We should choose our relationship with the EU based on the relationships we want with others, not t’other way around

Britain is leaving the EU. I’ve identified various options for what we should seek to do next. A common reaction I’ve encountered is along the lines of “We can’t get into thinking about what relationships we have with non-EU countries until we’ve resolved what new relationship we’re going to have with the EU”. I want to convince you that that’s wrong. And not just a bit wrong: dangerously, Brexit merit-destroyingly wrong.

Those who tell you that we must first resolve our relationship with the EU are telling you that that must be our most important geopolitical relationship, the one that all other relationships are constrained, the defining and central one. But that was a key proposition of the Remain campaign – that Britain’s place in the world had to be defined by our entanglement with our EU partners. That notion – that the EU should get to define and constrain us, was what we rejected by voting Leave.

That doesn’t mean we should have no relationship with the EU. It certainly doesn’t mean we should seek to cut ourselves off from or fall out with the EU. Indeed, it doesn’t even mean, in principle, that our relationship with the EU might not, in the end, be our single most important geopolitical partnership (without being defining or constraining) – though I wouldn’t want that to be the outcome, the British political process and voters might ultimately choose it.

But we should reject the idea of baking that in to the Brexit process. The relationship we should seek to have with the EU should depend upon what relationships we want to have with other non-EU countries. We cannot work out what we want to do with the EU until we’ve worked out at least what non-EU arrangements we’d be trying for.

Let me illustrate the point with an example I don’t think will happen – to illustrate that I’m making a point of principle rather than something that depends upon a particular non-EU geopolitical arrangement I might have in mind. Suppose that the UK decided that, post-Brexit, we wanted to set up a customs union with the US regarding motor cars. That would mean that motor cars would be exported and imported tariff-free between the US and UK but anyone else exporting to the US or UK would face a single tariff determined jointly by the US and UK.

We wouldn’t be able to set up such a customs union with the US if we had already agreed to tariff-free trade in motor vehicles with the remaining EU. If we first agreed to tariff-free trade in motor vehicles with the remaining EU, that would prevent us from establishing a customs union with the US. The relationship with the EU would define what other geopolitical arrangements we could enter into. But we don’t want to be constrained at this stage. What we want is to work out first what new deals we might want to do with non-EU countries and only then work out, on the basis of these other deals or potential deals, what discretion there remained for us to do new deals with the EU.

The insistence that our EU deal must be worked out first is an attempt to cling on to our EU partnership, as closely as British politics allows post-referendum. If we accept that, we will constrain ourselves, potentially ending up with nothing more than the same sort of constraints we faced as EU members but with less explicit involvement in EU decision-making.

We’re not leaving the EU in order to have a relationship with the EU. We’re leaving the EU in order to do something else. What we need to be doing now is debating what we want or hope that “something else” to be.

How much should we be willing to pay for the ‘Glory of Rome?’

[This is a blog I had published on Telegraph blogs (now no longer maintained) on 24 August 2014.]

In a recent blog post I compared an estimated cost for mitigating climate change with an estimate someone had made of the cost of terraforming Mars. Obviously there was a tongue-in-cheek aspect to the comparison, since – although I suspect they were both rather low – the climate change example was at least moderately mainstream and worked through, while the terraforming Mars estimation was highly speculative and very much at the low end. The coincidence between them was too much fun to resist. But while it is a common party game of space buffs to ask “how would you terraform Mars for a few trillion dollars?”, and there is a burgeoning speculative literature for low-cost Martian terraforming schemes (building on the tradition of Lovelock’s scheme in Allaby & Lovelock’s 1984 book The Greening of Mars), there is obviously a high likelihood that even for practicable low-cost schemes (if someone produced one), the actual costs would be more like trillions per year for centuries than a few trillions spread over centuries.

Nonetheless, it remains absolutely the case that mainstream scientists do believe that terraforming Mars is within the reach of our civilisation – both in terms of the technology required and the resources we would have to achieve it. And amid the mischief, my piece raised two questions that I would like to explore further. First: How important is it for our civilisation to have epic-scale goals? Second: How much of our resources should we be willing to devote to the achieving of those goals?

I say: our civilisation needs epic-scale goals. What do I mean by that? I mean “the Glory of Rome”, the French mission civilisatrice, the British imperial notion that it brought engineering and law or the other British imperial notion that it allowed for the educating of the ignorant and their introduction to True Religion and Virtue. The Egyptians built their pyramids and the mediaeval Europeans their cathedrals to express their commitment to their epic religious goals. But what goals does our decadent, pleasures-focused culture have?

When there is want and misery and oppression, humans are much clearer about their purposes. When we are under threat of destruction – as in the Cold War, say – necessity grants us purpose. But when our lives are fairly comfortable and we do not expect to disappear tomorrow, things are much more difficult.

One thing we have tended to do is to invent ourselves new threats – the Millennium Bug, bird flu, SARS, dinosaur-killing meteors. The threat from global warming, though real and important enough even in its own terms, is psychologically tempting to exaggerate for this reason – we find it comforting to be under epic threat because then we know more clearly why we get up in the morning. Similarly, for many people the idea that humanity – or at least Western civilisation – might be united in a common purpose of the struggle against out-of-control climate change adds a seductive element to the story.

If we are not to fall prone to inventing terrors to grant ourselves a purpose, we must find some positive purpose instead. Some might like to suggest religious objectives and there have indeed been times in the past (e.g. the mid-19th century British Empire) where religious objectives were central unifying cultural goals. But there are other alternatives. The Portuguese in the 15th century sought to discover if (as they suspected) Africa had a southernmost extent and, if it did, to find a sea route to India. Exploration and adventure are among the grandest, most unifying and least controversial of objectives.

