Thoughts on Europe a week out from the Referendum

Re-reading my blog entry of March 29th 2014, I realise that I have been in a big intellectual circle before coming back to the same point.  During the campaign, I have wobbled a lot but I am settling on Brexit and here's why.

There are three main reasons:

1. The Economic Union
2. The Customs Union
3. The Political Union

The Economic Union

The Euro will turn out to have been a historical disaster.  I don't understand why everyone cannot see this.  Imposing an external currency on an economy is exactly the same in economic terms as returning to the Gold Standard.  In the 1930s, in the depths of the Great Depression, Great Britain returned to the Gold Standard and the result was nothing short of catastrophic.  Fortunately, the politicians of the time quickly realised this and reversed the decision.  Today's politicians in the eurozone have no such freedom of action.  There is no easy way to leave the Euro.

The southern countries - Greece, Spain, Italy, Portugal - have been rendered uncompetitive by the Euro.  They cannot do anything about it and they are suffering terrible youth unemployment and stagnant economies.  Germany, at the other end of the scale, is finding its exports artificially boosted by the fact that its currency, the Euro, is much weaker than a purely German currency should be.  As a result, we are seeing a transfer of wealth from the poorer countries to Germany.

This is not sustainable and the Euro will fail.  Despite the enormous sums of money being thrown at the problem, Grexit is inevitable.  It will be followed by Itexit, Spexit and Pexit before even France throws in the towel and we have Frexit.  During this phase there will be terrible social and economic dislocation in Europe and no growth.

More through luck than judgement, we are outside of the Eurozone but we are inside the customs union and we are going to get dragged down with it if we don't leave.

The Customs Union

A Customs Union is not a Free-Trade Area.  It is an area with a common external tariff wall and free movement of goods within it.  For this to work, the external tariffs have to be set centrally.  This means that 28 countries have to agree on external trade policy.  Most of the 28 countries do most of their trade internally, within the Customs Union.  One country alone does most of its trade with the rest of the world and that is the UK.  Nearly 60% of our trade (and growing) is with the rest of the world.  Yet the tariffs we charge on, say, American imports are not set here.  They are set in Brussels where we have a 1/28th vote.  When America imposes tariffs on EU goods to balance our tariffs, these hit us disproportionately.

The interests of countries that trade mostly internally are quite different to the interests of a country as connected to the rest of the world as we are.  President Obama says that we would go to the back of the queue if we tried to do a trade deal with the US.  Why?  You would have negotiators sitting down together who spoke the same language, had the same enthusiasm for entrepreneurship and who had a shared reverence for Contract.  I reckon the deal could be done in a week.  We won't tax your stuff if you don't tax our stuff and if something meets your standards that is good enough for us and vice-versa.  Job done!  But even if it turns out to be more complicated than that, and it probably will, then we could still do a better deal on our own than as part of a bloc with diverse and competing interests.

The Political Union

This is largely covered in my earlier blog.  The EU is not democratic and cannot be while we all speak different languages.  We are not going to adopt a common language and even if we did, it would be a second language for most people and you need to share a mother-tongue with a political candidate in order to judge not just the policies, but the person.  In short, there is no demos around which EU democracy can be built.  

The paradox is that as the Euro fails the EU will face a choice of breaking up or integrating more.  I think they will choose integration and the impossibility of democracy will then prove crucial.

So I'm voting out.

What will happen?

There will be an initial shock and downturn.  I can't see a way of avoiding that.  It may take several years before the UK resumes a normal growth path.  I wish that were not so, but it is.  However, in the medium term, as Europe fails, we will reap the benefits of the decision we are about to take.  And in the longer term we will prosper in a world that favours small, agile economic units over massive centralised ones.