Economy
We have nothing to fear but the fear of Brexit itself

We have nothing to fear but the fear of Brexit itself

Anti-Brexit dread could become a self-fulfilling prophecy.

British people are being told that there are two ways to approach Brexit, and they have to choose between them. An ideological way or a pragmatic way. Guided by formal principle or by practical necessity.

Catherine Barnard, professor of European Union law at Trinity College Cambridge, described the apparent options as follows: ‘You either have to prioritise sovereignty and domestic control, which has very significant economic costs; or you have to be more pragmatic and put a priority on your economic interests. A decision will have to be taken.’

So this is a stark choice, apparently, between sovereignty and economic livelihoods. The implication is that people shouldn’t be so stupid as to bring on economic deterioration resulting from a stubborn attachment to something as pretentious as wanting to ‘take back control’ over their nation and lives.

It is important that we cut through this presentation of Brexit. Despite the reasonable language used by the apparently sensible, Soft Brexit, economy-first side in this divide, their ‘pragmatic’ approach to the Brexit process would deny the referendum result and negate democracy. It is illegitimate to use the ‘economy’ to justify watering down Brexit and thereby evade the fundamental political and democratic questions it raises. It is also economically illiterate. Let’s take the democracy aspect first.

We know what we voted for

‘Hard Brexit’ is itself a tendentious term designed to mystify what leaving the EU means. Most people who use the term don’t want to leave and instead invent the idea that there is a partial variant that would still fulfil the referendum result. But there are no alternative ‘hard’ or ‘soft’ versions. There is leaving the EU and there is remaining in the EU.

The electorate’s decision last June was unambiguously to leave the EU and all its institutional apparatus and arrangements, including, centrally, the EU Single Market and the EU Customs Union.

The Single Market is the EU arrangement launched in 1993 that establishes the four ‘freedoms of movement’ – of goods, capital, services, and labour across EU national borders (even though some of these remain partial in application). Enforcement is under the jurisdiction of the European Court of Justice.

The Customs Union actually preceded the Single Market by 25 years, eliminating customs duties on goods travelling within EU member countries while imposing a common external tariff on all goods entering the EU. Membership of it also prevents individual EU member states from negotiating their own trade deals – instead, such deals are negotiated by the European Commission. The Single Market and the Customs Union are therefore integral parts of the European Union: leaving the EU means leaving them. Saying Britain should remain a part of these arrangements even ‘after Brexit’ is a disingenuous way of opposing leaving in toto.

Despite all the patronising assertions that people didn’t really know what they were voting for last June, the referendum question actually could not have been clearer: should Britain remain in or leave the EU? The official booklet that the government sent to every home arguing to remain made two things clear. First that, unusually, this was to be a decision of the people, not parliament: ‘This is your decision. The government will implement what you decide.’ And secondly that, if we voted Leave, then we would leave the EU in its entirety.

Throughout this official publication, the government explained that leaving would mean no longer having ‘full access’ to the Single Market. ‘Remaining inside the EU guarantees our full access to its Single Market. By contrast leaving creates uncertainty and risk… The government judges it could result in 10 years or more of uncertainty as the UK unpicks our relationship with the EU and renegotiates new arrangements.’ By definition, these ‘new arrangements’ would be distinct from the status quo of Single Market membership.

It is also disingenuous for leading Remainers to claim that ‘no one voted for a weaker economy’, and therefore it is up to the powers-that-be to pursue an outcome that doesn’t jeopardise our economic interests.

The British people did not vote to leave the EU with a proviso that there would be no economic costs. In fact, the case for remaining, in both the government’s official communications and in much of the general campaigning, focused almost entirely on the alleged economic damage that would result from leaving. The idea that people were unaware of the ‘economic’ arguments and were ignorant that leaving would bring a changed economic relationship between Britain and the EU countries, and between Britain and the Single Market, is condescending. It suggests the British electorate, or at least the 17.4million who voted to leave, were incapable of seeing and grasping the ‘economic’ discussion that was everywhere in 2016.

People heard these ‘economic’ arguments and yet a majority still voted to leave. This means a huge number of people rejected the economic case, either as exaggerated gloom-mongering and/or as a risk worth taking. What is clear from the vote is that, to a very significant section of the electorate, improving our democracy by bringing political decision-making back home was more important than the possible impact of Brexit on their living standards. 

Don’t blame Brexit

And what about this economic ‘impact’ of Brexit? Is there any substance to today’s predictions of British economic weakness when Brexit happens? Yes and no.

Yes, in that the British economy is stuck in a low-productivity rut, which is unlikely to be fixed by 2019, when Brexit happens. No, in that this rut has very little to do with the act of leaving the EU. However, there is a very real danger that today’s Brexit-related fatalistic pessimism becomes self-fulfilling, meaning it isn’t Brexit that poses a threat to our economic standing but the fear of Brexit. Let’s take these three points in turn.

Britain’s economy has been in trouble for a long time, with its growth rates trailing off ever since the 1960s. This is not going to resolve itself spontaneously, and current policies are making things worse. An increasing dependence on debt – personal, business and government – camouflaged this loss in underlying productive momentum for much of the time that followed. Until 2008, anyway, when the financial crash exposed the limits of this financialised way of coping with anaemic production.