But how much of our resources should we be willing to devote, and over what timescale?

Through history, civilisations have devoted large proportions of their output to their main goals: religious buildings, religious ceremonies, military ventures, voyages of discovery, great monuments. They did that even when their problems of disease and hunger were vastly greater than ours. As someone once said, responding to the criticism that resources devoted to a religious purpose could better have been spent on the poor: “The poor you will always have with you”. Civilisation cannot be simply a matter of allocating resources to those things that get us through to tomorrow. If some goal is truly meaningful, it is worth making sacrifices for. We see the sacrifices that the enemies of Western Civilisation make and the sacrifices that our own forefathers made. Should we not be willing to do the same for the goals we think important to our civilisation?

Let’s turn that thought into numbers. The Great Pyramid at Giza is generally reckoned to have been built by approximately 20,000 men working for around 20 years. The population of ancient Egypt at the time was around 2 million. If we assume the workforce was around half the population, so one million, that means those 20,000 workers constituted around 2 per cent of the workforce of Egypt. They were probably at least as high in terms of productivity as the average Egyptian worker, given how systematic the pyramid project was, and the pyramid project was probably at least as capital intensive as the average project. Therefore, we can reasonably assume that those 20,000 workers constituted at least 2 per cent of Egyptian GDP. Total world output was around $72 trillion in 2012. So if we devoted the same proportion each year to some key goal of our civilisation that we thought as important as the Egyptians thought the Great Pyramid, that would imply us spending around $1.5 trillion per year upon it. Arguably since we are much richer today than the ancient Egyptians, we should be willing to devote a larger proportion of our resources to such projects.

Over what timescale? In medieval Europe, the average life expectancy was around 30. The Portuguese started their attempt to round Africa in 1419, and got there in 1498 – some 79 years or 2.6 times the average life expectancy at the time. The current life expectancy for developed countries is 80. So if we were willing to spend as long on a project, relative to our lives, as the Portuguese spent rounding Africa, we would be willing to spend around 210 years.

These approximate thought experiments suggest that we should be willing to spend more than $1.5 trillion per year for more than 200 years on the epic goals of our civilisation. So what’s it going to be, then?

Of course the UK can agree trade deals now that will apply post-Brexit

There is a rather peculiar discussion going on at present. The EU has competence over making trade agreements with non-EU countries for the EU. Individual member states aren’t permitted to enter their own separate negotiations or cut their own individual deals. That is not in dispute.

One might have thought it equally obvious that the EU does not have competence over making trade agreements between non-EU members. For example, the EU does not have competence over trade agreements Australia might make with, say, Israel, to commence in 2020, assuming that neither Australia nor Israel will be a EU member at that point.

But for some reason this appears not to be obvious to some people. They suggest that the UK is not able to enter into its own agreements that will begin to apply only after the UK has left the EU. The idea appears to be that the EU has competence over trade negotiations even when those trade negotiations apply to a period when the UK is not in the EU.

Common sense would suggest that, regardless of what any document might say, that can’t really be the intention and it certainly shouldn’t be something the UK should contemplate accepting for a moment. The idea is absurd. What business is it of the EU what trade agreements the UK has after it leaves the EU? And what a silly idea, that anyone in the UK would really deliberately have agreed to allow the EU to prevent the UK entering into trade agreements that will apply only after the UK leaves the EU! If someone thinks that was the correct way to interpret a Treaty, that person has misinterpreted it.

This isn’t a matter of “refusing to abide by our Treaty obligations”. No-one sensible should accept that that was really a Treaty obligation in the first place. The only conceivable purpose for such a provision would be to make life difficult for someone choosing to leave the EU by trying to make them agree that in the period immediately afterwards they would have no trade agreements. Well, if that was the idea we won’t be doing that. We should leave via Article 50, rather than simply repealing the European Communities Act, insofar as doing so is sensible and polite and reflects good will on all sides. If someone attempts to stop us from negotiating post-Brexit trade deals, that would bring into question whether we were really best to proceed via Article 50 at all.

Let common sense prevail. Obviously we can’t have any new trade agreements apply to a period when we are EU members. But equally obviously we can’t allow the EU to stop us from making agreements with non-EU countries that will apply after we have left the EU. Everyone needs to accept, right now, that that’s just not going to happen.

Forget Blair – the real questions about Iraq should be addressed to Major and Clinton

The media persists in its epic decade-long missing of the point on Iraq. I’ve explained before why we invaded Iraq. By 2001-3, and Prime Minister worth his salt would have done as Blair did and authorized British participation. The media persists in stupid questions about whether Blair was too supportive of George Bush or whether the Attorney General was given all the necessary information about the war’s “legality” or whether Blair’s internal processes provided enough scrutiny of intelligence evidence about Iraqi WMD.

Irrelevant! Whilst you spend your time on that nonsense you miss the point. As I’ve explained – and as is blatantly obvious to anyone who was there at the time – we invaded Iraq in 2003 because we believed Saddam Hussein had spent the previous decade defying us – attempting to build nuclear and chemical weapons plus a super-gun to fire them – and, in the post-9/11 world, we could not allow him to carry on defying us. Why would Blair have seriously questioned the intelligence evidence he was presented with about Iraqi WMD when it was simply confirming what we had all seen on our television screens several nights per week for the previous decade. Remember the weapons inspectors being stopped at the gates, and the talking heads on the television explaining that those things being taken away in the background of the televisions pictures appeared to be parts for nuclear enrichment? Virtually every government in the world officially confirmed in a UN resolution (Resolution 1441) that it believed Iraq had continued to attempt to build WMD despite armistice terms (including in particular UN Resolution 687) in which it had promised not to.

