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Reviewing the case for Brexit *

First published: 25th April 2016

In the 1920s and 1930s, the rise of populist and nationalist movements preyed on the insecurity and uncertainties felt by many citizens, urging them to back leaders who, echoing the past, ‘would make the world right again’. As the wonderful historian Margaret Macmillan has written, they offered assurances and belief, the certainty of control, and a new economic dawn. Today, in the US, we have Donald Trump promising to make America great again. In China, unstinting public support for President Xi Jinping is the sine qua non for the country’s Great Rejuvenation. Not to be left out, the UK’s Vote Leave campaign, is fulfilling much the same function, even without what we would regard as an obvious charismatic leader. The most colourful, perhaps, is Boris Johnson, outgoing Mayor of London, and so cue the sorcerer’s apprentice, his chief economist, Gerard Lyons, who writes in a recently published e-book on ‘The UK Referendum: An Easy Guide to Leaving The EU’.

The good thing about Lyons’ 44 page tract is that it is short. It is certainly not an idiot’s guide to the debate for as the former Chief Economist of Standard Chartered Bank, he certainly has experience and skill in framing a discussion. It is, though, written for non-specialists and therefore, both readable and accessible. The question then is, what does he say and is it persuasive? The tract examines some history to begin with, looking at the birth of the European project after the second world war and moving on to an outline of how the UK’s conflicted relationship with Europe has evolved. Although Lyons claims in the introduction his arguments will be balanced, the chapter entitled ‘ The UK will not lose influence with Brexit’ confirms his strongly held view that the UK is better off on its own, and we should vote to abandon the EU. There then follows a series of chapters on the Single Market, membership costs, immigration, the City, trade, effects on jobs and investment, leading ultimately to his inevitable conclusion.

I was put off by errors of fact and judgement. Lyons admits that Brexit would lead to some uncertainty in the economy – surely an understatement – but he reverts to now flawed economic thinking that this would be followed by a strong economic recovery. It’s flawed because if there’s something economic thinking has had to acknowledge since the financial crisis, it is that disequilibrium situations can persist, and they are. Short of a possible large devaluation boost, following Brexit, which might help to cushion the ensuing recession and boost inflation and risk premiums in financial markets, there is no reason to expect Lyons’ outcome. Tracing the outlines of post-war history, he states factually that every IMF Chief has been a European and every World Bank President an American. Jim Yong KIm, a South Korean by birth, who is now President of the World Bank, might beg to differ. This doesn’t spell irrelevance for the Brexit case, but betrays an inattention to detail.

He also says that the referendum is choice between staying in an unreformed EU – but he has no claim or argument as to how the EU will evolve – versus ‘leaving and positioning the UK for a changing global economy in the 21st century’. If this isn’t flowery language ad absurdum, what is? The changing global economy isn’t the panglossian, benign place he assumes throughout the book. It is fractious, and dangerous. World trade has stalled, the BRICS are mostly in serious trouble with the exception of India which is a relatively closed economy, and emerging markets are going through a growth hiatus of indeterminate length. Protectionism is on the rise. No US presidential candidate is advocating the status quo as far as globalisation and free trade are concerned. The G20 is toothless when it comes to global co-ordination. America and China are their own economic blocs, deriving strength from size. So is the EU, relatively. It is almost childish to imagine that the UK, cut loose from the EU, could be the stand-alone bulldog economy that Lyons believes.

Later in the book, he says once the UK left the EU, it could always apply to rejoin in future years if it wanted. Really? He seems to think the EU is sort of sports club or gym. Seriously, thats not how UK or European politics work. In any event that could be a generation away, and it is by no means clear that the UK is past the point of no return in its EU relations. WE are only voting because of an internecine war in the Conservative Party. No other reason.

Lyons litany of ‘why we don’t like the EU’ is quite familiar, and comprises some issues about which Remainers would agree. Yes, it is bureaucratic and a rules-based institutional structure that is sometimes inflexible, and prone to what we might all agree to over-regulation or even silly regulations. Yet, historically, the UK’s intervention in framing and agreeing much EU regulation has been common and frequent. And according to the OECD’s reputable governance indicators, the UK itself has one of the least regulated enterprise sectors and labour markets in the world, regardless, so go figure! The worst and most damaging regulations the UK has are in respect to land and the housing sector, all of which are self-made. There is no reason to expect this to change after Brexit.

