ECONOMIC PERSPECTIVES – 72

Those still shedding tears over our departure from the EU invariably refer to the success of the EU in healing post-WW2 wounds and keeping peace in Europe for 75 years. By the same token they imply that, by leaving, we are creating a dangerous rift that threatens to spark a resurgence of nationalistic tensions in Europe, and the incipient racism that invariably follows. So the refrain goes.

But those fractious symptoms lurk below the surface anyway. The EU project succeeded in reconciling Germany with nations it had recently occupied under a dictatorship of unparalleled cruelty, while other East European states joined after escaping the horrors of one-party rule, militarily inflicted by the Soviet Union.

Deep differences may have been papered over, but not necessarily eliminated. Is it not possible that the seemingly unlimited availability of sovereign bailouts, courtesy of the European Central Bank, has kept Greece, Cyprus, Ireland, Spain and Italy grumbling, rather than revolting, over the harshness and inequality of conditions that originate in Brussels?

The delusions of nostalgia

The nostalgic version of events espoused by persistent Europhiles is shared by most of the left-leaning members of my own family circle, as well as the generality of socialists with selective memories. Indeed, possession of a highly selective memory is a precondition of remaining socialist.

I can’t really blame youngsters who have yet to bring their rational faculties into line with their own observations and experiences, but what of those who wilfully hark back to the 1970s as if a reversion to that “paradise” would be preferable to life outside the EU?

Remember when IMF had to rescue Britain?

How easily they forget the budget deficits, the deep recession, 25% inflation – and having to go cap-in-hand to the IMF to rescue Britain, the “sick man of Europe”. All that, and the crippling industrial strife – rubbish on the streets, suspension of public services, even a gravediggers’ strike in Liverpool – accompanied by a penal top tax rate of 98%, including investment income surcharge. There were also race riots in Toxteth and Brixton, followed by the 1984 miners’ strike against closure of uneconomic pits. Well, thanks, but no thanks!

Those who erroneously attribute peace in Europe to EU institutions are economic novices. They should learn that the greatest assurance of lasting peace is economic success, not wishful politics. Why do they not acknowledge that the real threat facing the EU’s framework right now is the abysmal failure of its bloated bureaucracy to install and maintain the most basic conditions for achieving economic viability – notably minimal regulation, a low tax regime, free markets and the financial discipline of a sound currency.

Regulations galore

The test of whether an enterprise stands or falls is determined only when it is left to its own devices. This must be the case – always and everywhere – provided government resists the temptation to initiate “improvements” of its own devising. As Don Boudreaux recently noted, rules are invariably followed only when they grow organically from life in society rather than imposed in the form of legislation or administrative diktat – and this remains the case even when those laws and diktats are imposed by governments chosen democratically.

EU growth and productivity lag

Against such self-evident good sense consider what takes place in the EU. International comparisons show that its productivity and growth lag pathetically. Is this surprising when businesses are faced by massive state intervention in the form of around 80 Directives and 1,200 Regulations every year? So embedded is the delusion that the state can legislate its way to economic success that the resulting bureaucratic overkill is crippling the EU’s own trade.

Trade principles and economic theory

The Single Market’s Common External Tariff is maddeningly complex and counterproductive. Speaking of regulatory alignment and free trade in the single market is self-contradictory. Just look: there are 13,000 variations of tariffs on biscuits, baked goods and confectionery alone – all of them taxes that have a direct impact on the cost of living. And then there are countless “nuisance” tariffs of less than 2.5 % on a huge range of products from white goods such as fridges and cookers to small electric appliances, whose chief burden is the cost to businesses of administering compliance.

Britain has always been a trading nation and clearly, apart from legitimate rules on health protection, all the above drivel must be ruthlessly swept away. But we need more than that. Government must recognise that the objective of its trade policy must be free trade – not free trade agreements. The purpose of trade is to allow citizens to benefit from the comparative advantage enjoyed by respective trading partners – a natural extension of the principle behind the division of labour. It’s simple: Talents, skills and resources are not distributed equally between nations any more than between individuals. That’s why international trade happens – but it is always transacted between businesses. Governments don’t trade. But their role is equally simple: dismantle the barriers and stay out of sight!

Say’s Law – the eternal principle

 

These are all variations on the oft-repeated theme implicit in Say’s Law: “we produce in order to consume”; “we export so that we can import”.

There is much to celebrate because we are now unshackled from a burdensome behemoth that is floundering to survive in its existing form. Yet the EU’s bigwigs show no signs of waking up to the harm they are blithely inflicting on the citizens of 27 nations.

Resisting the old regimen

The common approach to trade policy these days is to protect domestic industries by favouring them with taxpayer-funded subsidies and imposing tariffs on imports. Partisan industrial favouritism is a pernicious form of crony capitalism because it distorts capital allocation in the markets – a phenomenon that the UK government must resist at all costs if the full benefit of newly won independence is not to be squandered.

We can but watch if the Brussels steamroller trundles on with its unaffordable agenda of setting up shiny new overseas embassies and replacing the cost of NATO membership with an army of its own – an ominous source of mutual distrust. They can’t afford it anyway, especially after losing Britain’s £11 billion annual contribution at the end of this year – roughly equivalent to the entire EU administration budget, as reflected in its annual financial statements. Speaking of which, the Court of Auditors has never signed off the EU’s own accounts to the effect that it is free of fraud, corruption and other irregularities, when billions of euros in the EU budget are spent illegally every year.

Even more serious problems will emerge when citizens in member states face genuine grievances concerning the loss of norms they used to take for granted as entitlements. When modest returns on savings are replaced by negative interest rates, protest will take on a more menacing meaning.

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[GOING POSTAL/ February 2020 – EMILE WOOLF]