The problem with the Iraq invasion is that it appears that that basic premise – which would have both justified and made inevitable the 2003 invasion from any UK Prime Minister, whether he also believed stuff about “45 minutes” or not – was false.

It’s not altogether certain. After all, some 5,000 chemical weapons were found in Iraq during the occupation. But there is at least a strong case to be made that Saddam was not all that seriously in violation of the armistice terms from the First Gulf War during the late 1990s. Certainly he did some things – like his preposterous super-gun, which the British political establishment was deeply aware of through the Matrix Churchill affair. But lots of governments around the world do some things we don’t like. The question was whether Saddam was so clearly top of the list that we could not credibly deal with anyone else (e.g. Gaddafi) until we had dealt with him.

But once we see that it was the decade-long belief that Saddam was not complying with his armistice terms that led to the 2003 invasion, we should grasp that the 2003 invasion itself was not the only consequence of that belief. Two other very significant consequences should immediately leap out at us: there were sanctions on Iraq precisely because of that same belief – sanctions estimated to have led to hundreds of thousands of Iraqi deaths – and there was repeated punitive bombing of Iraq, of which the most significant episode was in 1998. Indeed, in 1998 President Bill Clinton even signed the Iraq Liberation Act.

But sanctions on Iraq were not initiated or (for many of the years they were in effect, with as I say the consequence of hundreds of thousands of deaths, not to mention the impoverishment of a huge and initially fairly wealthy country) maintained by George W Bush or Tony Blair. And the 1998 bombings were not authorized by George W Bush.

Sanctions were maintained, from the mid-1990s on, after the period we now believe Saddam was broadly compliant, by John Major and Bill Clinton. And it was Clinton who was the US President during the 1998 bombings. It was under Major and Clinton that the story of Iraqi non-compliance with UN sanctions began. It was under them that the intelligence services told us Iraq was still trying to build WMD. It was Major and Clinton that killed hundreds of thousands of Iraqi people with sanctions. It was the failings of their intelligence services that meant that by the time Bush and Blair were considering the matter there was never going to be any result in Iraq other than invasion, after the events of 9/11.

So why is it always George W Bush and Tony Blair we put in the dock over Iraq, attacking their character or their scrutiny of intelligence evidence, and never John Major or Bill Clinton?

What is wrong with Theresa May’s position – The short version

The UK should guarantee, immediately, that any EU citizen legally resident in the UK on June 23rd will have indefinite leave to remain and work in the UK post-Brexit. Theresa May refuses to do this, saying that must be negotiated bearing in mind UK citizens living elsewhere in the EU.
By taking this stance, May signals two appalling things.
1) That she thinks our wonderful, kind friends and allies in the rest of the EU might consider ejecting UK citizens if they don’t get something in exchange for not doing so. That is a shameful smear.
2) The UK might, under some circumstance, consider ejecting millions of EU citizens resident here. Monstrous.
She needs to back down.

The next PM needs to be someone in favour of leaving the EU

The UK voted to leave the EU by a decisive but not overwhelming majority. Conservative Party members voted overwhelmingly to leave. Conservative MPs solidly supported Remain. MPs and Conservative members now have to choose a PM.

The obvious options are to pick a pro-Remain PM who will reach out to and satisfy pro-Leave voters, or a pro-Leave PM who will reach out to and satisfy pro-Remain voters.

Here’s how I would expect each of these options to play out. A pro-Remain PM will seek a way forward that will preserve as much as seems feasible of the status quo whilst placating core Leave concerns. The obvious way to do that would be to seek a new relationship with the EU that preserves as much of what we have as possible whilst restricting immigration.

Such a PM would achieve legitimacy, despite having been a Remain supporter, by embracing Leave core vote concerns, and a majority by peeling opponents of immigration out of the Leave coalition.

By contrast, a pro-Leave PM has no need to prove legitimacy by appealing to any sub-set of the Leave vote provided that the core commitment to take back control (including on immigration) was delivered upon.

Let’s give one potential concrete implication – a bad one, but not the worst one, in my view. A pro-Remain PM might accept a Brexit arrangement that involved no additional control (indeed, perhaps less control!) if immigration were restricted.

More generally, the right way to think about the point of leaving the EU is that it is time for us to do…something else. The form of something else that is possible and better for us than having remained in the EU is not obvious and can only emerge in time. Almost by definition, a pro-Remain PM will not believe that a something else that is better than having stayed in the EU will be feasible. That means she will not work for it in hope, she will not wait for it in expectation, and there’s every chance that she would not see it when it came.

A pro-Remain PM is, by definition, seeing her task from here as making the best of a bad job, trying to find a practical way forward in a situation she did not want and does not consider welcome. She will see it as a priority to resolve uncertainty and come to some new arrangement quickly even if that new arrangement is not as good as what the UK would have had in the EU – after all, she does not expect that waiting would mean any significant improvement. Accepting a new settlement that is inferior to having remained in the EU would be, for her, vindication not defeat.

That will not do at all. To make the most of Brexit, we need someone with the imagination, resolve and faith to wait out the period of uncertainty until we see how the post-Brexit dice have fallen and what possibilities we have available. There is absolutely no rush – quite the reverse; it is almost inconceivable that any grand deal the UK could do in the next five years would be the best thing for us to do next. In the meantime, we need to place ourselves so as be the best position to take advantages of whatever possibilities later present themselves.

