This is the field where one of the main Brexit battles will be fought, with the Remain army’s war cry, “a Leap in the Dark”, ringing in our ears. But economics is not a science. Changes within the system have second-order effects (and higher) and these will have unforeseen consequences that may swamp the expected ones. When Britain left the ERM in 1992 sterling fell as was expected (by 15%) but the Government could now take action – such as cutting interest rates. The pound recovered and the economy prospered. Some experts (economists, politicians and businessmen) who predicted misery if Britain were excluded from the Euro now predict much the same if we leave the EU; earlier failure does not deter them from making such judgements.
Evan Esar (America’s answer to Oscar Wilde) said, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” Looking back things (sometimes) become clearer.
Economics, as a discipline, does not have the advantages of other sciences, such as being able to conduct controlled experiments. Economists study a very complex space and, like meteorologists, can’t really predict the future beyond the near term. Theory and experience reveal patterns but the system overall is so complex that forecasts are unreliable. And yet leaders of the EU/EMU believe that they can not only predict but also control the future, if only the rest of us would behave according to their rules.
A sound purpose for economic and monetary union would be to support the successful functioning of the economic and commercial activities of the citizens of the EU. The varied and competitive nature of these activities will ensure that things are never smooth and closer coordination of policies will not be able to iron out what is intrinsically bumpy. As a result, economic policies have become an end in themselves, requiring masses of unwanted regulations to grind down every perceived bump into a uniform dust.
Within the EU Germany is easily our largest trading partner. The USA is larger than any of the others (though Ireland ranks high for its size). If we insist on aggregates then EU trade is less than RoW (Rest of the World), and shrinking fast in proportion. We have a trade surplus with RoW but a huge deficit with the EU whose policies do not favour Britain’s strengths, primarily in services. UK trade is the least integrated of EU nations, where intra-EU trade exceeds extra-EU trade by 2:1 on average (References *4).
Suppose France attempted to rally the EU in a trade war against Britain (pour encourager les autres), then Germany would block it or lose overseas markets for a million cars a year; if France succeeded we would buy more wine from Australia and South America. Eurostat (the EU’s statistics branch) recently reported that the UK is the least economically integrated in the EU of any member state, with less than half the proportion of its exports going within the Union. UK exports to the EU have dropped at an astonishing rate, from 55% to 44% in 15 years. Meanwhile the 28 EU countries’ share of world GDP has fallen precipitously, almost halving from over 30% in 1980 to around 17% in 2015; the US share is now bigger and China is about equal already.
There is a world of opportunities and in this real world experiments can be conducted, and failures closed down and learnt from. It remains a good question whether our elected leaders are competent and enthusiastic to navigate the world rather than sulk grumpily in the face of their growing irrelevance. However, national leaders in democracies are accountable to their electorates and can be got rid of if they don’t perform. This is not true of the ‘experts’ who demand that we hand over our economies to their control and who wish to convince us that, if we all conform to the same economic model, growth, full employment and stability will follow.
Compare reality to these delusions, from the five Presidents (References *1):
“[T]he European Stability Mechanism has established itself as a central instrument to manage potential crises”, “… the Deposit Guarantee Schemes Directive has led to more harmonisation, … but it still contains some national discretion, which should be reviewed.” “In a Monetary Union, the financial system must be truly single or else the impulses from monetary policy decisions … will not be transmitted uniformly across its Member States … This will require further measures … to address the still significant margin for discretion at national level … The euro is a successful and stable currency … It has … shielded them against external instability“, “… the integrity of the euro area as a whole has been preserved“.
Economically Britain is drifting away from Europe. The Remain army’s munitions include many blanks. Trade and the economy are not the biggest issues for the Referendum.