So what would the economic effect of leaving the EU be?

Assuming anyone votes for it, as I did

Worstall @ the Weekend Now that the election's over (result unknown as I write) it's possible to perform for a reader request: what would the economic effect of Britain leaving the European Union be?

Given that I'm a known 'kipster I didn't want to do this pre-election: I'm here at El Reg despite my 'kipness, not because of it and thus wanted to steer clear of anything too nakedly party political during an election.

The economic effect of leaving the EU would also be nothing. Nada, zip. For the EU is a political system which details how we reach decisions about what economic policy should be. It has reached, through that system, certain decisions about what economic policy is going to be, that's true. But there's no particular reason why the same policies could not be reached via a different political route. Or even, possibly, better ones or, obviously enough, rather worse ones.

So, the fact of being in or out of the EU doesn't determine what economic policies are going to be: and, sensibly enough, it is what economic policies are going to be which will determine how the economy does.

Well, OK, we've actually got an assumption in here that government policy has any effect on the real economy at all and that in itself is slightly controversial. It's a commonplace among economists that policy doesn't affect long term growth rates very much if at all. The short term stuff of interest rates, the deficit and so on, yes, those can and do have effects, but growth over the decades lies much more in the hands of the populace than anything decided in the legislature.

With a very large proviso, of course. It's entirely possible for governments to do very silly things which reduce growth and thus the influence of policy upon growth is trying to stop them doing those very silly things. This is where things like the Washington Consensus come in, it's really a list of things that developing countries shouldn't do because they're stupid. Once we've got over that we come back to the economists' general idea that in the long term growth is gonna be what growth is gonna be and government doesn't really have much effect upon that. At least the economic policies they espouse doesn't have much effect.

Which brings us to this German report (note, released during the UK election campaign, naughty!) about what would be the effects on the UK economy of Britain leaving said EU (PDF):

If the United Kingdom (UK) exits the EU in 2018, it would reduce that country’s exports and make imports more expensive. Depending on the extent of trade policy isolation, the UK’s real gross domestic product (GDP) per capita would be between 0.6 and 3.0 percent lower in the year 2030 than if the country remained in the EU. If we take into account the dynamic effects that economic integration has on investment and innovation behavior, the GDP losses could rise to 14 percent. In addition, it will bring unforeseeable political disadvantages for the EU – so from our perspective, we must avoid a Brexit.

Well, there we have it, Britain will be poorer out of the EU, let slip the headlines of political warfare and job done. However, there's a massively important word in there, that “depending”. Really what is being asked here is, well, how stupid will British economic policy be if it does leave the EU? The more stupid it is the worse the country and its economy will do: the other side of which is the cleverer that policy is (or, as above, the less stupid we allow government to be) the better both will do.

Britain's not in the euro (one of the very few things that Gordon Brown got right under the Terror) so we're neither suffering from the horrendous effects of that nor would we have the dislocation of leaving. And after that, well, there's really only two sets of policies to think about, along with a minor issue of some cash flow.

On that cash flow issue, Britain pays into the general funds very much more than it gets out. Not being in will mean not having to do that and so British taxpayers won't be paying for the Mafia not to build windfarms in southern Italy. Hurrah! And that makes us £8 billion or so a year better off but it has to be said that while this is an irritant it's not exactly an important number in the UK's £2 trillion or so economy.

We've then got the regulatory effect of whatever it is that the EU insists we do. I think this is very high: but I'm obviously biased. Both by being a 'kipster and also from working in one of those industries quite badly affected.

As an example, try setting up any new chemical or manufacturing process anywhere in the EU. You've got to do an environmental impact assessment. OK, that seems fair enough: but it takes a minimum of 10 months to get this through and usually longer. OK, maybe that's also OK when someone's proposing a new oil refinery or summat. But this also applies to someone thinking of changing the process by which they deal with, say, 100 tonnes of something or other. Even 10 tonnes of something. And note that it applies to “change” as well as “start anew”.

Our point in having a market economy at all is that it's the one type of economy that is best able to adapt to changing circumstances. Putting roadblocks like this in the way of being able to make such changes doesn't seem to make all that much sense, however much we might want to protect the environment.

However, do note that I'm making a huge assumption here. That a newly independent Britain won't bring in rules just as stupidly limiting of economic growth. Might run my way, might not, but it's probably fair to say that the betting would be on rules equally fatuous.

Which leaves us with the other set of rules on what we can and can't do: trade, really. Trade, the free movement of goods, services, people and capital. The Huns here are assuming that we will retreat into a Little England phase. We'll find that we face small but noticeable tariff barriers to our exports to Europe and we'll then replicate these, or something very like them, on imports into the UK. They're not predicting all out Bennite autarky, nor the similar effects of the Greens' idea of local economies for local people. Just the recreation of the EU's limits upon trading with the world but with the line drawn around the UK economy, rather than it being drawn around the whole of the EU with intra-trade being entirely free.

Which raises the obvious question that, well, if free trade with the rest of the EU is a good idea, our losing that meaning that the economy shrinks because we replicate those limits, then, well, why not try the Great British solution? Why not just declare unilateral free trade with the rest of the world? Would that actually be better policy than only having free trade within the EU?

Fortunately, someone has studied this. And it's a little odd to be describing something from Patrick Minford as been fair, reasonable and even-handed. Not to imply that he's biased, but he's very certain of his opinions. And he's a whole book on this very point here.

The answer being that if we could have free trade with everyone, free even of those EU constraints upon it, we'd be rather better off. And if we had the usual EU constraints upon our trade with the EU (by being outside the tariff barriers) and then replicated those barriers around the UK's trade with everyone then we'd be worse off. By an amount not dissimilar to what we're being told above. However, the intermediate policy, of saying bugger whatever anyone else does the UK now has unilateral free trade in all directions still makes us better off than being inside the EU.

The mechanism here is subtle. Yes, exports are counted as an addition to GDP, imports as a subtraction. So Johnny Foreigner buying less of our exports because they place tariffs or other restrictions upon them reduces GDP. General tariff levels these days are pretty low so it's a low effect. And having the economy entirely open to any imports, free of even those low tariffs, has a similarly reducing effect.

However, having the domestic economy continually subjected to competition from best practice in the rest of the world does spur on the continued advance in production methods. Thus, over time, a free market and free trade economy becomes more and more efficient. And more efficient is a synonym for the people getting richer, for GDP rising. This isn't a controversial finding by the way, it's exactly the method by which technological transfer is said to impact upon developing countries. Domestic producers get more efficient precisely because they're exposed to the competition of the best in the world elsewhere.

All of which brings us back to our original answer about the effects on the UK economy of leaving the EU. The effect of actually leaving is nothing. What matters is what policies are followed afterwards. Bad policies make us poorer, good policies make us richer. The EU currently stops us from doing some bad things (imposing restrictions on trade within the EU for example) but also stops us from doing some good things (not having restrictions on trade with the rest of the world as another example). If we leave and do more of the bad things the EU stops us doing we'll get poorer, if we leave and do more of the good things that the EU doesn't allow us to do we'll get richer.

And, if, on balance, we only do the good things while the EU imposes whatever bad things they can upon us then we still come out ahead.

Of course, to believe all of this you've got to believe that free trade really does make us all richer - and there're still a lot of people who have trouble with that idea, eh? ®

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