A pro-Leave PM should be able to grasp intuitively some of what that might require. A pro-Remain PM could potentially lock us into some new arrangement where we would have been better off never leaving the EU at all.

Don’t let fear of risk put you off voting to leave – by Jillian Lilico

The problem with the leave campaign is that they have not confronted people’s concerns head-on. Everyone keeps talking about the great unknowns and rather than acknowledge these and provide solutions the general message has been opaque and defensive.

Ironically everyday people from other countries take a big step into the unknown – leave their friends, networks, sometime high paying jobs to go to Western countries including ours to find a better life. Not all do but those with the determination and will for survival find that better life. Doesn’t Britain have the same capabilities and what is wrong with the unknowns that an exit from Europe might pose? Yes there are risks:

  • Will Britain become an isolated island economy? We’ll have to learn from other island economies like Australia, Japan, Hong Kong; what works for them and how could we make similar work for us.
  • What will we sell to the rest of the world when our goods and services become more expensive? Well like any successful business, we’ll have to become a leaner economy; strip out the unproductive sectors and identify and concentrate on our core offer .
  • Who will we trade with? Britain will have to work harder. We’ll have to find new friends. We’ll have to understand what potential partners value from us and put those bravely on the table.

We should not be thinking that disentangling ourselves from the EU will unshackle us from “red tape” but how also we can build on and excel on some of the good things that Europe has introduced to make Britain a model economy where people are proud to live and work.

Risks – Yes. But Brexit – certainly Yes.

Jillian Lilico

The EU says the Single Market adds 2% to GDP, so how could leaving it cost 6%?

The Treasury has forecast that leaving the EU would cost the UK 6% of GDP growth in a scenario where that meant leaving the Single Market. The impression given in the media is that that 6% lost growth is a consequence of leaving the Single Market, though I’ve repeatedly attempted to point out that even in the Treasury’s model Single Market departure is only a small portion of that cost. The OECD has similarly forecast that the UK would lose growth in GDP of 5%.

Many in the media have noted the range of “acronym organisations” (IMF, OECD, HMT, NIESR, HMT) that have said leaving the Single Market would create a large cost to GDP. But acronym organisations produce estimates of the impact of the Single Market on GDP even when there isn’t a referendum on. And the message of those studies has been quite different.

Here’s one organisation that ought to know a bit about the Single Market: the European Commission. A couple of years back, to celebrate 20 years of the Single Market, the European Commission published a review. As one might expect, that review included an estimate of how much the Single Market has added to EU GDP. We can see it there, on page 13. What’s the answer? 2.13% of GDP. Not 6% of GDP. 2.13%.

There are a few things to say about that 2.13% number. You may notice that it refers to 2008, not 2012 (the 20th anniversary). Why’s that? Because the 2012 number would have been lower, given the way the Great Recession and Eurozone crisis damaged trade and capital flows between EU Member States. Let’s not worry about that for now though – let’s give them the 2% number.

Next, you’ll notice that that is an EU average, not the number for the UK. The number for the UK would almost certainly have been lower, for two key reasons. First, the UK trades less with other EU member states than the EU average. Second, for the period up to 2008, Single Market regulations tended to change UK regulations less than they changed regulations elsewhere in the EU, because the UK was very influential upon how regulations were designed and implemented. So the UK experienced less deregulation, market liberalisation and so on than the EU average, and hence is likely to have gained less. Again, let’s ignore this and take the 2% figure as a decent estimate of the UK’s gains.

Third, that is the figure for what the EU/UK gained through the Single Market programme. That is not the same as what the UK would lose by leaving the Single Market. We would be very unlikely to lose all that we have gained, because many of the gains were one-off, involving things like improving the way our markets functioned or increasing productivity.

Let’s set all that aside, though, and grant for now that the Single Market has added 2% to UK GDP, using that as our rough estimate for what leaving it might cost us.

Another thing the various acronym studies of HMT, OECD, etc. assumed is that leaving the EU would create no additional scope for new trade deals. Many commentators have scoffed at the idea that trade deals with the rest of the world could remotely compensate for the losses of being outside the Single Market.

Once again, conveniently enough, the European Commission had, before the Brexit referendum dominated everything, produced estimates of the potential value of new trade deals. It estimated the value of the top seven trade deals the EU would like to do – none of which currently seems likely to happen with the EU. What was that value? 2% of GDP.

The UK probably wouldn’t do all those deals by 2030. Just the ones with the US, Japan, and Canada, which sum to about 1% of GDP. But we would do other deals not on that list, with countries such as Australia. Remain campaigners talk about the trade deals with “53 countries” the EU has, whilst conveniently forgetting to mention that most of those 53 countries are places such as Jersey, Guernsey, the Faroe Islands, Andorra, San Marino and the like. The EU really has just three extant trade deals of any significance: those with Mexico, South Africa and Korea. There is enormous scope for the UK to do additional trade deals with the rest of the world, and the European Commission’s own analysis suggests such deals could comfortably compensate for the 2% or so GDP losses associated with not being in the Single Market.

To summarise: the European Commission says being in the Single Market adds 2% to GDP. If we were outside, we could do additional trade deals with the rest of the world, beyond the three significant countries with which the EU currently has deals: Mexico, South Africa and Korea. The European Commission’s own analysis suggests that just seven of those deals would be worth 2% of GDP, and the three the UK would be most likely to get that the EU would not would be worth 1% of GDP. And all of that is before one even touches upon other gains from being outside the EU, such as allowing the EU to work better and grow faster, improving UK regulation and repatriating the UK’s net contribution.