Reliance on borrowing hasn’t gone away since 2008. Far from it. Britain has only been muddling through its productive malaise courtesy of the Bank of England providing the cheapest and easiest borrowing conditions in its entire 300-year history. Despite this, the underlying decay in the fundamentals has been more difficult to disguise. Hence the more overt arrival of financial hardship over the past decade: flatlining or falling real incomes for most people in the public and private sectors; an expansion in poor-quality, low-paying jobs; and a public-spending deficit that it seems impossible to close.

The pertinent point for the Brexit discussion is that this protracted record of low investment and weakening productivity performance long preceded the economic uncertainties that we have heard so much about since the referendum vote. Nor can these underlying problems be attributed to EU membership. They are homegrown, and can only be overcome through domestic actions undertaken by the state and by businesses.

We should be sceptical when every bit of bad economic news is attributed to Brexit. Import prices rising: ‘Brexit-induced devaluation.’ A foreign firm not expanding its UK operations: ‘Brexit-related export difficulties.’ Industry not investing enough: ‘Brexit uncertainties.’ Whatever changes will come with Brexit, the reality is that the underlying driver of these developments predate and exist separately from Brexit. The pound had been overvalued. Some foreign companies are finding other locations more attractive than low-growth Britain. And business investment has been falling away for a very long time.

Secondly, there is no inevitability that simply leaving the EU will have a negative (or positive) economic effect on Britain’s gross domestic product. About five per cent of British annual output derives from directly exporting into EU countries. Does anyone really imagine that this production for EU markets will stop the day we leave the Single Market? The US, China and Russia, and many other countries, successfully export goods and services into the EU despite its high levels of protectionism. They do this without being in the Single Market or even in a free-trade arrangement with the EU. Britain can do likewise. If some British-based companies are unable to do so, that would be down to their poor international competitiveness, not the UK being outside the Single Market.

The truth is that exporting into Europe, unencumbered by the WTO ‘constraints’ that Remainers fearmonger about, has been a flat or declining share of Britain’s trade ever since its peak in 1992. Coincidentally, but pertinently, this was the year before the Single Market was set up. So Britain is leaving one of the slower growing economic blocs of the world, and opening up greater freedom to interact with the faster-growing areas, including China and India. Maybe there could in the end be a net direct ‘Brexit effect’ of one or two per cent of GDP either way. But what matters most is the strength of our economy, not our trading relationship with the EU.

Here we come to the thing we should be most concerned about: how Brexit pessimism risks perpetuating Britain’s slow economic decline.

Brexit in itself won’t help British economic performance directly, but it could indirectly be a catalyst for initiating a pro-growth economic programme of change. Leaving the Single Market will force change upon the economy, and on how existing businesses operate. Extricating Britain from the most protectionist economic bloc in the world will by definition change Britain’s relationship both to the countries within that bloc and also to the countries in the other four-fifths of the world economy beyond.

This does create a ‘once in a generation’ opportunity. Disruptive? Yes, but when we have a flat, drifting, depressed economy, disruption is exactly what is needed. Britain could adopt a wide range of pro-growth policies. It could end easy-money policies, raising interest rates, to reverse dependence on the debt economy. This would help clear out the industrial congestion from zombie businesses. The government could commit far more in public funding for basic research in new and emerging sectors. It could also declare, and back financially, a national goal to halve power costs for business and households within 15 years, through developing competitive energy technologies. Planning and land deregulation could enable the mass manufacturing of desperately needed housing. There could be more state-backed venture-capital funding and other incentives for existing and new businesses to undertake innovating investments.

Sadly, what we have instead of those things is a commitment from all sides to muddle through. We seem to have given up on thinking we can change things for the better. Brexit is being used as a fatalistic excuse for economic policy inaction. Obsessing over the supposedly inevitable damaging consequences of Brexit gets in the way of dealing with Britain’s long-running decay in its capacity to produce new industrial sectors and decent high-productivity, well-paying jobs. The assumption that Brexit is bound to be bad for the economy is the latest incarnation of our biggest contemporary barrier to restoring economic prosperity: our cultural fear of change.

Our growing discomfort with change and uncertainty – paralleled in America and many other old industrial countries – has meant successive governments have abandoned pro-growth policies in favour of trying to stabilise a static economy. This is why we have a zombie economy with such a ‘long tail’ of low-profit or loss-making businesses showing flat productivity going back many years. The reluctance to make economic change reveals a failure to imagine that we could improve economic performance. The stated desire to minimise the implications of Brexit, to secure the ‘softest’ Brexit possible, is testimony to the antipathy to change. It expresses an intellectual inability, or a failure of nerve, in coming up with a different set of economic arrangements that could be better than the status quo within the EU.

The economic danger is that the momentum behind the Soft Brexit movement will consolidate Brexit fatalism, and make it self-fulfilling. A failure to restructure the economy after leaving the Single Market would not just be a missed opportunity – it would mean actively opting for continued economic decay. And no doubt Brexit will get the blame for that decay. Intellectual honesty, democracy and economic prosperity all hinge on defeating the narrative of putting the ‘economy’ above national sovereignty, and ‘pragmatism’ above democracy. Tackling the fear of Brexit is the key to rethinking our democratic and economic future.

Phil Mullan’s new book, Creative Destruction: How to Start an Economic Renaissance, is published by Policy Press.

Picture by: Getty.

For permission to republish spiked articles, please contact Viv Regan.

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