The book contains some errors of judgement—and of factby George Magnus / April 22, 2016 / Leave a comment
The UK Referendum, An Easy Guide To Leaving The EU by Gerard Lyons
Read more: It’s time for Vote Leave to come clean
Historically, populist movements have drawn support by preying on insecurity and uncertainty. As the wonderful historian Margaret Macmillan has written, these movements evoke the past to persuade supporters that “good times” can return. They offer assurances and the certainty of control. And they also claim to deliver a new economic dawn. Today in the US, by way of example, Donald Trump is promising to make America great again. The UK’s Vote Leave campaign is, in a sense, behaving in the same way by alleging that Britain, stripped of its EU ties, can be independent and proud as it once was (in a bygone era). The publication of a new e-book by Gerard Lyons, The UK Referendum: An Easy Guide To Leaving The EU, is part of this narrative.
Lyons is Chief Economic Advisor to Boris Johnson—one of the leading campaigners for Britain the leave the EU. The good thing about his tract is that it is short—44 pages. It is not an idiot’s guide to the debate; as the former Chief Economist of Standard Chartered Bank, he can frame a discussion skilfully. It is written for non-specialists and is therefore readable and accessible. So, what does he say, and is it persuasive?
The tract first looks at the birth of the European project after the Second World War. It then outlines how the UK’s relationship with Europe has evolved. Although Lyons claims in the introduction his arguments will be balanced, the chapter “The UK will not lose influence with Brexit” fits with his strongly-held view that the UK is better off on its own. There follows chapters on the Single Market, membership costs, immigration, the City, trade, effects on jobs and investment. This leads to his inevitable conclusion—that we should abandon the EU.
The book contains some errors of judgement—and of fact. Lyons admits that Brexit would lead to some uncertainty in the economy (surely an understatement), but then argues this would be followed by a strong economic recovery. If there’s one thing economists have had to acknowledge since the financial crisis, it is that disequilibrium situations can persist. Short of a large devaluation of sterling following Brexit, which might help to cushion the ensuing recession and boost inflation and risk premiums in financial markets, there is no reason to expect Lyons’s outcome.
Tracing the outlines of post-war history, he then states factually that every IMF Chief has been a European and every World Bank President an American. Jim Yong Kim might beg to differ. He is a South Korean by birth and current President of the World Bank. This doesn’t mean Lyons’s case for Brexit is irrelevant, but it betrays an inattention to detail.
He also says that the referendum is a choice between staying in an unreformed EU—but has no argument as to how the EU will evolve—versus “leaving and positioning the UK for a changing global economy in the 21st century.” If this isn’t flowery language ad absurdum, what is? The changing global economy isn’t the panglossian, benign place he assumes. It is fractious and dangerous. World trade has stalled. The Brics are in serious trouble (with the exception of India, which has a relatively closed economy). Emerging markets are going through a growth hiatus of indeterminate length. Protectionism is on the rise. No US presidential candidate is advocating the status quo as far as free trade are concerned. The G20 is toothless when it comes to global co-ordination. America and China are their own economic blocs, deriving strength from size. So is the EU, relatively. It is almost childish to imagine that the UK, cut loose from the EU, could be the stand-alone bulldog economy that Lyons believes.
Later in the book Lyons says once the UK left the EU, it could always apply to rejoin in future years if it wanted. Really? He seems to think the EU is like a gym. That’s not how British or European politics works.
Lyons’s litany of “why we don’t like the EU” arguments is familiar, and Remainers would agree with some of them. Yes, the EU is bureaucratic. It is prone to over-regulation—perhaps even silly regulation. Yet, historically, the UK has frequently supported—and framed—EU legislation. According to the OECD’s reputable governance indicators, the UK itself has one of the least regulated enterprise sectors and labour markets in the world. And the most damaging regulations the UK has are in the housing sector, all of which are self-inflicted. There is no reason to expect this to change after Brexit.
Yes, the UK is a net contributor net to the EU budget. But while £8 billion or so seems like a lot of money, it is not relative to a £2 trillion economy—or set against the spending of most government departments. What we pay is a reflection of the size of our economy, and we pay dues to a project from which we also derive huge benefits. Lyons doesn’t acknowledge these. Access to the Single Market is one such benefit, but there are also broader benefits such as investment flows, science and research and development. Not to mention the alleviation of labour and skill shortages.