Since the Single Market adds 2% to GDP and leaving it would allow us to pursue trade deals worth more than 1% of GDP and perhaps much more, how can the Treasury seriously expect anyone to believe leaving the Single Market will cost 6% of GDP?

Eight quick responses to the Treasury’s short-term Brexit impact study

The Treasury today published its estimate of the short-term impact of a vote to leave the EU. Ten quick responses.

  1. The “shock” scenario assumes the central case of the Treasury’s long-term impact assessment. If that scenario is way too high (HINT: yes) that will make the short-term impact over-stated too.
  2. The “recession” claim consists of four quarters of -0.1% growth. If that went -0.2%, 0, -0.2%, 0 instead, there’d be no recession. Tenuous.
  3. I think there’d be 2-3% loss in short-term. OECD said 3% with overly pessimistic assumptions. HMT’s 3.6% is a bit high (mainly because its estimate of the 2030 loss is too high, meaning its “transition” impact is too high) but 3.6% is not ridiculous.
  4. The Treasury assumes shocks would begin from 2016Q3. There could be some impact as quickly as that, but I’d guess most of the short-term losses would be the year before & year after Brexit, which would actually happen in 2020.
  5. Earlier this year the Chancellor warned of the dangeous cocktail of risks, facing the economy, including factors such as China and oil price falls. The economy is mainly slowing because of other factors. Indeed, without the economy being slow anyway, the impacts the Treasury report estimates would get us nowhere near a recession. The talk of Brexit “causing” a recession is clearly scapegoating and the Chancellor getting his excuses in early for a downturn mainly caused by completely different things.
  6. Today’s Treasury analysis attributes much of the recent slowdown & weakness in sterling to concerns about the Brexit referendum. But the global slowdown & UK exposure thereto via our large exposure to global trade is surely the main driver of that, not Brexit.
  7. The Treasury says an instant triggering of Article 50 post-referendum would be a driver of uncertainty. In which case, maybe don’t do that?
  8. Interestingly, the HMT analysis assumes that fiscal policy would relax to accommodate the shock, but monetary policy would be unaffected.

UPDATE: I’ve worked a couple of things out that might be of interest. Despite all the talk of “a recession as bad as the early 1990s” or “GDP falling by 3.6%”, the Treasury forecasts no such thing. What it actually forecasts is GDP falling on a quarterly basis by 0.4% over four quarters. But here’s the fun bit. Because those four quarters are from 2016Q3 to 2017Q2, when we measure annual GDP we include the growth in the first two quarters of 2016 and the last two of 2017 (which the Treasury helpfully tells us). Assuming some sensible guess for 2016Q2 of around 0.4% or 0.5%, we get annual growth (yes, growth, not contraction) in 2016 of about 1.5% and 2017 is unchanged.

I wonder if anyone really explained to Osborne that his “year-long DIY recession” would mean annual GDP going up, not down?

What is it reasonable to believe might be the economic impact of Brexit?

Of UK trade, about 55% was with the Single Market in 2005, about 45% is with the Single Market now and about 33% will be with the Single Market by 2030. The fall is for various reasons, but the most important is that the rest of the world (China, India, etc) is growing faster than the non-UK EU economies and will continue to do so for much of the next 15 years.

UK exports are currently about 28% of GDP. Let’s suppose, to make the maths easy, that by 2030 they will be 30% of GDP. Then the one third or so of those exports that are to EU countries will be around 10% of GDP.

It doesn’t follow that if our exports to EU countries vanished, GDP would be 10% lower. After all, we would be likely to import a fairly similar amount, and presumably if exports to EU countries were disrupted, then imports would be disrupted, also. At a first iteration, if imports and exports fell by the same amount, GDP would be unchanged (though of course there would be other more complex negative impacts that I’ll come to in a moment). Even if exports to EU countries were impaired without any corresponding harm to imports (say if, post-Brexit, the EU raised tariffs on UK exports but the UK did not raise any tariffs on EU exports to the UK in retaliation), since the UK has a floating exchange rate, sterling would depreciate against the euro so imports to the UK would become more expensive (making them fall) and exports to EU countries would become more expensive. If those suggesting UK GDP would fall by 6% really meant “in dollar terms” (i.e. instead of one pound being worth, say, $1.50 in 2030 it would be worth $1.41) but with GDP in sterling terms being more-or-less unchanged, I might well find that plausible, but I can’t see it being much of a referendum-winning claim.

Thus, in themselves, those 10% of GDP of exports to EU countries don’t per se add anything like 10% to GDP – if indeed they add anything at all. Their main value lies in supporting imports, and the main value of those is not extra GDP (and certainly not extra jobs) but, rather, extra welfare (enjoyment, use value, usefulness) for consumers. But they are associated with extra GDP in more subtle ways. Because we trade at all (and trade with EU countries is part of that), domestic businesses face additional competitive threats, making them more efficient and making their products cheaper, higher quality and more innovative. Because the UK is part of the market for some products, firms can exploit more economies of scale, making products cheaper for our consumers. Because our firms see what is possible from foreign imports, they are driven on to do better themselves.

These benefits are important and will have an impact on GDP. In fact, they are worth a lot of GDP. It is true that much of those sorts of gains arise from the UK being exposed to trade at all, rather than its being exposed to trade with EU countries per se. And it is also possible that some such gains top out – that, for example, at some point a market is as close to perfectly competitive as human technology allows, so being exposed to even more trade won’t add anything further.

But, even so, the EU is a big chunk of our trade and by 2030, one third of our trade will still be a big chunk. So even though the direct GDP gains from trade with EU countries are likely to be small, and even though the main benefits aren’t GDP at all, it would not be unreasonable to guesstimate that that 10% of GDP of exports to the EU might be associated with 10% extra GDP.

