The Bear’s Lair: Brexit could unshackle Britain from a corpse

When Britain joined the future European Union in 1973, it appeared to be improving its economic outlook by doing so. Certainly when I foolishly voted “Yes” in the 1975 Referendum I thought so. Europe seemed the only bright possibility for the appallingly run United Kingdom, with 25% inflation that year and a Labor government leftist and incompetent even by the standards of most of that ilk — yes, I can assure younger readers that it was indeed even worse than Gordon Brown’s effort of 2007-10 (the advent of Sunny Jim Callaghan and the IMF the following year greatly improved it.)

However, since 1975 two developments have changed the picture. Margaret Thatcher came to power, and, while not free from errors, especially relating to the City of London, her policies finally turned around the wreckage of the 1970s British economy and smartened it up. Second in the late 1980s and onwards the EU bureaucrats, pleased with the progress they had made in assembling a free trade area, decided to turn it step by step into a superstate, without any proper democratic controls on its government. This should without question have been subjected to a referendum when proposed to Britain in the 1992 Maastricht Treaty. Since a negative verdict then would not have taken Britain out of the Common Market, but simply stopped the zombie superstate in its tracks, Remain voters should rain their curses on John Major, who denied Britons that referendum, and not on the greatly more capable and democratic David Cameron.

Opponents of Brexit (apart from the undemocratic ones who want to ignore the referendum result altogether and make Britons keep voting until they get the result they want) now hope for a “Norway solution” whereby Britain would remain within the European Single Market, would continue paying its current very substantial contribution into EU coffers, would not regain control of its borders and would lose any say in what EU bureaucrats’ rules actually said.

That seems to me a very bad deal indeed. Britain would be subject to whatever budget increases the bureaucrats decided to award themselves, without having any say in the matter. Britain is already the second largest contributor to EU funds; by leaving itself vulnerable to looting in that way it would quickly find itself subsidizing endless schemes of social welfare and bailouts in southern and eastern Europe.

On the other side, Britain would not get the full benefits of membership of the Single Market, because it would no longer have any control over the rules made, which would inevitably discriminate against the City of London, ensuring that Paris, Frankfurt and other tinpot Continental financial centers grabbed as much of the City’s business as they could. Already, even without any formal action by Britain to leave the EU, Lord Hill, the British commissioner for financial services, has been forced out of his post, to be replaced by the (generally admirable) Latvian Valdis Dombrovskis, who will doubtless be replaced by a French leftist in due course.

As for free movement of labor within the EU, most people favored that when it was introduced in the 1990s, yet it has become the principal rallying point for opponents of the EU. The reason is that the EU has proved itself utterly negligent in enforcing its own borders, with Angela Merkel in particular making the problem many times worse by her completely irresponsible welcome to refugees last year.

It’s one thing to be open to Polish plumbers and other East Europeans, the flow of whom will naturally slow as their own economies get richer. It is quite another matter to welcome the flotsam of the world, shipped to Europe by criminal gangs, and including not only the utterly unemployable but also those who wish great harm to the West’s tottering civilization. Because of the inability or unwillingness of the continental states to control their own borders, Britain needs to restrict free movement. Britain is after all already a thoroughly overcrowded island, whose environment has never really recovered from the population explosion caused by the Industrial Revolution.

It is vanishingly unlikely that the EU will allow Britain to remain a member of the Single Market, even in an attenuated version with discrimination against the City, without “free movement of labor.” It is also completely impossible that the EU will allow Britain access to the Single Market without continuing its massive budgetary contribution, which if in the Norway position it will be powerless to prevent getting ever larger.

Accordingly, British policymakers need to look at the advantages and disadvantages of the Single Market itself, to see if it is worth the major costs, financial, economic, social and political, of allowing free movement of labor and making enormous budget contributions.

It quickly becomes apparent that the Single Market offers no advantages that could possibly outweigh its costs. For one thing, it prevents Britain from signing advantageous trade agreements elsewhere. The EU is essentially a protectionist organization – and why not? – the great majority of its members (by all means, excepting one or two such as Holland) have a long history of protectionism, while the members from Eastern Europe suffered 50 years of outright autarky.

Hence the EU has little enthusiasm for agreements that actually free trade (as distinct from those like the Trans Pacific Partnership that call themselves free trade agreements but are mostly cloaks for protectionist intellectual property legislation.) When India attempts to set up a free trade arrangement with the EU, it finds itself stymied by special interests, especially in southern Europe, whose economies are old-fashioned enough to fear Indian competition.

Britain’s tradition is the opposite; indeed, it damaged its own economy very severely in the late nineteenth century by its fanatical devotion to unilateral free trade. The country built its economic power by trading around the world when few other countries did the same. You only have to read Daniel Defoe’s “A tour through the whole island of Great Britain,” published in 1724-27, to see that even that far back, long before industrialization, Britain was different from other countries by its inhabitants’ keen devotion to trading and the market, whether domestic or international. Long-lost annual fairs in the middle of rural Cambridgeshire drew vast crowds from all over the country, many of them driving horses, cattle or sheep hundreds of miles, in order to secure the widest possible universe of buyers for their goods.

Looked at this way, the EU’s Single Market stifles British enterprise rather than expanding it. It represents a steadily declining share of world trade, even as more and more countries have been added to it, indicating the sclerosis of its structure and the declining global salience of its participants. The insane over-regulation imposed by Brussels and the even more insane monetary policy imposed by Frankfurt make the Single Market even less attractive, because they stifle innovation and trade, wrecking the growth of productivity and wealth. They also cause a steadily lengthening list of countries in southern and eastern Europe to become overspending basket cases.

Portugal has joined Greece and Cyprus among countries demanding bailouts while rejecting utterly the fiscal self-discipline necessary to get back on its economic feet. Spain has for the moment rejected the siren song of fiscal ruin, but even so it along with Portugal is about to be “sanctioned” by the European Commission for violating previous agreements on budget discipline.

The sanctions will presumably be nominal – they would otherwise make the budget problems worse – at which point it will become clear that there is in fact no central budgetary discipline mechanism in the EU. This discovery, together with the enthusiasm of the European Central Bank for financing even the wildest and most unjustified budget deficits through government bond purchases at ultra-low rates, will drive more and more countries to discover a hidden populism and imitate Greece. Italy and France are both ripe candidates for such a political turn, and who can suppose that the hitherto admirable budget discipline in Eastern Europe will not break down under this temptation?

The European Single Market is not all that attractive even now, and it would not take much more fiscal and monetary indiscipline to turn it into an economic corpse. Defoe’s farmers and traders would have scorned to involve themselves in such a parochial and sclerotic market, but would have wanted to spread their net wider, among the whole universe of buyers. Thus even in principle the European Single Market would not have appealed to them. Instead they would have wanted the ability to make the best possible trade agreements with the most dynamic possible markets, including India, China, the United States and the faster growing countries of the Commonwealth.

Britain’s character is as it was in 1724-27, when Defoe wrote, and in 1815, when its most successful administration set the country on the road to long-term prosperity. It requires full independence of the European Union, not continued partial attachment to an entity that is already showing signs of rigor mortis.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)