Former Economics Editor of the NZ Herald

Brian Fallow: Nostalgia no basis for Brexit

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The British vote next Thursday on whether to leave the European Union or not. If they opt for divorce the split is unlikely to be amicable and will be economically costly.

It is rare to see as much consensus among economists as there is on the latter point. The OECD, the International Monetary Fund, the Bank of England, HM Treasury and academic economists disagree only in the magnitude of the hit to the United Kingdom's gross domestic product that would result from British exit (Brexit).

To be fair there is a lot of uncertainty around the estimates. Brexit, after all, would be unprecedented.

That uncertainty about the implications for British trade, and for the role of the City of London as a major financial hub, would persist for a few years - the time Brexit would take to negotiate - and have a chilling effect on investment and hiring in the meantime.

It is sometimes argued that same uncertainty would see sterling sold off and a lower exchange rate would be positive for British exports. That is akin to saying why not shoot yourself in the foot; it's marvellous what they do with prosthetics these days.

British voters are not being given a choice between the status quo and some clearly defined alternative relationship with the EU. They don't know, because no one can tell them, what a vote to leave the EU would mean. But whatever that relationship becomes it will continue to be crucial to the British. About half of Britain's two-way trade is with the rest of the EU, including 45 per cent of its exports.

If someone advocated that New Zealand tear up the CER with Australia and the free trade agreement with China in the vague hope of negotiating better deals to replace them, would we think that was a sensible plan?

Thinking about the trade implications of Brexit is bedevilled by an outmoded conception of trade in which goods are made in one country and sold in another.

Today value chains cross national borders multiple times. The impediments to international trade are not so much tariffs at the border but misaligned regulatory standards which block those value chains.

If Britain wants to continue to trade with the rest of Europe on anything like the current scale, it will be on Europe's terms. But it will have given up any influence over what those terms are.

The best deal Britain could hope for post-Brexit would be one like Norway's. Norway has unrestricted access to the European single market for (non-agricultural) goods and services, but must comply with the single market's regulatory standards, in which it has no say. In return Norway must contribute to the EU budget, to the tune of 83 per cent per capita of what the British pay now.

Whether such a deal would be available to Britain is a moot point, especially if Brexit were seen on the continent as a precedent which posed a threat to the union's existence.

Then there is the question of the effect on Britain's trade with other regions if it is no longer governed by agreements negotiated by the European Union.

Eurosceptics assume those agreements dilute Britain's interests but research by the London School of Economics found that the EU's trade deals tended to benefit Britain more than other European countries.

And when it comes to negotiating trade deals - size matters. Renegotiating agreements with the rest of the world would be a long, slow and, one suspects, dispiriting process. The idea that Britain alone could negotiate better terms than the EU is deluded.

Another big source of uncertainty is what Brexit would mean for the City's role as a financial centre. It is clear than it would not be enhanced.

Perhaps reflecting that, the geographical breakdown of support for the Remain campaign is stronger in London than in the rest of England.

Scotland, Wales and Northern Ireland also tend to favour remaining in the EU. Perhaps they have a keener sense of the perils of being peripheral. Demographically support for the EU is stronger among the young and better educated.

If the economic case for remaining in the EU is so clear, why does the polling suggest it will be a near-run thing?

"Time for the UK to take its future back into its own hands, my boy," is how a former colleague who now lives there put it to me.

But the days when Britain enjoyed the same global position that the United States has now are long gone. Nostalgia is no basis for policy.

The European Project has always represented a trade-off. The benefits from removing barriers to the movement of goods, capital and people come at the cost of centralised decision-making for increasingly large and diverse groups of people, none of whom like compromise.

A sense the EU institutions are remote and unaccountable is not confined to the British.
The European Project has not been an unqualified success. The euro has proven a calamitous mistake, at least for the weaker members of the euro area, and the EU is failing to deal with the issues around refugees and migration more broadly.

But Britain wisely opted to stay out of the euro area. Nor is it part of the Schengen Agreement abolishing border controls, which appears to be unravelling.

Concern about unfettered migration from the rest of the EU is a key button the Leave campaigners have been pushing, unpersuaded by research that suggests fears it hurts employment among the native population are misplaced and that immigrants make a net positive contribution to public finances.

It is fair to say the British have always been reluctant Europeans.

When I lived in London in my distant youth I had the impression that for the Germans and the French Europe was all around them but for the British it was something they looked over their left shoulder at, while facing the Atlantic and the wider world. That lack of euro-centricity can be a strength.

But the days when Britain enjoyed the same global position that the United States has now are long gone. Nostalgia is no basis for policy.

And it is dismaying to see nationalism on the rise in a part of the world which, more than any other, should know how destructive a force it can be.

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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