Leave or Stay: the two best paths to economic freedom

Making the Pieces Fit: Reforming Britain's relationship with the EU

by Philip Booth and Ryan Bourne

Download the full report (.pdf) here: www.iea.org.uk

Read the full blog here. 

Summary:

• There is a noble classical liberal case for a European economic federation. However, the European Union as currently constructed goes way beyond the role necessary or desirable for a supranational body to guarantee economic freedom. The EU is inherently a political project.
• Instead of allowing diversity and competition between member states, underpinned with the use of courts to prevent trade barriers, the EU has at its core a centralising, harmonising agenda. This risks raising the overall level of regulation higher than is necessary and embedding systemic risks.
• It is unclear that the EU is the ideal level for the necessary provision of public goods or dealing with externalities, given that these tend to be either global or highly local in nature. The EU dilutes influence for the UK on major international bodies, whilst taking control where local decision-making would be more appropriate.
• Although the EU has been somewhat successful in preventing nationalist interests from obtaining favours from governments, the centralisation of more power in Brussels makes the EU easier to lobby for sectional or country-group interests. In future, the UK could become subservient to the euro-zone countries within the EU institutions.
• The EU has high levels of external protection, particularly in agriculture and manufacturing, which raise prices for UK consumers. There is some evidence too that a common external trade policy reduces the likelihood of the UK enjoying ‘free trade’ deals with major growing economies.
• Constraints on government action imposed by institutions such as the EU can be a welcome means of preventing harmful policy change. But if bad policies become entrenched, a system of government unresponsive to public demands for change can lead to sub-optimal policy.
• Many of these problems could be overcome if the UK left the European Union, provided steps were taken to ensure Britain became and remained a liberal, outward looking nation. This would require the longterm aim of instituting genuine free trade, maintaining liberal labour markets and constraining government interference in the economy.
• A Brexit may also be the jolt the EU needs to change course in its own agenda, leading to a re-think of the whole centralising nature of the project, with more powers devolved back to nation states.
• If the UK votes to remain in the EU, Britain should focus on changing the overall institutional structure in a more free-market direction. This agenda should focus on institutional change rather than the repeal or refinement of particular directives.
• It will probably take a long time for Britain to disentangle itself from the EU or at least EU policy. Moving towards a more classical liberal Britain is therefore a long-term endeavour. It seems likely in the event of a Brexit that the government and civil service will push for the UK to join the European Economic Area. This brings with a repatriation of some powers, but does not fully restore control across a range of economic areas. To realise the true gains from Brexit, the EEA must, in these circumstances, be very much a transitional arrangement.

Current Controversies Paper No. 52

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Read more: www.iea.org.uk