So if trading with EU countries (note, I say, “trading with EU countries”, not “being in the EU”) is worth 10% of GDP, what proportion of that is it reasonable to believe could possibly be lost if we left? The Treasury says GDP would be 6% lower by 2030 if we were outside. Let’s imagine that were achieved purely through harming the GDP contribution that comes from trading with EU countries (it doesn’t, of course; nothing like it – which is precisely the point I want to help you to see). That would mean that leaving the EU would mean the UK’s losing some 60% of the entire economic contribution made from trading with EU countries. Even if that entire economic contribution were roughly equivalent to the sum of imports and exports – so 20% of GDP not 10% – the notion is that leaving the EU would cost of 30% of the entire value of trading with EU countries.

Would that make any sense at all as an estimate? Think about it. The average trade-weighted tariff applied by the EU is 1%. WTO tariffs average 4.4%. So if the UK imposed no tariffs on imports from the EU and imposed an extra UK-wide tax to offset tariffs imposed by the EU (yeah, yeah, WTO rules, blah-blah – forget that for now and concentrate on my thought experiment), if exports to the EU would be 10% of GDP that would cost between 0.1% and 0.44% of GDP (since 10% x 1% = 0.1% and 10% x 4.4% = 0.44%). Not 6%. 0.1-0.44%.

“OK, but what about non-tariff barriers?”, I hear you cry. Well, let’s think about those. Some of the most extreme non-tariff barriers imposed by the EU on friendly countries are those imposed on US car exports to the EU. The US auto sector pays 10% tariffs and about 25% tariff-equivalent after taking account of non-tariff barriers. Let’s imagine a near-total breakdown in diplomatic relations with the EU post-Brexit, with all UK sectors ending up facing as bad tariffs and non-tariff barriers as US auto exporters. That would be 25% tariff equivalents on that whole 10% of exports. So to offset that, the UK government would need to impose taxes equivalent to 2.5% of GDP. Let’s imagine those taxes created huge additional distortions, making their total negative impact half as much again as their scale, so GDP was actually 3.75% lower. More modest variants (a merely disastrous breakdown in relations resulting in 10%-15% tariff-equivalent of non-tariff barriers) might be only half or so of that – perhaps 2% of GDP.

[UPDATE: I note that the European Commission estimates that the gains to EU GDP from the Single Market have been around 2% of GDP (see here, p13) – precisely in line with my figure here. It is, of course, highly implausible that by leaving the Single Market one could lose the entire gains from being a member. Paul Krugman’s estimate of the trade losses from Brexit is, likewise, 2 per cent – in that case based on the notion that Brexit will lead to a drop in UK exports from 30 per cent of GDP to 25 per cent, apparently based on the idea that Brexit would reverse most of the trade creation gains the UK made from joining the EU. So, Krugman says that the UK’s proportion of its trade with the EU rose from around one third before it joined the EU to around 50 per cent today, which he believes is all trade creation. So if non-EU trade was 67 units and EU trade was 33 units, and joining raised EU trade to 67 units, total trade is now 134 units. If EU trade dropped back to 33 units, that would be a fall of 34 units or 34/134 = 25 per cent. If total trade is 30 per cent of GDP, a fall in that trade of 25 per cent would be a drop to 22.4 per cent of GDP. Krugman’s drop to 25 per cent of GDP therefore assumes Brexit means the loss of around two thirds of the trade creation gains from EU membership.]

So you see that in even disastrous and wildly implausible scenarios where there is a near-total breakdown in relations with the EU post-Brexit, we can’t get anywhere near the Treasury’s 6% GDP loss from Brexit by 2030. We can barely get half way. And that’s before we even broach the really big questions of whether there would be any negative consequences of Remaining (there would) and whether there would be any, even partially offsetting benefits from leaving (there obviously, obviously would and it’s incredible nonsense to deny it).

The lesson I want you to draw from all this is that it simply isn’t plausible that leaving the EU could cost us 30%-60% of the total GDP value the UK gets from trading with EU countries. And of course that isn’t how the Treasury gets to its 6% of GDP loss either.

What the Treasury assumes is that if the UK leaves the EU, we will make what the Treasury regards as economically destructive decisions, such as raising tariffs on imports to the rest of the world and not entering into any new trade deals with new geopolitical and economic partners. The allegedly bad economic consequences of Brexit are created, in significant part, by us. That’s the only way Brexit could get anywhere near causing a 6% loss of GDP. Without us making stupid economic mistakes following a Brexit, it just isn’t plausible that, in terms of impaired trade with EU countries, it could cost us more than a percentage point or two of GDP (even before one started to consider offsetting gains).

Well, if these economic decisions the Treasury assumes we would make are so bad, might I humbly suggest we don’t make them?

The Treasury assumes that the UK’s economic openness would decline as a consequence of Brexit. Over the long-term, a country’s economic openness can be seen as the product of five key drivers:

  • geography relative to transport technology – i.e. how easy it is to get stuff to and from the country, given the transport technologies of the day;
  • comparative advantage – ie how tradable the stuff is that the countries is best at making, relative to everyone else;
  • the general appetite of other countries to trade with that country;
  • whether geopolitics means special sanctions are applied upon trading with that country;
  • that country’s appetite to trade with everyone else.

