Jean Pisani-Ferry: The EU referendum will be an important test for populism

Technology Eye | Jun. 07, 2016

If voters in the United Kingdom decide in the country’s referendum on June 23 to leave the European Union, it will not be for economic reasons. They may choose Brexit because they want full sovereignty, because they hate Brussels, or because they want migrants to return home, but not because they expect great economic benefits.

The pro-Brexit camp initially appeared to be holding two strong economic cards. The first was UK citizens’ overwhelming rejection of their country’s net fiscal transfer to the rest of the EU, which currently amounts to 0.4% of GDP. Since Prime Minister Margaret Thatcher first demanded to have “her money back” in 1979, the budgetary costs of EU membership have completely overshadowed its economic benefits in the public’s view.

The second card was the sorry state of continental Europe’s economy. In terms of GDP growth, employment, or innovation, other EU countries, on average, lag behind the UK (and, to an even greater extent, the United States). Whereas EU membership was once regarded as a gateway to prosperity, it is increasingly viewed as a drag on progress.

But lately, as John Van Reenen of the London School of Economics recently put it , the economic case for Brexit has been largely missing in action. Its advocates are at pains to explain what kind of trade and partnership agreements, if any, Britain could enter into with the EU, much less how those agreements would be superior to the current arrangement. As a result, it is tough to argue that the UK would receive a net economic boost – or even that it will not suffer considerably – by leaving the EU.

Of the eight economic evaluations recently surveyed by the Institute for Fiscal Studies, a respected independent research institution, only one claims that leaving the EU would lead to significant economic gains. And that study – produced, unsurprisingly, by Economists for Brexit – has been sharply criticized by the rest of the economic profession for lacking an appropriate analytical basis.

Most studies find that Britain would suffer significantly from leaving the EU. UK exporters would end up participating less in the large EU market, and they would be shut out of EU-negotiated agreements ensuring access to major international markets. While the UK could negotiate new agreements with these partners, that would take time, and, acting alone, its negotiating power would presumably be weaker.

This means that the UK would trade less with EU and non-EU partners alike. It would pay higher prices for inputs and consumer goods, and British firms’ reduced integration into global value chains would undermine productivity. The cost in terms of foregone GDP would be 5-20 times higher than the saving implied by not contributing to the EU budget. That is not an appealing deal, to say the least.

All modern analysis of economic internationalization shows that foreign trade is a powerful selection mechanism. It provides major growth opportunities for the most productive and innovative firms, while enabling them to learn from their overseas competitors. It is no accident that the world’s best firms – which have the highest productivity, profits, and wages, and invest in strengthening human capital – are trade champions. Brexit’s adverse impact on UK firms’ scope for development would further increase the economic cost.

These arguments have been forcefully advanced ahead of the referendum. Yet they have not simplified the debate on the costs and benefits of Brexit. This may be partly because that debate has not played out along party lines. Prime Minister David Cameron’s Conservatives are deeply divided on the topic, while Jeremy Corbyn’s Labour Party is lukewarm about the EU. Because the choice is not between left and right, independent views have gained greater weigtht.

The June 23 referendum is important in its own right, owing to its far-reaching implications for the UK’s relationship with Europe. But it will also deliver broader lessons.

If British voters decide to leave the EU, it will indicate that rational economic arguments carry less weight than emotional appeals. Such an outcome will bolster populist forces elsewhere – from Italy to France to the US – in their advocacy of isolationist policies that most experts regard as economic nonsense. To oppose such forces and policies, mainstream political parties will have to address their failure, even with the facts on their side, to offer a narrative compelling enough to convince voters to choose economic openness.

A vote by a majority of British citizens to remain in the EU would have the opposite impact, highlighting that, whatever negative feelings people may have about a policy or entity, reason and logic cannot be tossed aside. Equally important, such an outcome could encourage greater scrutiny of the economic consequences of populist programs in the US and the rest of Europe.

What is at stake in the June 23 referendum is therefore not only the relationship between Britain and the EU – or even the future of the “European project.” How voters decide will be an important test of whether democratic choices in advanced countries are governed by economic rationality or popular passions.

SOURCE: World Economic Forum

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