To my knowledge, no one has tried to trace the consequences of EU membership on the country’s total factor productivity (TFP) growth—that is, the immeasurable part of productivity growth not accounted for by labour and capital directly. It’s a term that captures technical progress, organisational efficiencies, and the spin-offs from deeper integration, such as those represented by the Single Market. What we do know is that our TFP performance, as with most advanced economies, has been poor (this is for a variety of reasons). Leaving the EU would unquestionably compromise it further. That will make us worse off, regardless of whether you believe the precise numbers in the Treasury’s recent study or not. It’s a cost Lyons doesn’t recognise, but neither does his boss Boris or the rest of the Vote Leave campaign.
Lyons’s opinions are weakest when it comes to whether the UK would lose influence in the world post-Brexit, and on defence and security matters. This is to be expected: he is, after all, a pure economist, not an international relations specialist. I understand why he included them—they are probably more important than the complex world of economics as people are more likely to fully understand them. But what he writes you could hear at Speakers’ Corner any Sunday and doesn’t really add anything to his case. The UK has representations in global institutions that would endure Brexit. Plus nuclear weapons. But he doesn’t seem to recognize what other countries think about the EU as a negotiating partner. Outside the EU, the UK may find favour here and there with other systemically important countries, but it is implausible that the US, China and so on would take the UK as seriously outside the EU. We need only remind ourselves that the president of the United States has recently said precisely this.
Lyons is better, though by no means balanced and comprehensive, when it comes to the Single Market, the City and other economic matters. What he really doesn’t like about the Single Market isn’t the economics and commerce of it, but free movement of labour. And yet, here he is very careful to hedge his bets for fear of pandering to a more extremist view. He acknowledges, as all economists must, the benefits of immigration to the UK. Well, up to the point it becomes “excessive”, whatever that means.
He says immigration contributes to downward pressure on wages, though there is no evidence to say this is so. He says it adds to pressure on local communities in schooling, healthcare and housing—which may well be true—but isn’t the counterpoint that the authorities should handle the process better? Lyons doesn’t want the UK to have to take in EU migrants because we cannot control how many come in. One can sympathise with this sovereignty grab to a degree, but it’s a pretty flimsy reason to change the future of the country. Especially when there remain pragmatic responses to the issue that are hardly rocket science.
Lyons insists the City’s future is secure. He makes his point using the familiar justifications: we all know why London is the world’s financial centre par excellence. But he doesn’t cite the recent legal case in which the European Central Bank (ECB) sought to have certain types of financial derivatives transactions processed in Eurozone countries only. It lost the case, but the ECB may well demand that you must have an EU domicile in which to base your headquarters for euro-denominated transactions. That would pose a threat to the City that Brexit campaigners bypass completely.
The most surprising claim Lyons makes is that the UK doesn’t need access to the Single Market, or any trade deal at all for that matter. He claims we could learn from South Korea or Singapore and deal with whomever we like on any basis as a member of the World Trade Organisation. This is a complex issue but Lyons should know better than to choose two countries that are pivotal in China’s supply chains. They are also and major exporters or re-exporters of manufactured goods, parts and components.
This suggestion by Lyons is on a par with Michael Gove’s argument that we should join with the Balkan countries, along with Ukraine and Iceland, to trade freely. This has been labeled the “Albanian option.” You don’t have to think about this much to work out it’s a bad idea. The UK’s natural geographic advantage is that it is in the heart of Europe, which is why it’s where most of our trade is.
In the end, Gerard Lyons has made a calm pitch for an alternative future for the UK outside the EU. But he and the Vote Leave campaign refuse to acknowledge the considerable costs to living standards that are at risk, and lack a realistic and well-founded vision about what this future could look like. More to the point, they lack a well-founded vision of how it would be to our advantage. I didn’t expect him to paint Brexit in the first instance an act of self-harm, and then as a catalyst for the disintegration of Europe. But for us and our progeny, this matters more than budgetary costs and trade.
Now read: Stephen Kinnock—Brexit would be a betrayal of British principles