The only one of these options that could plausibly be changed much by Brexit is the last – our appetite to trade with others. Many commentators do assume that Brexit would be an act of isolationism, a choice to cut ourselves off. I don’t see it that way at all – indeed, I see no reason to believe it would be likely to lead to that. I believe Brexit is about cooperating with non-EU partners more intimately and with the EU a little less intimately – i.e. a change in the mix of our partnerships, not ceasing to have partners. And I think it’s pretty obvious that the dominant political forces in the UK would see things my way post-Brexit and that isolationist forces would have marginal, if any, impact.

The great likelihood is thus, in my view, that the UK would have about the same openness over the long-term if we left the EU as we have now. Modelling exercises which attribute large economic costs to our choosing to cut ourselves off, post-Brexit, are nothing more than mathematical tilting at windmills. The monster they fear simply doesn’t exist other than in the fevered minds of Remain campaigners.

Meantime, the option these models assume of the UK being able to continue as we are doesn’t exist either. It’s important to grasp that the difference between mainstream pro-Brexit economists such as myself and the Treasury or OECD is not that we have different economic theories. In, say, the austerity debate, many people were probably dimly aware that there were Keynesian and non-Keynesian theories about the impacts of deficits. There is no equivalent of that theoretical debate in the Brexit discussion. I use gravity models all the time. The difference between myself and the Treasury is nothing to do with economics, per se, at all.

Where we differ is in what we believe to be plausible political outcomes from Remaining and plausible political outcomes from Brexit.

Here’s a big difference: Remain assumes that the EU can carry on for the next 15 years pretty much as it has done for the past 15 years. I do not. I believe that, because it is what the EU has done for 60 years, because it is what the EU says it will do (e.g. in the Five Presidents’ Report), because it is regarded as an existential necessity in the light of the euro crisis and migration crisis, and because it is such a cool idea in its own terms, the Eurozone will politically integrate much more deeply over the next 15 years. As a non-member of the euro and Schengen area, the UK will become increasingly peripheral to EU decision-making, with the Eurozone caucasing to force through Single Market rule-changes that serve the needs of the Eurozone and Schengen areas and in which the UK has relatively little interest but which will affect us nonetheless. Those who said that if we didn’t join the euro our interest and influence would decline were right. It will.

The consequence will be that within 15 years the UK’s position as an EU member (if indeed – which I don’t believe will happen, in fact – it were permitted for us to stay formally an EU member for that long without joining the euro), would be that we will have the rules set for us by others. Our status will be as per the Treasury’s “Norway” or “EEA” option – bound by the Single Market rules but not able to influence them. (For technical reasons that won’t concern us here, if in fact the UK left the EU to join the EU it would not have the Single Market rules set by others without being able to influence them, but we don’t have space to explore why.)

Thus, much of  – perhaps as much as half – the Treasury’s modelled loss of 4% or so of GDP if we took up the EEA option would, actually, in my view, be what happened to us if we remained in the EU, while if we left our net position would (for the reasons explained above) be fairly close to today’s.

More generally, I believe that outside the EU we would enter into new trade agreements. There would be two forms of these.

First, there would be new trade deals that the EU finds it difficult to do because, although its size give it weight in trade agreements, the number of players (e.g. the 28 members) creates complexity in sealing the deal. We have seen recent discussion that the TTIP deal with the US might be vetoed by the Austrians. The agreement with Japan is bogged down by disagreements between Japan and Germany. The Australians argue with the Italians and Poles. The Canadians argue with the Greeks and the French.

It’s worth observing that the European Commission estimates that seven trade deals the EU has under negotiation (with the US, Japan, Canada, ASEAN, India, Mercusor and China) would be worth about 2% of GDP – approximately equal to our conservative estimate for loss on EU trade from Brexit. Several of those are unlikely to happen with the EU – the Japan and US ones are probably gone for now, and the Canada one seems to be in trouble. (The India one is also intrinsically unlikely but irrelevant for our purpose since the UK probably wouldn’t get one with India either.)

Outside the EU, the UK would make quicker deals. It might finalise two generations of deals in the time the EU takes to make one.

A second set of new deals would be new preferential agreements – e.g. a new customs union – with new economic partners. I would like to see a new deal with Canada and Australia, but if we didn’t get that there would be something else.

I think it unlikely that, at least in the short-term, these new free trade deals or new preferential partnership deals would be worth as much, per unit of trade, as the trade arrangements we have with our EU partners. But since there would be twice as much trade with the rest of the world as with the EU, we wouldn’t need them to be worth as much per unit of trade. Even if they were worth only half as much per unit of trade, that would offset the entire loss, in trade terms, of leaving the EU.

Given that EU tariffs are very low and that the EU has a regulatory philosophy greatly influenced by us and similar to ours, and thus the burden of complying with EU non-tariffs barriers would be low for us (they’d be requiring our businesses to do what our own government would probably want those businesses to do anyway), the notion that gains on non-EU trade could be half as much as losses on EU trade seems eminently plausible. Perhaps in the end we’d get nothing, but there’s every reason to think it plausible that what we’d get might be worth as much as what have now. I’ll assume we might get 0%, but we might also offset the whole of that 2% or so plausible maximum loss we set out earlier from reduced trade with the rest of the EU.

If I’m right that such new deals  could place the UK in roughly our current position, whereas by Remaining we would suffer a “Norway”-type fate inside, losing perhaps half the Treasury’s 4% estimated GDP losses, that would mean Brexit would gain us around 2% of GDP in trade effects. I suspect, however, that the Treasury model over-estimates that, so I’ll content myself with around 1% – half that half the Treasury’s Norway option effect. Perhaps things wouldn’t be that bad. Perhaps we’d lose only half that much again. Let’s take a range of 0.5% to 1% loss from Remaining from this factor.

