Sunday, June 19, 2016
A hard pounding - and with so very little to show for it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The moment is nearly upon us. Like the Scottish referendum in September 2014 but with even more at stake, a nerve-racking few days lie ahead. Either way, we will wake up to a different world on Friday morning , a very different one in case of a vote to leave.

One point is worth making. It is that economic models tend to underestimate the impact of shocks, as we saw in 2008. Some people say leaving the EU will be a little like leaving the European exchange rate mechanism (ERM) in September 1992. Apart from the fact that both narratives involve a plunging pound, the similarities end there. In 1992 we left a currency arrangement after 23 unhappy months having joined, as was said then, at the wrong rate, the wrong time and for the wrong reasons.

Leaving allowed an overvalued pound to come down to earth, and made room for big cuts in interest rates, which are simply not an option this time. As for sterling’s fall providing us with the elixir of export-led growth, it did not happen after the pound’s 25% fall in 2008-9, and there is no reason – with world trade depressed – it would be any different now.

Voting to leave the EU after 43 years in which our economy has become increasingly intertwined with the rest of Europe, and done well out of it, would be a very different proposition to being kicked out of the ERM. Even leaving the ERM made the Tory economic brand toxic for years. Apart from the economic and financial fallout, the political instability that would result from a Brexit vote would be much bigger. Whether this would be helped or hindered by George Osborne’s threatened £30bn emergency austerity budget – and whether it would happen - is one of the many questions that would arise.

It would be foolish to deny that any of this will prevent a big vote for leave and a close outcome on Thursday, and that those expecting “it’s the economy stupid” to have clinched it were wrong. A minority probably believes in the “project fantasy” of a seamless transition to a world waiting for British goods and services if only the EU were not holding us back, and the mythical pot of fiscal gold and bonfire of red tape beyond Brexit.

Rather more believe much more important is to “claim back our country”, which for most means sharply reducing immigration, even if there is an economic sacrifice. For some, where the pressures on local services are acute, and where there has been a sudden increase in the migrant population, such concerns are valid.

But there is also something more visceral happening elsewhere, the fear that hordes of Syrians, Iraqis, Turks, Libyans and those who use Libya as a jumping-off point are about to hit our shores, as well as legitimate economic migrants from the EU. They are not and politicians will regret stoking up the immigration issue. If there is a vote to leave, we will replace one set of politicians who unwisely promised and predictably failed to reduce net migration to the tens of thousands with another, unless the labour market is so badly affected it ceases to be a magnet.

Non-EU net migration from the Commonwealth but also China (mainly students), Russia and America, has averaged more than 200,000 a year this century. As for EU migration, over the long run it might be reduced but it would not stop.

But there are other pro-Brexit views out there, not specifically related to immigration, some of which I received in response to last week’s piece, which should be addressed.

The first is the eurozone. The argument here is straightforward. Why should we stay in the EU when the eurozone, its centrepiece, is heading for disaster? I wrote here on April 24 about the need for further eurozone reform. The much-misinterpreted Five Presidents’ report of last summer (the presidents of the Commission, Council, Central Bank, Eurogroup and Parliament) is about precisely that, rather than creating a “superstate”.

Its aim, to ensure that the single currency works for all its members and avoids being caught out as it was in 2008, is laudable. It wants member states to establish more flexibility in their economies and to build fiscal buffers so they can cope with future downturns. It is an agenda Britain should support. The worry is that, because of other issues, including the migration crisis and, yes, the referendum, it is not being implemented rapidly enough. But it is lazy to assume another eurozone disaster is looming. Lessons have been learned.

The eurozone’s experience demonstrates that, far from being a superstate, its members are not integrated enough. The European Central Bank had less freedom than other central banks to engage in unorthodox monetary policy, which is why it came to quantitative easing so late, because it had to deal with national sensibilities. That was also why its rescues of troubled eurozone countries were so fraught. Is the eurozone clear of the crisis? No, but as I noted last week, Britain is also in a state of convalescence.

The second strand is a familiar one. It is that, even if there is an economic price to be paid for Brexit, it is worth it to be freed from the yoke of the “unelected bureaucrats” in Brussels, restore our sovereignty and stop the EU making all our laws. In short, why should we stay with an imperfect EU? Space is limited, and these are big issues, but briefly.

It would be foolish to deny there is a democratic deficit in the EU, but it is worth digging into. European Commissioners are proposed by democratically elected national governments. The Commission president, chosen by the European Council (leaders of member states) by qualified majority voting, has to be approved by the European Parliament.

In Britain, moreover, we have a curious attitude to European democracy. If we wanted better scrutiny of the European Commission we would take European Parliament elections more seriously. But two-thirds of us do not bother to vote and we do not mind sending Westminster rejects and anti-EU oddballs there.

You could have direct elections for the Commission and its president (last time there were primaries) but that would be seen by critics as a step towards the superstate they fear.

On sovereignty, no country is truly sovereign in the modern world but we have independent economic and monetary policy, independent foreign and defence policy. Talk of an EU army – if Britain stays - should rightly be taken with a large pinch of salt. Steve Peers, professor of EU law at Essex University, pointed out in a recent article that Britain has vetoes in all the important areas, including defence, transfers of power, enlargement, taxation, non-EU immigration, asylum and criminal law, the single currency (including participation in bailouts and Britain’s opt-out) and the EU budget rebate.

Where there is qualified majority voting, future British governments can and should build alliances. People who think Britain can bestride the world, striking deals left, right and centre, strangely fear we are either incapable, or too timid, to stand up for ourselves in Europe.

These issues deserve a lot more space, as does the idea that most of our laws come from the EU; they don’t and most of those that do are the legal detail of single market rules. Old prejudices die hard, however, Since the days of Jacques Delors, some people have chosen to believe that Brussels only exists to do Britain down. It doesn’t. In this mad campaign, however, some people will believe anything.