Yes, the UK is a contributor, net, to the EU budget, and £8 billion or so is a lot of money to you and me, but not so in a £2 trillion economy, or set against most departmental spending totals.  In any event, what we pay is a reflection of our economic size and sophistication, and we pay dues along with others to a project from which we also derive huge benefits that Lyons doesn’t acknowledge or discuss. Access to the Single Market for one, but also the wider spin-offs that include investment flows, science and research & development, and the alleviation of labour and skill shortages.

To my knowledge, no one has tried to trace the consequences of EU membership to the country’s total factor productivity growth, that is the unmeasurable part of productivity growth not accounted for labour and capital directly. It’s a term that captures technical progress, organisational efficiencies, and the spin-offs from deeper integration, such as those represented by the Single Market. What we do know is that our TFP performance, like most other advanced economies, has been poor for a variety of reasons. What we can say without equivocation is that leaving the EU would unquestionably lower it further. That will make us worse off, regardless of whether you believe or don’t believe the precise numbers in the Treasury’s recent study. It’s a cost Lyons doesn’t recognise, but neither does his boss or the rest of the Vote Leave campaign.

Lyons’ opinions are weakest when it comes to whether the UK post Bexit would or would not lose influence in the world, and on military, defence  and security matters. This is to be expected, he is after all a pure economist, not a political economy or international relations expert. The tract might be stronger had he left these out. I understand why he included them – they are more important, probably, as concepts people understand than the complex world of economics. But what he writes you could hear at Speaker’s Corner any Sunday and doesn’t really add anything to his case. The UK has representations in global institutions that would endure Brexit. plus nuclear weapons. But he think he has little idea about what foreigners think about the EU as a negotiating partner when it comes to getting deals done. Outside the EU, the UK may find favour here and there with other systemically important countries, but it is implausible that the US, China and so on would take the UK as seriously outside the EU as inside. None less that the President of the US said as much when he visited the UK in late April.

Lyons is better, though by no means balanced and comprehensive, when it comes to the Single Market, the City, and other economic matters, such as jobs and investment, always bearing in mind that he is painting the dark side. What he really doesn’t like about the Single Market isn’t the economics and commerce of it, but free movement of labour. And yet, here he is very careful to hedge his bets for fear of pandering to a more extremist view. He acknowledges, as all economists must, the benefits of immigration to the UK – up to the point it becomes excessive, whatever that means, but he doesn’t define excessive. He says it contributes to downward pressure on wages, though there is no empirical evidence to say this is so. He says it adds to pressure on local communities in schooling, healthcare and housing – which may well be true – but isn’t the right counterpoint to that that the authorities manage the process better? Lyons knows that managing the migration of those that want to live and work in Europe and the UK is a complex, formidable challenge. He just doesn’t want the UK to have to take those people who come to or live in the EU because we cannot control the flow. One can sympathise with this sovereignty grab to a degree, but it’s a pretty flimsy excuse to affect the country’s future, when there remain pragmatic responses that are hardly rocket science.

Lyons insists the City’s future is secure for amy of the familiar reasons we know about when it comes to why London is the world’s financial centre par excellence. Yet, he doesn’t cite a recent l;egal case in which the ECB sought to have certain types of financial clearing done only in the Eurozone. It lost the case, but it doesn;t take a genius to imagine that the ECB could and well might demand that you had to have an EU domicile in which to base your headquarters for Euro-denominated transactions. That would pose a threat to the City that Brexit campaigners bypass completely.

The most surprising point in Lyons’ tract is that he claims the UK doesn’t need access to the Single Market, or any trade deal at all for that matter. He claims we could learn from South Korea or Singapore and deal with whomever we like on any basis as a member of there WTO. This is a complex issue but Lyons should know better than to choose two countries that are pivotal in China’s supply chains and major goods and parts and components exporters, or in Singapore’s case, a re-exporter. This is on a par with Michael Gove’s option for us to join with the Balkan countries and Ukraine and Iceland to trade freely – or the Albanian option as it has been labelled. You don’t have to think about this much. The UK’s natural geographic advantage is Europe, which is why it’s where most of our trade is. We need to trade services, and we need to trade with systemically important countries in the world at a time when world trade is changing in shape and size and not favourably for countries that are on their own.

In the end, Gerard Lyons has made a calm pitch for an alternative future for the UK outside the EU. But he and the Vote Leave campaign refuse to acknowledge the considerable costs to living standards that are at risk, and lack a realistic and well-founded vision about what this future could look like, and more to the point, how it would be to our advantage. I didn’t expect him to paint Brexit in the first instance an act of self-harm, and then as a catalyst for the disintegration of Europe. But for us and our progeny, this matters more than budgetary costs and trade.

* This is the full version of an edited piece that appeared in Prospect Magazine on line on 22nd April 2016