tone (though my colleague is too intelligent to explicitly conflate correlation with causation) is that Britain’s improved performance has been “a result of” EU membership. Yet many Brexiteers believe that Britain’s economic progress has occurred “despite” membership.

Indeed, these counterfactual histories explain a lot about the pro-Brexit and anti-Brexit tribes today, and highlight a discrepancy in the anti-Brexit argument.

Britain did see a significant relative decline in the period prior to becoming an EEC member. In the 40 years after joining, GDP per capita here grew faster, such that Britain became more prosperous than the average of Germany, France and Italy in 2013 for the first time since 1965.

An increasing openness to trade and investment at an EU-level, the gradual liberalisation of markets across the EU, and restrictions on state-aid and government favouritism could all have contributed to this.

The mere fact though that one event precedes another does not tell us anything about whether the event caused the change in direction.

It doesn’t take much time to realise that there is a rather large confounding factor. During that same period, Britain underwent a paradigm shift in domestic economic policy, following Margaret Thatcher’s election in 1979.

State-owned industries were privatised. Marginal tax rates were lowered. The growth of government spending was suppressed. Product and (later) labour markets were liberalised, including the curbing of trade union power.

All of these, we’d imagine, would increase productivity. Cumulatively, they represented a significant supply-side reform package.

If it were the EU, rather than Britain’s domestic policy agenda, that generated the improvement in performance, why did some EU economies that did not reform really struggle?

Some might blame the euro more recently, but it’s becoming increasingly clear that the euro crisis merely exposed bad domestic policies in economies such as Greece, Portugal and Spain. The latter in particular has begun to grow robustly following significant domestic labour market reforms.

It therefore should not surprise us that those who were most optimistic about Brexit are often those who were part – or are modern-day disciples – of the Thatcher revolution. For us, while the EU has on net played a liberalising role across Europe, it is domestic policy that matters far more for success.

We do not think Britain will abandon the “good bits” of EU law, and in many areas, such as tariffs, regulatory policy and agricultural protectionism, Brexit presents opportunities to move in a more pro-market direction.

Indeed, the history we see is an EU that since the 1990s has sought to entrench more rights, regulations, environmental standards and financial regulations on Britain, preventing us from fulfilling the next stage of the economic liberal revolution.

One might disagree with this outlook. The rise of Jeremy Corbyn has been a bracing reminder that few battles in politics are final victories.

But the counterfactual historical interpretations above do highlight a major discrepancy in the Remainer arguments.

When Brexiteers bemoan the erosion of sovereignty owing to EU centralisation, Remainers are quick to point out how much consequential economic policy still remains within our own hands. Yet this does not square with their belief that we are necessarily doomed to fail economically outside.

Even if one thinks our trading conditions might be worsened as a result of leaving the Single Market, there are plenty of other supply-side levers to pull, as the 1980s showed us.

This is the key reason why I believe much of the economics profession has been so misguided on the long-term consequences of Brexit.

Whether Brexit is a success or failure in the long term will ultimately depend on the policies adopted through the domestic political process. Economists have no specialist knowledge on this, just as they had no idea of the neoliberal revolution that would have occurred from the late 1970s.

Of course, even now economists disagree on the virtues of lots of the policies implemented in the Thatcher-Blair era. Some debates will never be settled.

Just as its disputed whether Britain’s relative success since the 1980s was due to EU membership or the Thatcher revolution, so Britain’s future success or failure will be judged “as a result of” or “despite” Brexit.

 

This article was first published in City AM.

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Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).


3 thoughts on ““Despite Brexit” or “because of Brexit”?”

  1. Posted 15/11/2017 at 22:18 | Permalink

    A massive confounding factor has been left out. In the late 1970’s Britain became an oil producer. This allowed monetary policies aimed at a high pound to control inflation. Manufacturing was severely damaged buy much additional oil money was attracted to the city from elsewhere especially Arabia.

    The rest of the EU, as a whole, has no oil. So the price rises of 2007 and 2008 exposed debt problems while papering over the UK’s worst cracks by boosting the FIRRE economy yet again. Take away oil and the UK would be a very different place. When I started my engineering career in the Midlands in the early 1970’s we still matched Germany.

    Without oil we might still have done so. To take an extreme example, the transformation of British Leyland into Rover produced perfectly good cars, well focused on a particular market segment. Sales were building in Taiwan and Indonesia. Unfortunately the firm had cut back so hard that it simply did not have the production capacity to make a profit and no route to investment given British incentives to invest overseas. It is telling that large multinationals with sometime origins in the UK invest in Russia and India rather than export to them. Examples would be Unilever and BAT; Cadbury’s and Scottish and Newcastle in their day too. German firms manage to do both. Oil made finance the master not hte servant; nothing to do with the EU.

    A lack of oil may have meant more prosperity in Wales and the North of England and a less bloated London attracting fewer foreign migrants and more internal migrants due to lower house prices. The EU would have been a bigger market to play in for goods manufacturers than a “sovereign” 51st state could have managed. The EU has on the whole been manufacturing friendly. We might have retained more private sector suppliers to utilities, say BREL or some parts of GEC instead of losing, say, ICI to death by finance (also GEC’s fate). It’s not all gloom. Despite oil there have been some market share successes. Without the EU’s regulatory power, the UK’s mobile phone industry (Cambridge is to mobile phone design what Palo Alto is to computers) might not exist.

  2. Posted 16/11/2017 at 10:08 | Permalink

    @Philip Owen – Your argument is counterfactual. After the shakeout of the first two years of the Thatcher government (some of which might be blamed on her government’s policies but some of which was undoubtedly because of a western recession that started as she came to office and some of which was down to hugely inefficient industries losing out to overseas competition during the recession) , manufacturing output grew steadily. By 1997, output, even including the dramatic early 80s drop, was around 20% up on 1979. Output continued to grow until 2001, after which it stagnated and then fell dramatically. Output went down by over 10% between 1997 and 2010, despite rapid productivity gains in manufacturing organisations. I’d contend that it was the change in government policies since 1997 that damaged manufacturing industry most.

  3. Posted 16/11/2017 at 12:32 | Permalink

    Dear Mr Bourne

    “we’re the fifth largest economy in the world, but in the 1970s, before we joined the EU, we were the sick man of Europe – strike-bound, socialist, ungovernable, poor and getting poorer.” sayeth your correspondent, without mentioning our position in the world back then.

    Wikipedia has an interesting table at https://en.wikipedia.org/wiki/List_of_countries_by_largest_historical_GDP

    For nominal GDP our rankings were:

    1960 4th, 65 5th (eclipsed by France), 70 – 85 6th (Japan), 90 7th (Italy!), 1995-00 5th (USSR dissolves, overtake Italy), 2005 4th (overtake France), 10 6th (China, France), 2015 5th (overtake France again).

    Hereafter it is downhill as India, Indonesia, Brazil and Mexico push us steadily down to 9th position according to IMF & PwC forecasts to 2050, assuming we are not all dead from global warming by then.

    DP

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