Comments due by May 5 , 2016
ON JUNE 23rd Britons will vote on whether their country should stay in the European Union. They face a bewildering range of estimates of the potential economic effects of a Brexit. By 2030 Britain’s GDP could be as little as a fraction of a percentage point below the level it would otherwise reach, or as much as 9.5 percentage points lower, depending on just whom you ask and what they assume about the future. While such analyses are useful (particularly in their clarifying agreement that Brexit would do at least some damage to the British economy over the next 15 years), they are also guilty of providing a spurious sense of precision. When attempting to predict the fate of the British economy after Brexit, it is useful to keep two rules of thumb in mind. The first broad principle should hearten the Brexiteers: over long periods, GDP per person in Britain has risen surprisingly steadily (see top chart). It has usually taken a war to cause that growth to deviate much from the underlying trend—although there was a long and painful slowdown during the 1920s and early 1930s, when Britain stuck doggedly to a contractionary monetary policy. As soon as Britain abandoned the gold standard in 1931, it was off again on a long streak of steady growth (briefly interrupted by the disruptions of the second world war). Indeed, stable growth in output per person continued until the financial crisis of 200708. Joining the EU in 1973 does not seem to have accelerated it much, just as crashing out of Europe’s system of pegged exchange rates in 1992 did not slow it down. Other seminal events— the loss of Britain’s empire in the postwar years, or its balance of payments crisis and IMF bailout in 1976—also seem to have had no impact on the trend. Past performance is no guarantee of future returns, but Britain’s history suggests that the costs of Brexit will probably not be as large or as lasting as the more dire prognostications maintain. As the Remain campaign often points out, membership of the European Union has not prevented Britain being one of the most flexible, and least regulation bound economies in the rich world. That flexibility would help Britain adjust to the shock of Brexit, as would the demand boosting drop in the pound that would almost certainly follow a vote to leave. However, a modest cost is still a cost. Moreover, whether a member of the EU or not, Britain is a European country, deeply and irrevocably linked to the fortunes of the continent. As annoying as it must be to the Leave campaign, only 21 miles (33km) of the English Channel separate Britain from France (and there is no distance at all between Northern Ireland and the Republic of Ireland, or Gibraltar and Spain). From Paris, Brussels and Amsterdam, it is a far shorter train journey to London than to Berlin. Britain is thoroughly, helplessly European, and always has been, since its first prehistoric settlers blundered over the land bridge from the continent. The European connection has big implications. Trade with far off countries is costly, in terms of money and time. A paper published in 2012 by David Hummels of Purdue University and Georg Schaur of the University of Tennessee finds that every day goods are in transit adds a cost equivalent to a tariff of between 0.6% and 2.1%. Countries therefore trade most heavily with close neighbours. More than 50 years ago Jan Tinbergen, a Dutch economist, observed that trade seemed to follow a “gravity model”, meaning that trade flows were a function of both the distance between trading partners and their size (or economic “mass”). They were Britain’s dominant trading partners three centuries ago, when Europe accounted for 75% of British trade. And they are Britain’s dominant trading partners now, accounting for roughly 50% of its trade, despite the fact that the rest of the world accounts for a much bigger share of global economic activity now than it did in the 18th century (see bottom chart). In fact, trade between Britain and the rest of the EU is larger than geography alone would predict, according to a recent analysis by the Centre for European Reform, a thinktank. It calculates that the flow of goods and services across the Channel is 55% greater than distance and economic mass alone would imply. What is more, that extra activity is a genuine bonus. It is almost entirely made up of new economic activity that would not otherwise take place, rather than exchanges diverted from partners outside the EU by the single market’s external tariff. The integration fostered by European institutions nurtures crossborder supply chains and trade in services—a British speciality. Britain’s exports of services to the EU are larger than those to North America, Japan and the BRICs combined. The EU, in effect, shrinks the distance between European economies even further. Tilting at geography In other words, the push for Brexit is quixotic. However close the cultural affinities between Britain and its partners in the Anglosphere, the contribution of their trade to British output is much smaller than the EU’s, as are the contributions of the world’s big emerging economies. A Brexit would not delink Britain’s economy from the rest of Europe; it would merely worsen the terms on which trade is conducted and reduce Britain’s influence in European affairs. History suggests that the choice to leave the EU would probably not prove a calamitous one in economic terms. That does not mean it would be astute.
