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Brexit’s history lessons

Published in The National Business Review (Auckland), 6 May 2016

History offers great value in learning. But sometimes its lessons are too difficult to understand and apply – even for those who have written the history books.

Niall Ferguson, the Scottish-born economic historian, is a good example. Though his writings should make him the most natural critic of the EU, the Harvard professor finds himself on the side of those arguing against “Brexit” for the UK to remain in the EU. Why?

In his great book Civilization: The West and the Rest (2011), Ferguson distilled history’s six “killer apps.” They are those features and values that once created Western power – and now get installed in rising economies of the East.

First among Ferguson’s killer apps was competition – not just the kind of competition in the market place but that between jurisdictions. Contrasting medieval Europe and China, he noted Europe was split into hundreds of free cities, principalities, duchies and kingdoms. Meanwhile, China was a monolithic state with a top-down structure.

For Prof Ferguson, this difference was the key reason why Europe rose and China did not. It was competition between and within European societies that turned out to be the driver of discovery, development and progress. The combination of political and economic competition thus became the foundation of modern capitalism.

The competition thesis is central to Ferguson’s Civilization but it was certainly not original. In 1986, economist Nathan Rosenberg and lawyer L E Birdzell published their seminal book, How the West Grew Rich, which made the same case for political and economic decentralisation.

This makes it all the more remarkable that Professor Ferguson has emerged as one of the fiercest critics of Brexit, for isn’t the EU the Imperial China of our time?

In EU member states, more than half of all national legislation has its origin in Brussels. The EU is making laws with the explicit goal of “harmonising” different national systems. Yet “harmonisation” is effectively a euphemism, or rather an EU-phemism, of curtailing competition.

In the EU elite’s dream scenario, all differences among EU members would disappear. They would have harmonised their regulatory affairs, their labour markets, their tax laws and their welfare states. In this world, there would be no diversity or competition between Finland and Italy, Portugal and Poland.

The competition that made Europe great historically would be put on the chopping block. Rather than understanding Europe’s historical diversity as a strength, the EU has made it its goal to abolish as much of this institutional diversity as possible.

Prof Ferguson has positioned himself clearly against Brexit without even a mention of his previous advocacy for jurisdictional competition. Instead, he is focusing on another aspect: access to European markets. It is on this issue where he spots a weakness in the case for Brexit.

Brexit campaigners such as Dan Hannan, a Conservative member of the European Parliament, are indeed running a seemingly self-contradictory line. On the one hand, they promise that Brexit will restore Britain’s freedom to run its own affairs independent of Brussels. On the other, they claim the UK would still be able to trade with the EU as if it were part of it.

Prof Ferguson is unimpressed with this logic: “You cannot have it both ways,” he writes. “Either, as Mr Hannan promises, British business will be freed from EU regulations, in which case British exports to the EU will be reduced, or they will not, in which case all a Brexit vote achieves is to remove the UK entirely from the process whereby those regulations get made.”

He has a point. Once the UK declared its withdrawal, the remaining EU members could seek to punish it. It would not make economic sense, not even for them, but economic sense never really governed EU policymaking in the first place. In this case, all the doomsday scenarios of Brexit might indeed come true.

Prof Ferguson quotes research from the London School of Economics that estimates Brexit could reduce foreign direct investment in the UK by 22% and real income by 3.4%. He also mentions a Nomura study, which predicts a rapid decline of sterling.

The problem with these forecasts is that they are entirely speculative. In practice, nobody knows how a British withdrawal would play out. An event like this has never happened before. There is no historic precedent for Brexit.

Thus it is entirely possible that EU members realise that it would not be in their best interests to cut off Europe’s second-largest economy from its market. In which case Britain would retain access to the Common Market and gain the freedom to run its own affairs. Who knows, if Brexit works in Britain’s favour, we might then in the future start talking about Frexit, Gerxit or Denxit, too.

Crucially, a British withdrawal from the emerging EU superstate would be a strong move toward a more competitive Europe. It would be a Europe returning to the strengths of its diversity.

As long as this Europe still kept its borders open to movements of goods, services, capital and people, this would not be the worst outcome. This would be a free-trading Europe without any of the EU superstructures.

PS: See my conversation with Niall Ferguson at the PortfolioConstruction Forum conference in Auckland on 17 May 2016:

 

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