There would be other Brexit gains, as well. I’ve explained previously that by getting us out of the way, Brexit would allow the Eurozone to take control of EU institutions to address its governance issues, allowing it to grow faster – to our benefit. I’ve estimated that by 2030 that could be worth 0.3% of GDP.

Although we might lose something in regulatory terms from facing additional non-tariff barriers to trade with the EU, the flip side is that we would be able to set our laws for ourselves. That could allow us to make our laws more focused on our own needs rather than on the average needs of the EU. Perhaps more importantly, it would allow us to devise new regulations in the future, to address tomorrow’s regulatory challenges, with the possibility of experimenting and then u-turning if we get it wrong.

If what you want to achieve in regulatory terms is pretty clear – if you are trying to get tariffs and non-tariff barriers down, to develop free trade, to liberalise markets, to oppose state aid, to create competition – there are policy economy advantages in having a ratchet process whereby once measures are in place it’s very difficult to undo them. The EU’s decision-making is designed like that – with good historic reason. That’s been effective for much of its history, but the challenges of tomorrow are different – the sharing economy, e-cigarettes, climate change – and the best regulatory solutions are not obvious in advance. The EU is likely either to regulate too early, get it wrong, and be unable to back-track, or, for fear of binding itself in and being unable to back-track, failing to regulate early enough.

Better regulation can add decimal points to annual GDP growth rates. If it’s really true that by leaving the EU we could regulate better for tomorrow’s challenges, an estimate that that might add 0.05% to annual growth for a decade – or around 0.5% higher GDP by 2030 if we left the EU in 2020 (which is when I believe we would leave), would be conservative. If we didn’t get the hang of the new regulatory possibilities for the first five years post-Brexit, we’d only get half of that – so, 0.25% extra – by 2030. We might get nothing, but let’s take a range of 0% to 0.25% by 2030 as our gains from this source.

Additional to all of this would be the around 0.5% of GDP, per annum, net contribution the UK makes to the EU. I have every confidence that UK governments would find ways to spend that domestically that I would disapprove of and thus I don’t usually like to talk about the repatriation of our EU contribution as a significant Brexit benefit. But if we are on the topic of GDP, it’s pretty clear that if more of that were spent domestically that should count – at least as a source for some of those EU tariff-offsetting subsidies I mentioned earlier. It might even have a multiplier effect (i.e. 0.5% of GDP spent here might produce more than 0.5% in extra GDP). Let’s stick with assuming that, after some of it ended up leaking abroad and some of it was spent in ways that would reduce GDP rather than enhance it, the multipliers applied to what was left would take the net impact to between 0.25% and 0.5% of GDP – i.e. that somewhere between half and all the contribution would be added to GDP.

Thus, overall, we have the following GDP benefits from Brexit by 2030:

  • +0.5% to +1% of GDP from avoiding being in the position of being over-ruled on Single Market regulations if we Remain.
  • -2% of GDP from having tariffs and non-tariff barriers equivalent to 10%-15% tariffs imposed on our exports to the EU, post-Brexit.
  • 0% to +2% of GDP from new free trade deals and new preferential trade agreements (e.g. a new customs union) with new geopolitical partners.
  • +0.3% of GDP from the Eurozone growing faster once we were out of the way.
  • 0% to +0.25% of GDP from regulation more focused on our needs and being better able to experiment and u-turn when we face new challenges.
  • +0.25%-0.5% of GDP from the repatriation of the UK’s EU contribution.

So, our estimate is that by 2030 the net impact of Brexit would be between a loss of 0.95% of GDP (i.e. a small but non-trivial loss) and a gain of around 2% of GDP, depending mainly on how we do with new trading arrangements with new international partners and on how badly our position would deteriorate within the EU if we Remain.

This seems to me to be the sensible order of magnitude for this discussion. The outer end of the loss scale sits at us losing around 10% of the total GDP gain we make through trading with our EU partners (irrespective of whether we do so as EU members). The upper end of the gain scale assumes the politics works well for us, in terms of new trade deals, that the Eurozone seizes the opportunity Brexit would afford to integrate more and take control of the EU institutions, that our repatriated EU contribution is spent reasonably fruitfully and that we make wise regulatory choices with our new flexibility.

(There are other factors as well. I don’t believe there would be much enduring change to immigration from Brexit, other than some change in the mix of who comes, so that won’t have much economic significance. I believe Scotland would be less likely to leave the UK if we Brexit – indeed, I fear that if we Remain Scotland is more likely than not to leave. I could have added some GDP loss to the Remain scorecard for this, but I have excluded that effect here.)

None of this is guaranteed. We could horlicks the whole thing up – elect communists or isolationists or engage in some other madness post-Brexit.

It’s also worth noting that in my view even the upper end of the gains scale – the +2% scenario – would not by itself justify Brexit, especially as I expect we might have temporarily lost growth of 2% or so of GDP in the short-term in around the 2019-2022 period. The economic case for Brexit should not be that there would be large economic gains. The EU is not mainly an economic project. The main good things about it have not been economic, and the main bad things aren’t economic either. The reason for leaving isn’t economic – it’s the large constitutional, self-determination and geopolitical gains we could make by leaving that are the real prize from Brexit.

The economic case for Brexit is not that we would make large economic gains. It is that there would not be such large economic losses that it would not be feasible to seize those big constitutional, self-determination and geopolitical gains without disaster. I hope I have demonstrated here that by 2030 one should expect the economic consequences from Brexit to be roughly balanced – somewhere between a loss of 1% of GDP and a gain of 2% of GDP. That means we can and should seize those – hugely important – other gains by a Leave vote on June 23rd.